Journal of European Public Policy

ISSN: 1350-1763 (Print) 1466-4429 (Online) Journal homepage: https://www.tandfonline.com/loi/rjpp20

Brexit and the battle for financial services

David Howarth & Lucia Quaglia

To cite this article: David Howarth & Lucia Quaglia (2018) Brexit and the battle
for financial services, Journal of European Public Policy, 25:8, 1118-1136, DOI:
10.1080/13501763.2018.1467950

To link to this article: https://doi.org/10.1080/13501763.2018.1467950

Published online: 26 Apr 2018.

Submit your article to this journal

Article views: 4158

View related articles

View Crossmark data

Citing articles: 6 View citing articles

Full Terms & Conditions of access and use can be found at

https://www.tandfonline.com/action/journalInformation?journalCode=rjpp20
JOURNAL OF EUROPEAN PUBLIC POLICY
2018, VOL. 25, NO. 8, 1118–1136
https://doi.org/10.1080/13501763.2018.1467950

Brexit and the battle for financial services

David Howartha and Lucia Quagliab
a
Institute of Political Science, University of Luxembourg, Esch-sur-Alzette, Luxembourg;
b
Department of Political Sciences, University of Bologna, Bologna, Italy

ABSTRACT
This paper analyses the policy developments concerning the Single Market in
finance in the context of Brexit. Theoretically, we engage with two bodies of
work that make contrasting predictions on European financial market
integration and the development of European Union (EU) policies on financial
regulation: one focused upon a neo-mercantilist ‘battle’ amongst member
states and the other stressing the importance of transnational financial
networks (or coalitions). Empirically, we find limited evidence of the formation
of cross-national alliances in favour of the United Kingdom (UK) retaining
broad access to the EU Single Market in financial services, the presence of
which would have aligned with the expectations of analyses focused upon
transnational networks. By contrast, the main financial centres in the EU27
and their national authorities competed to lure financial business away from
the UK – what we explain in terms of a ‘battle’ amongst member states and
their national financial centres.

KEYWORDS Brexit; financial services; financial regulation; European Single Market; France; Germany

Introduction
The United Kingdom (UK) is the world’s largest exporter of financial services
and approximately one third of that export goes to the European Union
(EU). Hence, the decision of the UK government to leave the EU triggered
widespread concern on the future of the financial sector, both in the UK
and in the EU. Key issues concerned both the impact of Brexit on the financial
sector in the UK and in the EU27; and the political bargaining power that this
would give to the UK and the EU during the Brexit negotiations. The academic
literature on the political economy of finance and the politics of financial regu-
lation in the EU makes contrasting predictions concerning these key issues. A
neo-mercantilist state-centric body of academic work that emphasizes the
competition amongst the member states and their financial centres in the
EU (Fioretos 2010; Howarth and Quaglia 2013; Story and Walters 1997)
would predict that the limitation of access to the Single Market following
Brexit would encourage the relocation of financial activities to other EU

CONTACT David Howarth [email protected]

© 2018 Informa UK Limited, trading as Taylor & Francis Group
 JOURNAL OF EUROPEAN PUBLIC POLICY 1119

financial centres, which would therefore seek pro-actively to lure business

from London. More generally, this body of work predicts that any piece of
EU financial regulation that potentially has significant distributive conse-
quences – largely but not entirely due to the make-up of different national
financial systems – will result in a ‘battle’ amongst member states. By contrast,
a second body of academic work that draws from the literature on transna-
tional finance (Macartney 2010; Mügge 2010; Van Apeldoorn 2002) and the
new interdependence (Farrell and Newman 2016; Newman and Posner
2016) would predict that cross-national alliances would mobilize in favour
of the UK retaining broad access to the Single Market.
In this paper, we ask whether Brexit triggered a ‘battle for finance’ amongst
the member states and their financial centres to attract business from the UK,
or whether cross-border coalitions mobilised with a view to securing as much
market access as possible and why this was the case. This issue is of immense
economic and political significance given the potential impact of Brexit nego-
tiation outcomes on the development of a key economic sector – finance – in
the UK and the EU. An examination of this issue also provides a valuable
opportunity to speak to the broader academic debate on the relative impor-
tance of state-centric explanations versus transnational networks to the devel-
opment of financial governance in the EU and elsewhere.
This paper is structured as follows. We first review the literature on the poli-
tics and political economy of financial market integration in the EU. We then
map the preferences and the mobilization of various parts of the financial
industry in the UK, as well as the positions to date (April 2018) of the UK auth-
orities during the Brexit negotiations on finance. We do the same with refer-
ence to the other two main EU member states, namely Germany and France
which, respectively, had the second and third largest financial sectors in the
EU and, in Frankfurt and Paris, respectively, had the third and second
largest financial centres in the EU by total assets. These were also the most
influential member states in the context of Brexit negotiations (Krotz and
Schild 2018). We recognize that a number of other second-tier EU27 financial
centres and member states with significant financial sectors had the potential
to gain from Brexit – notably Dublin (Ireland), Brussels (Belgium), Amsterdam
(the Netherlands) and Luxembourg. However, given limited space we do not
focus upon these. Empirical material was gathered though a systematic survey
of press coverage and policy documents, as well as semi-structured interviews
with representatives of EU-headquartered banks, EU-based banking associ-
ations, business associations, and national government officials responsible
for financial affairs.
Our findings suggest that the main financial centres in the EU and their
national authorities competed to lure financial business away from the UK,
in line with the ‘battle’ amongst member states approach. In contrast, the for-
mation and mobilization of cross-national alliances in favour of the UK
1120 D. HOWARTH AND L. QUAGLIA

retaining broad access to the Single Market in financial services mostly failed
to materialize, contrary to the expectations of the transnational finance litera-
ture and the new interdependence approach. The main caveat of our analysis
is that the Brexit negotiations are ongoing at the time of writing. Nonetheless,
a broadly convincing argument on the positioning of financial interests and
national authorities can be already presented.

