Britain wins ECB battle, but has it won the war?

Britain wins ECB battle, but has it won the war?

The European Court of Justice (ECJ) granted the UK an important victory against the European Central Bank (ECB) on March 4, with a ruling that prevents the central bank from limiting the clearing of euros outside the Eurozone.

The move would have fragmented the single market and increase the probability of Britain leaving the EU. However, the court document leaves open the possibility of future conflicts with the ECB. Why is this so, and are future conflicts likely?

On July 5, 2011 the ECB published its Eurosystem Oversight Policy Framework (EOPF). The document argued that clearing houses based in the UK or other non-Eurozone countries would have to move inside the Eurozone to continue to do business in euros.

The ECB also stressed that clearing houses that settle euro-denominated payment transactions should settle them in Central Bank money and be legally incorporated in the euro area where the ECB would exercise full supervision. The UK challenged the policy in 2011, calling for the ECB’s policies to be annulled.

The ECJ supported the UK’s request for the EOPF to be annulled. According to the press release that followed the court’s decision on March 4:

“The General Court holds that the ECB lacks the competence necessary to regulate the activity of securities clearing systems as its competence is limited to payment systems alone by Article 127(2) of the FEU Treaty.”

“The General Court annuls the European Oversight Policy Framework published by the ECB in so far as it sets a requirement for CCP’s involved in the clearing of securities to be located within the Eurozone.’’

The Court added that if the ECB felt that its role in managing payment systems required the oversight of securities clearing, it would need to request a change to its statute so that the relevant article includes explicit reference to this point.

The ruling is crucial for the UK and other Eurozone countries because it prevents a damaging split in the single market and in particular in financial services.

If the Court had sided with the ECB, there would have been a split in the single market for clearing certain currencies and securities based on where firms were located in the EU. Furthermore, it sets limits on Eurozone action, something that will be crucial in the future for a wide range of issues but notably banking union and financial regulation.

However, when the ruling is put into perspective, it raises questions about the political nature of the General Court and whether it is actually a victory for the UK.

The first thing to bear in mind is that Germany is well known for being an advocate of British membership in the EU. Although political and media criticism eventually forced her to renege on her stance, Angela Merkel at first did not support Jean-Claude Junker’s nomination in May 2014 after Britain expressed strong reservations about his candidacy.

On economic policy, the loss of British influence would be strongly felt by Northern liberal allies who wish to shape Europe in a more pro-market and pro-trade direction. Germany will offer every face-saving technique available to rescue David Cameron from his Eurosceptic back-benchers.

However, it is hard to believe that Berlin will not use Cameron’s weak position to skillfully shape financial regulation in a way that suits German interests. To put the same point differently, Germany will use both ‘’carrots and sticks’’ to keep Britain in the Euro and achieve its own goals.

What next?

To emphasize the last point, consider the latter of the press conference citations.

The ruling qualifies the EOPF’s annulment in terms of the location policy’s (i.e location of clearing houses in the Eurozone) illegality. This leaves open a different interpretation that still remains to be seen.

One could argue that whatever this oversight of clearing houses might entail in the future, the ECB would need to request a change in its statute which would be decided under Qualified Majority Vote, as stipulated in the ruling. It is not clear that there would be any support for this other than by France and Spain.

Furthermore, the ECB does not tend to take its own initiative on issues that Germany deems politically sensitive. Yet this is the important point: the Court leaves open the qualification of ‘’oversight’’ and therefore potential problems for the UK’s financial sector in the future, should the Germans consider some sort of oversight desirable.

Consequently, it fits with the German ‘’carrot and stick’’ strategy, especially when considered under the light of previous defeats such as the one over the Financial Transactions Tax (FTT). Germany has been and still is a strong supporter of the latter.

Hence, the ruling seems to show that it is the EU and especially Germany who has the potential to skillfully shape financial regulation. In fact, the ruling might be more of a victory for the EU than for the UK.

However, the Germans are involved in a difficult balancing act given Angela Merkel’s goal of keeping the UK in Europe. One can only conclude then that this is only the first round. What the second round will look like remains to be seen.

Categories: Europe, Finance

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