By Joseph Horch, International Business Writer
On June 23rd of this year, the United Kingdom voted to leave the European Union (EU). Many leading economists and financial experts said that the decision to leave the EU would cause a decline in prosperity. Now, three months after the shocking decision, British officials are seemingly rattled by the divorce.
Should the UK exercise article 50 of the Treaty of the Lisbon Treaty, which would allow the island nation to withdraw its membership, UK based banks would lose their access to the EU capital markets, a right referred to as passporting rights. Passporting rights allow banks within the EU to serve clients from across the 28 nation bloc.
“Passport rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area,” said Jens Weidman, the President of the Board of the German Federal Bank.
Joining the European Economic Area (EEA) is one alternative Great Britain could explore. Being a member of the EEA would allow Great Britain to maintain membership in the single market. However, Great Britain would have to accept free movement of EU citizens.
Opposition to the free movement of EU citizens was a major issue for the United Kingdom Independence Party (UKIP), the political party responsible for the Brexit movement.
Passporting rights have played an instrumental role in London becoming one of the world’s premiere financial hubs. The financial services industry is believed to account for 12 percent of national output.
Should Great Britain choose not to remain in the single market, Weidmann believes that some financial institutions would leave London for Frankfurt, home to the Frankfurt Stock Exchange, the 10th largest exchange in the world measured by market capitalization. “As a significant financial center and the seat of important regulatory and supervisory bodies, Frankfurt is attractive and will welcome newcomers. But I don’t expect a mass exodus from London to Frankfurt.”
Rating agency Moody’s, however, predicts that while costs of doing business with Europe will become more expensive, firms should be able to ‘manage.’
“In particular, we consider that the third-country equivalence provisions contained within the incoming MiFID II EU directive may provide firms with an alternative means of accessing the single market,” said Simon Ainsworth, vice president at Moody’s
“The complexity of (quickly) unwinding the status quo and a desire to minimize the initial impact on European domiciled banks will likely lead to the preservation of most cross-border rights to undertake business.”
Great Britain’s Prime Minister, Teresa May, faces pressure for what is being called a ‘hard’ Brexit; pulling out of the single market and ending full passporting rights and free movement of European Union citizens.
However, Chancellor of the Exchequer, Phillip Hammond, and British based banks have singled that they want the UK to stay apart of the EU.
The European Commission has said that UK access to the single market would cease to exist, unless they were to allow for the free movement of people. Great Britain has faced criticism from Europe for wanting to ‘cherry-pick.’ “We would reject cherry-picking. You cannot just pick out all of the best items and have just what suits you,” European Commission President Jean-Claude Junker said this earlier this weekend.
President Junker’s comments seem to signal a desire to make Britain feel some pain for wanting to leave the EU, and igniting similar feelings of isolation across Europe.
A version of this article appeared in the Tuesday, September 27th print edition.
Contact Joseph at