State of the art on the political economy of European financial

market integration
We consider two alternative explanations, which are rooted in the literature
on the politics and political economy of EU financial integration. The first
explanation is mostly state-centric and focuses on the competition amongst
member states and their financial centres in order to attract financial business
in the Single Market. The early literature on the ‘battle of the systems’ (Story
and Walter 1997) argues that national authorities seek to promote EU financial
integration in a way that protects their national varieties of financial capital-
ism. Although national financial systems have partly converged across the
EU over time, distinctive features remain. Hence, a more recent version of
this literature points out the competition amongst member states to ensure
that EU financial regulation does not penalize their financial industry or impor-
tant parts of it, such as hedge funds in the UK (Fioretos 2010), or savings banks
in Germany (Howarth and Quaglia 2013). Moreover, the member states might
undertake domestic reforms that make their financial centres more attractive
(for example, Lütz 1998).
According to this approach, in the context of Brexit, we would expect a
neo-mercantilist ‘battle’ for finance between the UK-based financial industry,
notably the City of London, and other EU financial centres, jostling for position
to attract business from London, with support from their respective local and
national authorities. More specifically, one would expect attempts by the EU
(and the main member states therein) to restrict the ability of UK-based
firms to provide a range of financial services, including clearing, to the rest
of the EU because this would encourage the relocation of these financial
activities to the main EU27 financial centres.
Second, one would expect that each financial centre would seek to play to
its comparative advantages because what it could gain from Brexit in terms of
new financial operations depended largely on the national variety of financial
capitalism. Consequently, Germany and France would be well positioned to
attract business in banking, as they would have – post-Brexit – respectively,
the first and second largest banking sectors by total assets in the EU, with
the concentration of sophisticated investment banking activities in Frankfurt
and Paris (Howarth 2013). Furthermore, Paris and to a lesser extent Frankfurt
were well-positioned to attract the clearing of euro denominated derivatives
 JOURNAL OF EUROPEAN PUBLIC POLICY 1121

in case the EU – and more specifically the euro area and the ECB – adopted
restrictions on euro clearing.
However, continental financial centres were far less appealing than London
in most of these financial services for a number of reasons: notably, the con-
centration of expertise in London, the UK’s comparatively light-touch regulat-
ory framework, advantages linked to the use of English common law, and the
country’s established financial infrastructure (see Bank of England 2015;
Batsaikhan et al. 2017). Brexit created an incentive for the national authorities
to attempt to woo business from London by making certain features of the
national financial system – notably regulation – and related areas – notably
tax policy – more appealing to UK-based financial services. Hence, one
would expect some domestic reforms in this direction.
The alterative explanation examined in this paper draws on the literature
on transnational finance (Graz and Noelke 2008; Macartney 2010; Mügge
2010; Tsingou 2008), which considers EU financial integration as a reflection
of the interests of big financial companies, first and foremost British, French
and German banks, whose businesses had become pan-European (see also
Van Apeldoorn 2002) and the literature on ‘new interdependence’ (Farrell
and Newman 2016, 2017; Newman and Posner 2016), which examines the for-
mation of cross-border coalitions brought together by mutual interdepen-
dence. For example, in the EU context, Posner (2009) and Quaglia (2010)
consider the role of transnational networks (or coalitions) in the making of
EU financial regulation over the last two decades.
These two bodies of work pay attention to the mobilization of transnational
networks (coalitions) of private and public actors seeking to protect and
expand cross border flows. For example, Farrell and Newman (2015) explain
how transnational coalitions generated by financial interdependence were
instrumental in settling transatlantic regulatory disputes in finance. According
to this literature, in the context of Brexit, we would expect financial firms
engaged in cross-border business in the UK and the EU27 to mobilize
because their profits would be significantly affected by reduced market
access. Hence, we would expect the formation of a transnational coalition lob-
bying on both sides of the Channel with a view to preserving as much as poss-
ible the current level of market access between the UK and the EU27, securing
a special deal for finance.
We would also expect that this industry coalition would be spearheaded by
the main EU-level lobby groups representing the interests of cross-border
finance. Moreover, since London is the fulcrum for the more internationally-
oriented financial firms in Europe, we would expect that these UK-based
financial associations would seek to mobilize their counterparts in the EU27
and that the UK public authorities would also seek to elicit the involvement
of the EU27 based financial industry and national governments with a view
to preserving as much market access as possible.1
1122 D. HOWARTH AND L. QUAGLIA

The UK and the Single Market in finance

After the referendum, the priority for the bulk of the UK-based financial indus-
try was to preserve membership of and full access to the Single Market. It soon
became clear that a European Economic Area (EEA) style arrangement post-
Brexit was not feasible for the UK government because of its commitment
to ending free movement of labour (Bulmer and Quaglia 2018). As its main
alternative, the UK-based financial industry favoured a special deal for
finance which, however, was not politically feasible for the EU Commission
and several member states, which insisted publicly on maintaining all four
freedoms of the internal market or none (Armstrong 2018). Hence, the
British financial industry called for the preservation of as much market
access as possible (The CityUK 2016a, 2016b). The Conservative government’s
‘Brexit White Paper’ of February 2017 (UK government 2017) made clear that
the UK would not seek Single Market membership after Brexit. Nonetheless,
the White Paper also highlighted ‘a legitimate interest in mutual cooperation
arrangements that recognize the interconnectedness of markets’ (p. 42) in
finance.
Once the UK government outlined its plan for a hard Brexit in early 2017,
the UK-based financial industry recognized that it would not be able to pre-
serve the EU passport. Hence, most British financial services campaigned in
favour of an extensive use of equivalence,2 in order to secure as much
access as possible to the Single Market (see, for example, Ford 2017). The
City also asked for a long transition period out of the Single Market (The
CityUK 2016a, 2016b). The strategy adopted by the UK-based financial indus-
try was to point out that it provided a variety of services to ‘customers’ across
Europe and that those services were necessary and could not be easily
switched to other locations. Moreover, the City argued that restrictions
imposed on British financial services to access the Single Market or to clear
euro denominated assets would result in higher costs and more risks for cus-
tomers across the EU.
According to the ‘battle’ amongst member states approach, given the
economic strength of the financial industry in the UK, one would have
expected that the UK government would try to protect this sector by securing
continued broad access to the Single Market after Brexit. However, the UK
government downplayed the preferences of the UK-based financial industry.
Three clarifications regarding the limited influence of the financial industry in
the UK must be made. First, the negotiations on finance were part of a broader
set of negotiations, whereby it would have been politically difficult for the UK
government to grant finance a special status. Second, there were divisions
within the UK government, whereby the Chancellor of the Exchequer was
more sympathetic than other parts of the government as to the concerns
of the financial industry. Third, the UK financial industry was not united on
 JOURNAL OF EUROPEAN PUBLIC POLICY 1123

