27 July 2016

Does Barnier have it in for the City?

This morning’s appointment of Michel Barnier as the European Commission’s chief Brexit negotiator by President Jean-Claude Juncker has prompted some excitable reactions from the British media. The Evening Standard went with the headline “Scourge of the City appointed for Brexit talks” while several commentators described it as ‘an act of war’. Although slightly exaggerated, it is true that during Barnier’s tenure as Commissioner for the Single Market and financial services the UK and the EU clashed repeatedly, and his appointment suggests that the Commission will take a tough approach during the Brexit negotiations, particularly when it comes to financial services.

The idea that Barnier has it in for the UK (and the City specifically) was given credence when shortly after his appointment in 2010, then French President Nicholas Sarkozy described it as “a French victory and a defeat for Anglo-Saxon capitalism.” It is worth bearing in mind that at that time, amidst the economic turmoil wrought by the global banking crisis and the unfolding Eurozone debt crisis, ‘Anglo-Saxon capitalism’ was not hugely popular and Sarkozy was looking to score some easy domestic points.

Ultimately, Barnier’s record is a bit more nuanced; he described himself as a pragmatist primarily concerned with ensuring “we have an economic system in place which creates wealth for our citizens”, adding that “I believe in a strong City at the heart of jobs and growth – for London, the UK and Europe as a whole.” In addition, some of the legislation seen as targeting the City, such as the AIFMD, was already well along the pipeline by the time he took over.

However, it is also undoubtedly the case that Barnier appeared more interested in controlling and restricting financial services activity as opposed to letting markets take their course, even allowing for the fact this was the general climate of the time. His clashes with the UK on issues ranging from the short-selling ban through to banks’ capital requirements (The FT has a comprehensive run-down here) had several common features including a desire to transfer powers from national regulators to the new EU supervisory agencies such as the European Securities and Markets Authority (ESMA) and a belief that unregulated financial activity was inherently undesirable. In fact, his rigid approach was exemplified by his attempt to introduce maximum harmonisation of capital levels in the EU’s implementation of the Basel III rules (known as CRD IV). This angered many in the UK and drew the ire of then Bank of England Governor Mervyn King.

Even when it came to the dispute over the attempt to force London-based euro denominated clearing houses to relocate to within the Eurozone – a proposal conceived by the ECB and the Bank of France – Barnier did not in any way seek to defend the integrity of the single market despite this coming directly under his remit. More widely, he often sought to drive integration of the Eurozone financial markets with little wider regard for the EU’s single market and the rights on non-Eurozone states. Conversely, while the bankers’ bonus cap was pushed by the European Parliament as its price for accepting CRD IV, Barnier gave it his active support.

Another criticism of Barnier was that in focusing so much of his attention on financial services he neglected the single market more broadly (his brief was for the entire internal market remember), for example the Services Directive has still not been fully implemented across the EU despite being adopted in 2006.

When it comes to financial services it is likely he will be a tough customer, but it’s not clear whether he will aim to be directly punitive. Of course, the potential pressure from his home state of France also has to be considered; it has overtly courted banks and financial institutions to relocate from London to Paris in the wake of Brexit.

Barnier’s experience extends beyond financial services

While Barnier’s appointment suggests that financial services will be a key feature of the Brexit negotiations (in particular the question of passporting rights), it is worth bearing in mind Barnier’s political experience extends more widely. He also served as France’s Foreign Minister (2004-05) and Agriculture Minister (2007-09), European Commissioner for Regional Policy (1999-04). He was also a member of the European Parliament (2009-10). This means he has experience in other areas which will feature prominently during the Brexit negotiations including agriculture and the EU budget. His various roles also mean that he understands the different and often competing perspectives of member states, the Commission and the European Parliament.

How central will the Commission be in the Brexit negotiations anyway?

Article 50 states that the exit agreement between the EU and a departing member state “shall be concluded on behalf of the Union by the [European] Council, acting by a qualified majority, after obtaining the consent of the European Parliament”, and the Council has already appointed the veteran Belgian diplomat Didier Seeuws to lead its own internal Brexit task-force. Given the high stakes and political sensitivities around Brexit member states will want to maintain close oversight of the process as opposed to leaving it to the Commission (some member states place a large share of the blame for Brexit at the door of the Commission in the first place). In the end, it is the member states that set the negotiating mandate for the EU, meaning Barnier (as well as Juncker and his UK-sceptic Chief of Staff Martin Selmayr) could find their hands tied somewhat.

That said, given the level of technical detail involved, the Commission will be closely involved in the Brexit talks as was also the case during David Cameron’s renegotiation. For example, returning to the question of financial services, it will be up to the Commission to determine (pressure from the Council notwithstanding) whether post-Brexit the UK regulatory system is deemed equivalent to that of the EU (if the UK seeks to go down this path to try to maintain access to parts of the financial services passport). This will be up to Valdis Dombrovskis, the European Commissioner responsible for Financial Services, and not up to Barnier however.