The Impact of Brexit on Europe’s Financial Landscape
The European Union is one of the largest political, economic and trading blocs in the world and is the only major economy not to have a single currency. The UK was the largest contributor to this, from the beginning of its stay until its departure in 2016. Brexit, better known as the United Kingdom’s decision to leave the European Union (EU), is a unique case of an economic and political union dis-unifying, and was a historic, headline-grabbing event for both the UK and the EU.
Brexit has certainly made a huge impact on the European economy and has caused a great deal of uncertainty. The UK’s financial landscape, though, is perhaps the most affected. The UK has the fifth largest economy in the world. Its financial services sector allowed it to become a global financial center, with London holding the title of the most important financial center in the world, particularly in banking and currency trading. Since Brexit began its process back in 2016, the financial services industry in the UK has been in constant flux.
In this article, we will discuss the implications of Brexit on Europe’s financial landscape and the likely impact this will have on the EU economy.
What is Brexit?
Official Brexit negotiations kicked off in 2017 and were projected to last two years, with a possible extension. As negotiations dragged on, a deal was reached between the EU and the UK in November 2020, paving the way for the UK’s exit from the EU on 31st January 2021.
Brexit is the process through which the UK left the European Union and stated its intent for a close trade and any other kind of relationship with its European neighbours. To do this, the UK had to negotiate a lengthy treaty with the EU and navigate the complex legal systems of the bloc’s 28 member nations. The discussions involved intense negotiations on topics such as citizens’ rights, freedom of movement, the Ireland-Northern Ireland conflict, trade, and financial services.
What is Europe’s financial landscape?
The EU is the world’s second-largest economy, after the US. It comprises 28 member states, and the total economic output of all of its countries is more than the US, China and Japan combined. As the UK’s largest trading partner, Brexit has had major implications for Europe’s financial landscape.
Since the Brexit referendum in 2016, the EU’s financial landscape has been undergoing a major transformation that affects its economies as well as its financial markets and regulations.
Financial services are one of the most crucial indices of this landscape, and Brexit specifically affects financial service regulations and markets.
The Impact of Brexit on UK Financial Services
The UK’s financial services industry is a cornerstone of its economy. London, one of the most powerful financial centres in the world, is its largest financial district.
Brexit has had an enormous impact on the UK’s financial sector. There has been a prolonged period of financial uncertainty and instability due to the lack of clarity over the UK’s long-term trading relationship with the EU. Several large financial institutions have already either left the UK or are planning to relocate. This includes a number of banks, pension companies, asset managers, insurance companies and others.
The UK’s decision to leave the EU means that the UK’s financial services sector will no longer be regulated by the European single market. This means that institutions located in the UK will be subject to the UK’s own rules and regulations, and will not be able to take advantage of all the benefits of the European single market.
The UK’s exit from the EU also means that financial services firms located in the UK are no longer able to passport their services to other EU countries. This means that, without passporting rights, financial services firms operating in the UK cannot provide services in other EU countries without having to develop different entities.
The Impact of Brexit on the EU’s Financial Landscape
The UK leaving the EU has had far reaching implications for Europe’s financial landscape. These implications are both immediate and long term and can be divided into three main categories: regulatory impacts, economic impacts, and financial stability and innovation impacts.
Regulatory Impact of Brexit
The UK’s decision to leave the EU means that the UK will no longer be subject to the EU’s financial services laws and regulations. This is likely to create a divergence of regulatory approaches as both the EU and UK will be free to develop their own regulatory systems.
The UK government has insisted that it will not ‘diverge for the sake of divergence’ from EU financial services regulations, but the expectation is that the UK will be free to diverge from the EU’s regulations in certain areas.
The divergence in the regulatory approaches of the UK and the EU will lead to additional costs for those financial firms that wish to operate across both markets. Financial firms must account for the fact that they will have to comply with two separate regulatory systems and bear the costs associated with operating across these markets.
Economic Impact of Brexit
The UK’s decision to leave the EU is likely to have profound and long-term implications for the EU’s economy. The size of the UK’s economy relative to the EU’s, coupled with the fact that the UK is the EU’s largest trading partner, suggests that the economic impact of Brexit will be significant.
Immediate economic impacts of Brexit include the increased costs associated with trading with the UK, a decrease in savings and investment inflows, and a weakening of the UK’s currency.
In the longer term, Brexit is likely to weaken the EU’s economy by hampering economic growth and reducing the EU’s global influence. The UK’s departure from the EU also reduces the attractiveness of the EU as a destination for foreign direct investments.
Financial Stability and Innovation Impact of Brexit
The UK’s financial services industry is a powerhouse in Europe. Immediate impacts of Brexit include an increase in costs associated with financial services transactions and the associated risk of a decrease in the level of liquidity.
The UK’s departure from the EU likely also means that the UK will be able to develop its own financial services regulations and pursue a divergent approach to financial services regulation. This could have long-term implications for innovation and financial stability in the EU and could lead to increased jurisdictional competition amongst EU member states.
Brexit is a historic and unprecedented event that has had a profound impact on the European Union and its financial landscape. In the wake of the UK’s departure, the EU has experienced a period of significant economic and political uncertainty.
The immediate impact of Brexit has been a weakening of the UK’s currency and a decrease in savings and investment inflows. There has also been a divergence of the regulatory approaches of the UK and EU and an increase in the costs associated with financial services transactions.
In the longer term, Brexit is likely to weaken the EU’s economy, hampering economic growth, reducing the EU’s global influence, and reducing the attractiveness of the EU as a destination for foreign direct investments. There may also be a decrease in the level of innovation and financial stability in the EU.
Despite the disruption caused by Brexit in Europe’s financial landscape, the EU is still a strong economic bloc and the UK itself has much to offer the rest of Europe. By closely coordinating with each other, both sides should be able to minimize the economic and financial implications of Brexit for the region.