the issue of Brexit (see James and Quaglia 2017). Different parts of the finan-
cial industry would be impacted by Brexit in different ways, and the parts most
likely to be badly affected were those that mobilised the most. The UK-based
financial services most potentially affected were wholesale – not retail –
because wholesale business is international and cross-border in nature.
Thus, the financial services most affected by Brexit would be investment
banking and clearing of euro denominated assets.
The four largest UK banks – HSBC, Royal Bank of Scotland (RBS), Barclays
and Lloyds TSB – opposed Brexit. However, they were not very vocal in
their opposition following the June 2016 referendum because they made
limited use of the passport, their UK customer base included Brexit supporters
and they did not want to antagonize the UK government (James and Quaglia
2017). Throughout 2017, UK banks announced ‘contingency plans’ to move
staff and operations to the EU27, in the event that Brexit negotiations did
not ensure full access to the Single Market. Lloyds TSB stated that it
planned to convert its German branch in Berlin into a subsidiary, and so did
Standard Charter with reference to its branch in Frankfurt. HSBC moved to
enlarge its existing subsidiary in Paris and RBS announced similar plans
with regard to its subsidiary in Dublin. Barclays announced its decision to
establish a subsidiary in Dublin.
Big non-EU banks – first and foremost US banks – used the UK as a point of
entry into the Single Market through UK-based subsidiaries that then
branched out or conducted cross-border business in the EU. Approximately
90% of both European turnover and employees of the five large US invest-
ment banks (Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, Bank of
America Merrill Lynch) were located in London (Schoenmaker 2016; Schoen-
maker and Véron 2017). US banks were vocal opponents of Brexit, especially a
hard Brexit, and were less restrained than UK banks in voicing their concerns
publicly in the media and vis-à-vis the UK government, especially the Treasury.
US banks preferred to lobby individually in the UK and announced plans to
open offices in Frankfurt.3 The degree to which these announced plans
were part of a bank lobbying campaign to influence the UK government’s
negotiating position was unclear. To date, details on most bank staff transfers
and office space expansion remained unclear. According to a number of
sources, most banks were ‘looking to minimize expense and disruption by
relocating as little as possible in the first instance’ (Oliver Wyman 2017; inter-
view, Brussels, October 2017).
The other part of the UK financial sector that would be badly affected by
Brexit, especially a hard Brexit, was derivatives clearing. Indeed, if clearing
restrictions were imposed by the EU in the context of Brexit, the LCH.Clearnet
Group would have a clear incentive to move its euro denominated clearing
business from London to Paris or Frankfurt. This partly explains why the
French and German governments were keen to restrict euro denominated
1124 D. HOWARTH AND L. QUAGLIA

clearing outside the EU, as elaborated in the following section. Hence, the
London Stock Exchange (LSE), which was the main owner of LCH.Clearnet,
repeatedly pointed out the need to avoid clearing restrictions in the
context of Brexit (see, for example, Burton 2017).

The EU27 and Brexit: defending collective and national interests

in finance
In the aftermath of the referendum, four interrelated dynamics in the EU27
are noteworthy. First, the European Commission, the Parliament and the
EU27 member states, made clear that the four freedoms were indivisible
and that there would not be a special deal for finance. The EU negotiating
guidelines adopted by the European Council (2017: 3) stated that ‘Preserving
the integrity of the Single Market excludes participation based on a sector-
by-sector approach … there can be no “cherry picking”’. Second, the Com-
mission (2017) proposed the tightening up of the procedures for assessing
equivalence for ‘high impact third countries for which an equivalence
decision may be used intensively by market operators’ – notably the UK.
The position of the member states on this tightening varied. While public
official statements on equivalence are rare, French Ministry of Finance offi-
cials (interview, 16 June 2017) argued that equivalence rules had been
excessively watered down in legislation – as in the Alternative Investment
Fund Managers directive – and should be reinforced especially for ‘high
impact’ third countries. The explicit French aim was to encourage UK firms
to relocate operations to Paris. Certain other member states (interview, Min-
istry of Finance, Luxembourg, 29 June 2017; Asimakopoulos and Wright
2017), however, saw no need to reinforce equivalence rules.
Third, the European Central Bank (ECB), supported by the French and
German central banks and governments, re-opened the issue of restricting
the bulk of clearing of euro denominated assets to the EU – and, ideally,
the euro area (Financial Times, 15 January 2017). In the aftermath of the
Brexit referendum, French President François Hollande and the Governor of
the Bank of France, François Villeroy de Galhau stated on separate occasions
that the UK would not be able to retain its key role in clearing euro denomi-
nated assets (Skolimowski 2016). In early 2017, Andreas Dombret (2017) – a
member of the Executive Board of the German Bundesbank – argued in
favour of ‘having the bulk of the clearing business inside the euro area’. In
June 2017, the ECB, with the support of the Commission, proposed a
change to its statutes that would give it and other euro area central banks
a clear legal competence in the area of central clearing.
Fourth, the main EU27 financial centres and their public authorities began
to mobilize to attract business, as detailed below. In May 2017, the European
Securities and Markets Authority (ESMA 2017) issued guidance aimed at
 JOURNAL OF EUROPEAN PUBLIC POLICY 1125

