Free The Influence of the European Economy on the Financial Sector of the United Kingdom Dissertation Example

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The Influence of the European Economy on the Financial Sector of the United Kingdom

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The Influence of the European Economy on the Financial Sector of the United Kingdom
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Abstract
The financial sector of the UK is relatively stronger than its counterparts in the EU and those outside its bounds. To ensure its ranking with growing global economies, the sector has to distinguish itself from the blend of economies formed by the EU to expand its limits. The EU contributes significantly to the trading in the sector, while the UK admits other parties into the EU through its market. This dependence has resulted in a catch-22 following Brexit and other developing relationships within the financial sector of the UK. The effect of the EU on the UK’s financial sector is bound to change, and the reaction economy of the UK to it is still impartial. A stronger relationship with the EU strengthens the UK financial sector on the European Economic Community market. However, dissociation from the EU promises renewed partnerships with upcoming industry leaders that promise sustainability and growth rather than bureaucratic rigidity.
Keywords: United Kingdom, financial sector, European Union
Introduction
Contemporary times have interlaced the workings of the economies of global nations. The resulting chaos presents unprecedented advantages and disadvantages to the participating nation states. In Europe, a shared history has cultured a synchronized economy that responds to changes in market positions across the entire continent. The splendour of centuries past circulates within the created value chain that now has formulated policies on how to efficiently maintain the bustling economy; However, recently there has been a shakeup with new global developments making the impact of the European economy tangible in the region’s financial hub, the United Kingdom. London is thriving against tremendous odds at its access to the open market in Europe. However, the framework with which the entire UK economy is set up encourages the abundance of infrastructural, intellectual, and financial capital that is necessary to maintain the functionality of the city in the absence of its key players. The nation hedges against the fluctuating European economy with unrivaled diversity. This thesis looks to prove that the UK economy remains steadfast despite the European economy’s intention to weigh it down. In essence, the European Economic Community (EEC) would destabilize if the UK’s financial sector runs out of industrial capital. Equally, the EU would suffer a hiatus created by the loss of a vital component of the EEC that makes the market operate at its current enviable capacity.
European Union Portfolio
The composition and performance of the EU indicate that the European Union (EU) is a notable economy in the world. The currency used for transactions in the economy is the Euro. The European economy works as a single market consisting of about 27 countries. It exists as a superior power in the trading world. It emphasizes on factors like growth in energy and research. It also works on reducing the negative economic effects on the environment resulting from its growth. Due to many debts, it has suffered poor growth over the recent years which installed fear that the trend could continue even in coming years.
To understand the European economy, we have to consider various factors. They include; the Gross Domestic Product (GDP), the purchasing power parity (PPP), the trade trends, employment, research, transport and energy and lastly the environment. Research shows the GDP EU’s GDP is approximately 16.478 trillion Euros (The World Bank). This GDP represents a proportion of 21.7% of the world’s economy. The annual rate of increase of the European Union’s GDP is about 2.6 percentper according to recent financial analysis (Trading Economics). The low GDP rate has been caused by reasons such as the rise in interest rates. This scenario is where the prices of products rise, but the money supply remains unchanged. Therefore, there will be high demand for money causing a hike in the interest rates. Research shows that when the prices of domestic goods rise, it brings a corresponding increase in demand for imports.
The purchasing power parity is another component to consider having a clear understanding of the European economy. It refers to an economic model that compares currencies from different countries using the valuation of consumer commodities and helps in tracking inflation. The PPP shows the number of currency units a particular product cost me different states. It also tries to analyze the overall price levels in those countries. In 2016 analysis, the PPP was estimated to be 19.99 trillion Euros which was said to be a significant improvement from the 2015 PPP. (The World Bank). Most economists use the PPP model to compare the living standards of the European people to other nations.
The European population plays a significant part in its economy. The European Union has an approximate of 511.5 million inhabitants (The World Bank). This high population provides the much needed workforce to run this top-tier open market leading to significant productivity. Education levels of the people also contribute to the operations of the economy. In the technological advancements, literacy level is a crucial element. The European population is endowed with people who have embraced education and therefore provide a highly skilled workforce. As a result, the Gross domestic product is increased as these people ensure quality and quantity production.