avoiding competition on regulatory and supervisory practices between

member states, and a possible race to the bottom in the context of Brexit.
ESMA subsequently developed sector-specific guidance concerning alterna-
tive investment funds, assets management and securities trading. Concerns
about a potential race to the bottom and supervisory inconsistencies were
also aired by the ECB and the Single Supervisory Board (SSB) (Lautenschläger
2017). In April 2017, the ECB published detailed guidance on several Brexit-
related queries, stating that it was concerned with ensuring consistent super-
vision throughout the euro area and that the ECB would not give out licenses
to ‘empty shell companies’ (ECB 2017a).
In France, the Governor of the Bank of France, Villeroy de Galhau, pub-
licly proclaimed Brexit an opportunity for the euro area and, more specifi-
cally, for the Paris financial centre (Cuny 2017). In September 2016, the
former Governor of the Bank of France, Christian Noyer was appointed as
‘France’s Brexit point man’ with the explicit mission of attracting financial
business to Paris. In the same month, the Autorité de contrôle prudentiel
et de résolution (ACPR) – which monitors banks and insurers – and the Auto-
rité des marchés financiers (AMF) – which safeguards investments and the
stock market – issued a joint statement saying they were ‘getting ready
to welcome British-based institutions that wish to locate their business in
France’ (ACPR and AMF 2016). The joint statement specified that the licen-
sing procedure would be simplified by using documents already available
in English that have been submitted to the supervisory authorities in the
home country, namely the UK.
The heads of French banks unanimously claimed that they were not preoc-
cupied with the potential destabilization of Brexit and rather saw it as an
opportunity for the French banking system, notably through the repatriation
of certain operations undertaken by French banks in London (de Guigné 2017;
interview with bank official, Paris, November 2017; Brassac 2017). Further-
more, the Fédération bancaire française (FBF) pointed out ‘the need to
create an ecosystem favourable to banks in order to attract them to Paris’
(authors’ translation) (Barbat Layani 2017). Despite the public expression of
limited concern, French banks had the third largest exposure to the UK
economy of any EU country’s banks (after Germany and Spain).
In November 2016, Europlace produced a report ‘Brexit: La Place de Paris
en pôle position en Europe pour attirer les entreprises’ (Europlace 2016). By
using 12 criteria for the evaluation of financial centres, the report suggested
that except for two criteria, Paris ranked higher than Frankfurt. However, in
June 2017, a French Senate commission produced a report (de Montgolfier
2017) that argued that French reforms adopted to date were insufficient to
make France (Paris) attractive to international financial firms and more
needed to be done. With the election of a pro-finance Emmanuel Macron
as President, the new French government announced a number of additional
1126 D. HOWARTH AND L. QUAGLIA

reforms to make Paris more attractive to international finance, including lower

corporate taxes, reform to the wealth tax, the elimination of the highest
bracket of payroll tax on employees, the cancellation of a planned extension
of the financial transaction tax, the reduction of additional regulatory burdens,
and the creation of a new commercial court for ‘highly technical’ legal dis-
putes. The new prime minister, Edouard Philippe made the broader
promise of keeping financial regulation to a minimum, insisting that France
would move on from a past of ‘over-regulation’ (Bright 2017).
In Germany, national policy-makers were eager to attract potential financial
business from London. German Finance Minister Wolfgang Schäuble dis-
creetly supported the City of Frankfurt’s efforts to attract thousands of
bankers (O’Donnell 25 January 2017). In January 2017, German banking regu-
lators met more than 20 foreign banks to spell out requirements to move
operations to Frankfurt. The meeting was hosted by the financial supervisory
authority, Bafin, which made clear that no ‘letter-box’ operations would be
accepted and that banks would have to have significant risk management
arrangements and senior executives based in Frankfurt (a point also made
separately by the Bundesbank).
The President of the Association of German Private Banks (2016) optimisti-
cally stated that he was ‘confident that Frankfurt [would] benefit from Britain
leaving the EU’. The Association of German Private Banks (2017) also indicated
that its member institutions would be relocating various operations from
London to Germany over the next two years and that this was ‘relatively
straightforward from a regulatory and organizational point of view’. Yet,
although the bulk of German banks were domestically oriented, the UK was
their second-most important foreign market, immediately following the US.
Moreover, German banks had significant exposure to the UK – about 22%
of German GDP. UK banks’ exposure to German counterparties represented
12% of UK GDP.
Similar to the actions of the French Europlace, the Frankfurt Finanzplatz
commissioned the study ‘Brexit – Let’s go Frankfurt’ (Helaba 2016). The
study compared European financial centres, ranking Frankfurt in second
place behind London. Like Paris, Frankfurt was keen to attract clearing deriva-
tives business, as stated by the head of Finanzplatz Deutschland, Hubertus
Väth (Colson 2017). In October 2017, Deutsche Börse moved to attract the
clearing of euro denominated derivatives contracts from London by changing
its clearing rules.

An overall assessment: ‘battle’ amongst member states or

transnational coalitions?
The explanation based on transnational financial networks and the new inter-
dependence fits well with the arguments used by the Bank of England, the UK
 JOURNAL OF EUROPEAN PUBLIC POLICY 1127

government, and part of the UK based financial industry (e.g., the LSE). For
example, the Governor of the Bank of England, Mark Carney (2017a, 2017b)
argued that there was a mutual interest in a special deal for finance given
that London was the ‘investment banker’ for the EU. Carney (2017a, 2017b)
also warned against the fragmentation of global markets by jurisdiction or
currency on the grounds that this would reduce the benefits of central clear-
ing. The chairman of the LSE (Rolet 2016) pointed out that the disaggregation
of the euro component of the LCH interest rate swap engine Swap Clear
would cost the financial services industry $77 billion of additional margins
(a similar) point was made in a policy paper by the Intercontinental Exchange
(ICE 2016).
However, the ECB (2017b) and some EU27 national central banks and regu-
latory agencies explicitly downplayed and/or challenged concerns about the
implications of Brexit for financial stability or credit provision in the EU27. For
example, in November 2016, Bundesbank Executive Board member, Andreas
Dombret (2016) pointed out that
it is often argued that if Brexit hampered the banking sector, it might impair the
financing of the European economy. I don’t share those fears. Brexit and its poss-
ible repercussions for the City of London are unlikely to be an issue for financial
stability or the financing of the EU’s real economy.

French authorities – both in the public sector and banking sector – were gen-
erally unwilling to raise the prospect of EU-wide financial instability caused by
Brexit (interview, banking association official, Paris, November 2017), despite
the high level of financial integration between the French and UK economies –
albeit lower than between Germany and the UK.
The French government and ministry of finance also took a hard line on the
need for a tough EU negotiation position with the UK and the sanctity of the
Single Market. In contrast, the German Ministry of Finance prepared a study
(internal paper), stressing that Germany had considerable interest in an ‘inte-
grated financial market’ with the UK – given the high level of financial inte-
gration between the UK and German economies – but this was to be
subject to the latter respecting EU regulatory conditions (Boerse-online.de,
27 March 2017).
As for private actors, one of the main European financial lobbying groups –
the Association for Financial Markets in Europe (AFME) – campaigned in
coordination with City lobbying groups (including the British Bankers’ Associ-
ation (BBA)) in favour of a long transition period for finance (AFME 2017). The
AFME argued that Brexit created particular uncertainty for cross-border
wholesale banking. The other main European financial lobby group, the Euro-
pean Bankers’ Federation (EBF) – which represents 32 national banking associ-
ations – adopted a more neutral position but nonetheless encouraged both
the EU27 member states and the UK to provide clarity and certainty on
1128 D. HOWARTH AND L. QUAGLIA

Brexit and financial matters as soon as possible to diminish the risk of financial
instability (interview with a major EU27 national banking association official,
Brussels, 15 November 2017).
There is no publicly available evidence to date that any EU27 national
financial associations or major financial companies sought to form a trans-
national coalition with financial sector actors across the Channel to put
pressure on EU and member state authorities to reach a special deal on
finance. A number of interviewees explicitly noted the lack of a transnational
coalition and the tendency of EU-headquartered banks and associations to be
sensitive – albeit reluctantly – to different national government positions.
The problem in these EU associations has been that each industry national
segment looks closely at the political position of their home country and
tends to align with it. So those who are headquartered in a country that sees
Brexit as an opportunity to attract business away from London tend to disen-
gage from any effort to find common solutions (interview with UK bank official,
Brussels, 17 November 2017).

Their silence [on the costs of Brexit to EU27 banks] is surprising to some extent.
But it is a deeply uncomfortable territory for companies. Companies are usually
cautious with politics, and Brexit is the most political thing happening in a long
time, so I can understand their silence. They doubt whether they can have any
influence on it and they wonder how they might be thanked for it afterwards
(interview with UK bank official, Brussels, 17 November 2017).

A French bank official (interview, Paris, 29 November 2017, authors’ trans-

lation) remarked that:
our only real concern is to not rise above our station, not to interfere with the
political debate, which is very tense because potential political costs are very
high. We are merely merchants. Hence we focus on technical points, we do
not comment on (dis)agreements between governments.

An official of a major EU27 banking association (interview, Brussels, 15

November 2017) reiterated that:
A deal on finance that would leave us as close as possible to the previous situ-
ation would be the preference of [national association] members, but we have to
be aware that this is impossible due to political forces, and prepare for no deal.

Officials from several major EU financial associations also noted their frus-
tration with the prioritization of national politics over a deal that would mini-
mize disruption. Some officials specifically targeted French companies:
the French government and the broader French establishment have taken a very
strong stance on Brexit. … It feels like the political position of the French
banking sector is defined in the Elysée [the French president’s office] and
passed on to the banks. When we talk to French banks individually, they
seem to worry about the consequences of Brexit, but collectively there is not
 JOURNAL OF EUROPEAN PUBLIC POLICY 1129

a word of that (interview, EU financial association officials, Brussels, 21 Novem-

ber 2017).

A number of EU27 national associations met with the UK-based International

Regulatory Strategy Group (IRSG) and the UK bank lobby group UK Finance to
discuss proposals for a ‘mutual access’ agreement (see Financial Times, 3 July
2017). However, the widespread view of these national associations was that
certain EU27 governments would not ‘let this fly’ and these transnational
efforts fizzled out (interview with a major EU27 national banking association
official, 15 November 2017). This absence of a transnational coalition and
the alignment with national government positions remains surprising given
widespread support in EU27-headquartered banks and national banking
associations for a special carve out on finance and concerns regarding the sig-
nificant predicted costs of having to capitalize their UK branches which,
without a special deal on finance, would potentially have to be transformed
into subsidiaries. However, in December 2017, the UK Prudential Regulation
Authority provided reassurances concerning the treatment of branches of
European banks in the UK after Brexit (Jack 2017), although the implications
(and the costs for European banks in the future) remained to be seen.
US-headquartered financial institutions, acting alone or in coordination
with US public authorities, encouraged a special deal on finance. US banks
were concerned about the cost of establishing or expanding subsidiaries in
the EU27 because of the need to meet EU and national capital requirements.
US bank efforts were largely channelled through the AFME, whose chairman
was Michael Cole-Fontayne, head of Europe at Bank of New York Mellon. The
AFME appears to have been the most important group leading transnational
efforts to push for a special deal for finance (Martin 2017; Williams-Grut 2017).
There was a ‘battle’ between the main financial centres in the EU27 in order
to lure business from London, building on national competitive advantages
mainly resulting from the configuration of national financial systems. The
main continental financial centres, first and foremost Paris and Frankfurt, com-
peted directly with each other in order to attract business from London. For
example, at an event in London in October 2016, representatives of business
lobbies from both Paris (Europlace) and Frankfurt (Finanzplatz Deutschland)
pitched hard to the business community that their cities should be the pre-
ferred destination for relocation (Business Insider, 19 October 2016). Rivalries
among EU27 financial centres and among their member state government
backers also surfaced in the case of euro clearing, where German, French
and Italian policy-makers argued that the ECB should only be given authority
over non-EU clearing houses engaged in significant levels of euro clearing,
but not those in the EU (Canepa and Koranyi 2017). Overall, EU institutions
adopted official neutrality on the attractiveness of different EU27 financial
centres.
1130 D. HOWARTH AND L. QUAGLIA