Passporting rights and its effect on the financial sector play a major role in shaping the dynamics of the European economy. Passporting rights directly influence the nation of conduction of business between the United Kingdom, the EU members and the outside world. The European market and its relation to the United Kingdom directly gets affected by loss of pass porting rights by the United Kingdom. People in the country have to pay extra money to transact in business deals with other countries. The major cause of this is the increased taxation of goods and services offered both to and by Britain. Hence this directly affects the financial sector in the country. The effect on the financial sector of the UK synchronously affects the European financial sector entirely.
The remotion of the UK’s passporting rights extends to the loss of financial entities and banks to other European nations. This reshapes the dynamics of the European market as banks form the major part in shaping the financial situation of a market. The loss of pass porting rights makes it hard for international banks to operate in the country. The restrictions mean the banks have to look for lax countries to set up offices that will serve the rest of the countries in the continent. Majority of the countries in the union will benefit from the exit of international banks and financial institutions from the country.
Impact of EU regulation on the UK economy
The UK entry in European Union membership is traced back in 1973. After the signing of Brexit treaty in 2017, the negotiations between the UK government and the European Union reached an agreement on its exit in 2019. In addition, the UK was to stay a member of the EU until the conclusion of the withdrawal process (Booth, 2015, p.45). There are many ways in which the exit of UK from European Union will affect the UK economy. First, the existing trade framework with the EU will be dissolved and restructured. The UK will lose some of its trade rights as it no longer belongs to the European Union. The extent of these losses will rely on the policies enacted without the consideration of the UK’s agenda.
Secondly, the other factor that will change is the consumer rights. Members of the EU benefit from the policies enacted as European Union laws, for instance, consumer protection, that safeguards the population conducting trade (Booth, 2015, p.45). Following the exit of the UK, it will no longer as much as before. Traveling in the European Union will no longer be considered unless the UK will be willing to draft another agreement which will indicate free movement of people in between the two. The other impact is a changed framework of trade with the rest of the world. After Brexit, the UK will have the freedom to go into partnerships with other nations aside from EU (Booth, 2015, p.46). Lastly, the UK will be restricted from buying a second home on the Med. If they have to purchase the house, then heavy taxes will be imposed on them to limit their movement.
The UK splendidly refused to participate in the European Monetary Union even though it is still Europe’s most prominent centre of finance. The UK continued to use the pound as its currency which will affect financial services in several ways. The European Stability Mechanism (ESM) system whose interest was to supports finances for the countries that are having trouble with financing themselves on capital markets in the Eurozone. The UK did not take part in the acceptance of the accord to set up the ESM. A particular area that creates latent hostility is short-selling. This is the selling a security that the seller doesn’t own or that borrowed by the seller. The motivation of short-selling is based on the notion that slowdown of a security’s price will alter it to be brought back at a cost that is low to make a profit. Since conjecture pushes short-selling, it is highly advised that it should only be practised by traders with experience and who know the risks. Previously, the UK has detested the nature of regulation of short-selling in the EU’s Court of Justice by the European Securities and Market Authority. The argument was that parties involved in the finances of the EU had subjective approaches to the regulation of short-selling; however, the court denied this contention. After losing this case, the EU’s control of short-selling had a widely adverse effect on the UK’s economy. This situation rose fears of a shift in the power balance that the EU backhandedly acquires at the expense of sovereign laws of each member state. According to research, it shows that the impact brought by imposing regulations on short-selling include
Decreased market liquidity.
Decelerated cost retrieval.
There is an inability to support stock prices.
When one purchases an asset, the utmost danger of your trade is that the asset’s cost goes down to zero and lose your investment leading to the unlimited downside.
If many traders own a stock with short-selling, its cost may rise abruptly, frequently caused by a convinced growth of the capital. This can contribute to the most traders to rapidly close their short-selling making its price to go up.
On short-selling positions, dividends are subtracted from the funds in one’s account
“There is the danger that a collapse of bank stock prices may lead them to experience funding problems or even a full-fledged run by depositors.” (Beber, Fabbri & Pagano, 2014, p. 19).