It is puzzling that in the case of Brexit there was a battle for financial ser-
vices amongst the member states, while at the same time an EU-wide trans-
national coalition did not materialize. This is unlike what happened, for
example, in the re-launch of the completion of the Single Market in finance
prior to the international financial crisis. Two factors account for this battle
and absence of transnational coalition: the political salience of Brexit and
the competing financial interests that Brexit generated. First, Brexit was an
issue of high ‘salience’ for politicians and public opinion in the UK and EU,
whereas the financial industry traditionally yields more influence on matters
of ‘quiet politics’ (Culpepper 2011). The influence of powerful economic inter-
ests is high when decisions are largely insulated from political pressures (Cul-
pepper 2011; Pagliari 2013), but it declines when decisions face greater public
scrutiny. In this context, politicians are more likely to respond to voters’ con-
cerns than to financial industry structural and instrumental power. The high
political salience of Brexit reduced the willingness of politicians to listen to
business concerns and therefore limited the incentives and ability of the
financial industry on both sides of the Channel to lobby for a special deal in
finance.
The UK government was less sympathetic to the Brexit-related concerns
raised by the financial industry than it was on most national and EU regu-
latory issues. James and Quaglia (2017) report that City lobbyists found it
difficult to access the Prime Minister’s office and that business groups
would be ‘frozen out’ if they were too negative on Brexit. In the EU,
national political authorities made clear that there would be no cherry
picking of the Single Market (especially for finance) and that they expected
their national business communities to support the positions taken by their
respective national governments. For example, at the beginning of the
Brexit negotiations in June 2017, Chancellor Merkel warned the German
business community to ‘hold firm’ and ‘don’t let anyone drive a wedge
between us’ (Delfs 2017).
Second, the financial industry in the UK and EU27 had (partly) competing
interests. The main financial centres in the EU27 had an interest in attracting
business from the UK, whereas the UK-based financial industry had the oppo-
site interest. Moreover, when trade associations and individual UK and US
banks sought to liaise with their counterparts in the EU, they were perceived
as making the case for a special deal in finance on behalf of the UK govern-
ment (James and Quaglia 2017). The financial industry and regulators on
both sides of the Channel also had an interest in avoiding major disruptions
in cross-border financial flows, the functioning of the Single Market in finance
and financial stability. Yet, politics appears to have trumped economics in the
context of Brexit.
The two theoretical frameworks applied in this paper are focused in large
part upon dynamics created by financial interests. However, one should be
 JOURNAL OF EUROPEAN PUBLIC POLICY 1131

aware of the explanatory limits of these two frameworks. Indeed, certain

aspects of the negotiations concerning Brexit and finance – for example,
the decision of the UK government to downplay the calls of parts of the
City of London for a soft Brexit and the concerns raised by the ECB against
continuing to rely on the City as the main centre for the clearing of euro
denominated swaps – cannot be adequately explained by these two theoreti-
cal frameworks.4 Nonetheless, a neo-mercantilist ‘battle’ amongst member
states approach remains the most convincing explanation for the positioning
of the German and French governments and their financial centres.

Conclusion
In this paper, we have used two main theoretical approaches derived from the
existing literature on the political-economy of European financial integration
to shed light on the implications of Brexit for finance and the dynamics that
have been unleashed. Our findings suggest that some ‘transnational alliances’
on the subject of finance and Brexit were formed as the result of financial
interdependence. Yet, these alliances were limited in scope and failed to
involve or mobilize significantly EU private and public sector actors. In the
private sector, the AFME – one of the main EU-level lobbying groups – and
several UK-based financial associations argued for a long transition period
for finance following the conclusion of Brexit negotiations and, ideally, a
special deal on finance. In the public sector, a number of German (and
other EU27) officials noted their awareness of the importance of the City of
London in European finance and reiterated the arguments presented by
both UK public authorities and a range of UK-based financial companies
and their representative associations (Asimakopoulos and Wright 2017). The
main caveat to be noted with regard to this conclusion about the lobbying
efforts and demands of international finance, is that it remained possible
that transnational coalitions involving EU partners could gain momentum
as Brexit negotiations progressed.
There is far greater evidence of a neo-mercantilist ‘battle’ amongst member
states, with individual national governments promoting their financial centres
and competing to attract financial operations from the UK. Frankfurt was
touted as the main destination for banks. French efforts to improve the attrac-
tiveness of Paris had limited success to the time of writing (April 2018),
although the 2017 election of Emmanuel Macron boded well for further
reform. In this context, the EU authorities, namely the Commission and the
ECB, were keen to preserve the integrity of the Single Market and its four free-
doms. They sought to prevent a regulatory ‘race to the bottom’ in finance –
with financial centres and national authorities attempting to undercut each
other – thus undermining longstanding efforts to construct a level playing
field across the EU.
1132 D. HOWARTH AND L. QUAGLIA

Notes
1. We wish to thank an anonymous reviewer for this point.
2. Equivalence rules stipulate that unless third country rules are equivalent to EU
rules, foreign firms providing services in the EU or doing business with EU
counterparts would be subject to EU regulation in addition to their home
country regulation. Without equivalence, foreign firms failing to respect EU regu-
lations would be blocked from accessing the Single Market.
3. According to Frankfurt Main Finance – the main financial sector promotion body
of the City of Frankfurt – quoted in the Handlesblatt, 26 April 2017.
4. We wish to thank an anonymous reviewer for this point.

Acknowledgements
The authors would like to thank Sébastien Commain – currently a doctoral student at
the University of Luxembourg and research assistant to Professor Howarth – for his
help conducting a number of interviews with financial company and association repre-
sentatives in Brussels and Paris. This paper was partly written while Lucia Quaglia was a
research fellow at the Scuola Normale Superiore, Florence.

Disclosure statement
No potential conflict of interest was reported by the authors.

Notes on contributors
David Howarth ([email protected]) is Professor of Political Economy at the
University of Luxembourg and a former Jean Monnet Chair at the University of
Edinburgh.
Lucia Quaglia ([email protected]) is Professor of Political Science at the University
of Bologna.

References
ACPR and AMF (2016) ‘L’ACPR et l’AMF simplifient et accélèrent les procédures
d’agrément dans le contexte du BREXIT’, Communication de presse, 28
Septembre, available at https://acpr.banque-france.fr/fileadmin/user_upload/acp/
Communication/Communiques%20de%20presse/20160928-CP-ACPR-AMF-agreme
nts-Brexit.pdf.
Armstrong, K. (2018) ‘Regulatory alignment and divergence after Brexit’, Journal of
European Public Policy, doi:10.1080/13501763.2018.1467956.
Association for Financial Markets in Europe (AMFE) (2017) ‘Implementing Brexit:
practical challenges for wholesale banking in adapting to the new environment’,
April, available at https://www.afme.eu/globalassets/downloads/publications/
afme-implementing-brexit-2017.pdf.
Association of German Private Banks (2016) Press Statement, available at https://
bankenverband.de/newsroom/presse-infos/president-association-german-banks-
regrets-decision-brexit/.
 JOURNAL OF EUROPEAN PUBLIC POLICY 1133

Association of German Private Banks (2017), Press Statement, available at https://

bankenverband.de/newsroom/presse-infos/impact-brexit-german-banks-will-be-
limited/.
Asimakopoulos, P. and Wright, W. (2017) ‘What the rest of the EU thinks about Brexit
and the City of London’, New Financial, available at 2017.04-What-the-rest-of-the-
EU-thinks-about-Brexit-New-Financial-FINAL1.pdf.
Barbat Layani, M.A. (2017) Press Statement, available at http://www.fbf.fr/fr/espace-
presse/interventions-de-la-fbf/marie-anne-barbat-layani-au-iveme-forum-du-grand-
paris---il-faut-creer-un-ecosysteme-favorable-aux-banques-pour-les-attirer-a-paris.
Bank of England (2015) ‘Mapping the UK financial system’, Bank of England Quarterly
Bulletin, Q2, London.
Batsaikhan, U., Kalcik, R. and Schoenmaker, D. (2017) ‘Brexit and the European financial
system: mapping markets, players and jobs’, Bruegel Institute, Policy contribution,
Issue 4, available at http://bruegel.org/wp-content/uploads/2017/02/PC-04-2017-
finance-090217-final.pdf.
Brassac, P. (2017) ‘Interview de Philippe Brassac, Président de la FBF, Directeur
général de Crédit Agricole SA, pour Revue Banque – “Le système bancaire français
est un ilot de stabilité dans un monde d’incertitudes”, FBF website, 9 January,
available at http://www.fbf.fr/fr/espace-presse/interventions-de-la-fbf/interview-de-
philippe-brassac,-president-de-la-fbf,-directeur-general-de-credit-agricole-sa,-pour-
revue-banque---le-systeme-bancaire-francais-est-un-ilot-de-stabilite-dans-un-monde-
d’incertitudes.
Bright, R. (2017) ‘Paris rolls out ‘red-white-and-blue carpet’ for banks’, Financial Times, 7
July.
Bulmer, S. and Quaglia, L. (2018) ‘Introduction’, Journal of European Public Policy,
doi:10.1080/13501763.2018.1467957.
Burton, L. (2017) ‘LSE fires back at EU plot to seize euro-clearing’, The Telegraph, 2 May.
Canepa, F. and Koranyi, B. (2017) ‘Exclusive: ECB plan to take euro clearing from London
stalled by infighting – sources’, 22 May, Reuters, available at http://www.reuters.
com/article/us-britain-eu-clearing-ecb-idUSKBN18I1B2.
Carney, M. (2017a) ‘Oral evidence’, Treasury Committee, House of Commons 11 January.
Carney, M. (2017b) ‘A Fine Balance, speech at Mansion House’, Bank of England, 20
June, London.
The CityUK (2016a) The Impact of the UKs Exit from the EU on the UK Based Financial
Services Sector, October, available at https://www.thecityuk.com/assets/2016/
Reports-PDF/The-impact-of-the-UKs-exit-from-the-EU-on-the-UK-based-financial-
services-sector.pdf.
The CityUK (2016b), Brexit and the industry, September, available at https://www.
thecityuk.com/research/brexit-and-the-industry/.
Colson, T. (2017) ‘Frankfurt is ‘confident in the arguments’ for poaching Britain’s €930
billion euro clearing industry after Brexit’, Business Insider UK, 7 July, available
at http://uk.businessinsider.com/brexit-relocation-financial-services-frankfurt-main-
2017-7.
Commission (2017), ‘Commission staff working document EU equivalence decisions in
financial services policy: an assessment’, Brussels, 27 February.
Culpepper, P. D. (2011) Quiet Politics and Business Power: Corporate Control in Europe
and Japan, Cambridge: Cambridge University Press.
Cuny, D. (2017) ‘Brexit Paris a toutes ses chances selon Villeroy de Galhau’, La Tribune,
29 May.
1134 D. HOWARTH AND L. QUAGLIA

de Guigné, A. (2017) ‘Brexit: Paris veut améliorer sa copie pour attirer plus d’entre-
prises’, Le Figaro, 24 July.
Delfs, A. (2017) ‘Merkel tells German industry to hold firm as Brexit talks begin’,
Bloomberg, 20 June.
Dombret, A. (2016) ‘What does Brexit mean for European banks’, Keynote Speech at a
Conference of the Association of German Banks Center for Financial Studies, Goethe
University Frankfurt, 13 July, available at https://www.bundesbank.de/Redaktion/
EN/Reden/2016/2016_07_13_dombret.html.
Dombret, A. (2017) ‘Andreas Dombret: Uncertain times – Brexit and its impact on the
financial sector’, Remarks to Boston Consulting Group, Frankfurt am Main, 7
February, available at http://www.bis.org/review/r170208a.pdf.
European Central Bank (ECB) (2017a) ‘Relocating to the euro area’, available at https://
www.bankingsupervision.europa.eu/banking/relocating/html/index.en.html.
European Central Bank (ECB) (2017b) Financial Stability Review, May, available at https://
www.ecb.europa.eu/pub/pdf/other/ecb.financialstabilityreview201705.en.pdf?
ce0cddcde1256fb5f6653e8aedf2ebd7.
European Council (2017) ‘Special meeting of the European Council (Art. 50) (29 April
2017) – Guidelines’, Brussels, 29 April, EUCO XT 20004/17, BXT 10, CO EUR 5,
CONCL 2, available at 29-euco-art50-guidelines.en.pdf.
European Securities Markets Authority (ESMA) (2017) Principles on the Supervisory
Approach on Relocations from the UK, available at https://www.esma.europa.eu/
press-news/esma-news/esma-issues-principles-supervisory-approach-relocations-uk.
Europlace (2016) ‘The Paris marketplace in pole position to attract companies’, Press
Conference slides, 29 November, available at http://www.paris-europlace.com/sites/
default/files/public/the_paris_marketplace_in_pole_position_-_28112016_en.pdf.
Farrell, H. and Newman A. (2015) ‘The new politics of interdependence: cross-national
layering in trans-atlantic regulatory disputes’, Comparative Political Studies 48(4):
497–526.
Farrell, H. and Newman, A. (2016) ‘The new interdependence approach: theoretical
development and empirical demonstration’, Review of International Political
Economy 23(5): 713–36.
Farrell, H. and Newman, A. (2017) ‘Brexit, voice and loyalty: rethinking electoral
politics in an age of interdependence’, Review of International Political Economy 24
(2): 232–47.
Fioretos, O. (2010) ‘Capitalist diversity and the international regulation of hedge funds’,
Review of International Political Economy 17(3): 696–723.
Ford, J. (2017) ‘An equivalence deal on Brexit may be the best the City can get’,
Financial Times, 10 April.
Graz, C. and Noelke, A. (eds) (2008) Transnational Private Governance and its Limits,
London: Routledge.
Helaba (2016) ‘Brexit — Let’s Go Frankfurt’, Financial Centre Focus, 3 November, available
at https://www.helaba.com/blob/com/408348/c00d2e172a25dd521fab5df9e34c795c/
financial-centre-focus--brexit---let-s-go-frankfurt-data.pdf.
Howarth, D. (2013) ‘France and the international financial crisis: the legacy of state-led
finance’, Governance: An International Journal of Policy, Administration, and
Institutions 26(3): 369–95.
Howarth, D. and Quaglia, L. (2013) ‘Banking on stability: the political economy of new
capital requirements in the European Union’, Journal of European Integration 35(3):
333–46.
 JOURNAL OF EUROPEAN PUBLIC POLICY 1135

ICE (2016) ‘Access to global markets’, Working Paper, available at https://www.theice.

com/publicdocs/ICE_Working_Paper_Access_Global_Markets.pdf.
Jack, S. (2017) ‘Brexit: UK plans to soften impact on European banks’, BBC, 20 December.
James, S. and Quaglia, L. (2017) ‘Brexit and the limits of financial power in the UK’,
Working Paper, University of Oxford, available at https://www.geg.ox.ac.uk/brexit-
and-limits-financial-power-uk.
Krotz, U. and Schild, J. (2018) ‘Back to the future? Brexit and Franco-German bilateralism
in Europe’s Union’, Journal of European Public Policy, doi:10.1080/13501763.2018.
1467951.
Lautenschläger, S. (2017) ‘Some supervisory expectations for banks relocating to the
euro area’, Technical workshop for banks considering relocation in the context of
Brexit, Frankfurt am Main, 4 May, available at https://www.bankingsupervision.
europa.eu/press/speeches/date/2017/html/ssm.sp170504.en.html (accessed 25 June
2017).
Lütz, S. (1998) ‘The revival of the nation-state? Stock exchange regulation in an era of
globalized financial markets’, Journal of European Public Policy 5(1): 153–68.
Macartney, H. (2010) Variegated Neoliberalism: EU Varieties of Capitalism and
International Political Economy, London: Routledge.
Martin, B. (2017) ‘London and Brussels urged to agree Brexit transition deal to protect
banks’, The Telegraph, 5 April.
de Montgolfier, A. (2017) ‘Places financières : quelle stratégie française face au Brexit ?’,
Rapport d’information 574 (Report presented to the French Senate), 7 June 2017,
available at https://www.senat.fr/notice-rapport/2016/r16-574-notice.html.
Mügge, D. (2010) Widen the Market, Narrow the Competition: Banker Interests and the
Making of a European Capital Market, Colchester: ECPR.
Newman, A. and Posner E. (2016) ‘Transnational feedback, soft law, and preferences
in global financial regulation’, Review of International Political Economy 23(1): 123–52.
O’Donnell, (2017) ‘Germany calls bankers to Frankfurt for Brexit move talks’, Reuters, 25
January.
Pagliari, S. (2013) ‘Public salience and international financial Regulation’, Thesis pre-
sented to the University of Waterloo.
Posner, E. (2009) The Origins of Europe’s New Stock Markets, Cambrdige, MA: Harvard
University Press.
Quaglia, L. (2010) Governing Financial Services in the European Union: Banking, Securities
and Post-Trading, London: Routledge.
Rolet, X. (2016) ‘Oral Evidence, Brexit: financial services’, 9th Report of Session 2016-17,
European Union Committee, House of Lords, December.
Schoenmaker, D. (2016) ‘Lost passports: a guide to the Brexit fallout for the City of
London’, Bruegel Institute, Blog, 30 June, available at http://bruegel.org/2016/06/
lost-passports-a-guide-to-the-brexit-fallout-for-the-city-of-london/.
Schoenmaker, D., and Véron, N. (2017) ‘Making the best of Brexit’, February, available at
http://bruegel.org/wp-content/uploads/2017/02/Bruegel_Policy_Brief-2017_01-
060217.pdf.
Skolimowski, P. (2016) ‘Draghi says clearing oversight after Brexit is “crucial” for ECB’,
Bloomberg, 29 June.
Story, J., and Walter, I. (1997) Political Economy of Financial Integration in Europe: The
Battle of the System, Manchester: Manchester University Press.
Tsingou, E. (2008). ‘Transnational private governance and the Basel process: banking
regulation, private interests and Basel II’, in J.C. Graz and A. Nölke (eds),
Transnational Private Governance and its Limits. London: Routledge, 58–68.
1136 D. HOWARTH AND L. QUAGLIA

UK government (2017) ‘The United Kingdom’s exit from, and new partnership with, the
European Union white paper’, 2 February, available at https://www.gov.uk/
government/publications/the-united-kingdoms-exit-from-and-new-partnership-
with-the-european-union-white-paper.
Van Apeldoorn, B. (2002) Transnational Capitalism and the Struggle Over European
Integration, London: Routledge.
Williams-Grut, O. (2017) ‘Hard Brexit: execs are lobbying Brussels to stop it’, Business
Insider, 3 July.
Wyman, O. (2017) ‘One year on from the Brexit vote: a briefing for wholesale
banks’, available at http://www.oliverwyman.com/content/dam/oliver-wyman/v2/
publications/2017/aug/OW-Wholesale-Banking-Brexit-Briefing.pdf.