Another impact is that the UK is concerned about the power to pay bonuses and other sorts of payment, which presently other member states regulate more. Also, the UK is also worried that other European Union members may become more critical financial centers if it turns subject to real rules that affect the regulation of financial services (Gill, S. (1998 pg 4). There are crucial subjects yet to be resolved at the EU level concerning how to regulate the EM. These include resolution subjects concerning central conceptions and also dividing competences. How the EU’s responded to the situation has been to target at protection of financial stableness. In the UK, there is a peculiar difficulty that needs to be solved in that it is not bound by European Union monetary policy, but by the European Union internal market law. Nevertheless, banking union is in both these clear-cut policy areas. Where the UK stand is mostly one of looking for opt-outs concerning financial regulation principles, instead of assuming a heading function in making these principles. This is not creating a significant contribution on how to resolve of the economic situation at hand. Due to this, some repercussions might follow, and the UK will be needed to know which position to take to control the financial services of the nation.
London: The Financial Hub
London has a lot to offer its UK nationals as well the entirety of Europe. Z/Yen’s assay of Global Financial Centers Indexes (GFCIs) showed that London has remarkably performed relative to its competitors such as New York and Singapore. It had a GFCI score of 24, giving it a 3-year run at the top of world cities in finance (Moshinsky, 2017). This measure is deducted from the city’s business environment, its infrastructure, human resources, the advancement of the financial sector and its general reputation. London’s topping of this list came as a surprise as the city’s reputation hung in the turmoil surrounding the Brexit negotiations. However, this radical shift in the UK relations in Europe stands to topple London’s dominance as the leading financial center of the world.
The city’s layout was intended for the administration of a Brobdingnagian worldwide empire. Even though it is now urbanized and modernized, the history of the city is rich with plans for its greatness in the political and economic space of the future that is today. The traditional framework of the UK government ensured the collection of infrastructure, global networks and sound expertise to ensure the efficient running of the empire. It was not until the reforms of the 1980s that these structures were put into use with the intention of managing the Commonwealth and further assert dominance in global financial administration. It will be a while before London runs dry of its endless intellectual capital that steers it to successes yet to be realized elsewhere in the world.
96 percent of the trading scheme set up by the EU trades in London (The City UK & City of London). London has established itself as a hub for local an international entities to establish themselves on a large scale. It remains open to investors beyond Europe; moreover, The City UK and City of London set it out as the entry point for investors seeking to access the EU. Ergo, the UK has always wanted to exert as much power as possible in the EU as most of the policies rake in benefit through their linkage with London. These efforts by the UK are meant to promote global competitiveness of the EU. Despite the incalculable effects of the pending divorce of the UK with the EU, there are worries within the EU of the loss of its greatest asset, London.
A single market is essential for synchronous development of regional and global trade. However, London bears an inbred advantage of traffic of trade, financial services and general popularity. McQuaid (2018) reveals that about 75 percent of the foreign exchange turnover was realized in the city of London. The foreign exchange market, insurance, bond markets and interest rate derivatives have superceded the turnovers of stock exchanges dwarfing the New York Stock Exchange relative tot he financial services within the UK. The reputation factor of the GFCI also hurts the ranking of New York’s financial services as their Wall Street headquarters are no less than a TV studio as it failed to match the persistence of the financial services within London. Also, nearly 70 percent of the Euro-based trade is created and cleared within the UK. Paris conducts a measly 11 percent while Germany handles only 7 percent. Moreover, nearly 90 percent of the EU’s hedge-fund assets and 30 percent of its capitalization in the equity market traversed through London. The performance of the financial sector of London makes it indispensable to the EU. The city embodies the vision of an open market that can sustainable profit all EU citizens (The City UK & City of London). The city has 251 foreign banks that add to its capacity for financial services.
Far from the EU, London’s financial services house the largest share of Islamic finance. $19 billion of assets are reported within London from Islamic entities (The City UK & City of London). Also, with the exception of Hong Kong and China, about 60 percent of renmibi (RMB) global payments occur in London. Moreover, 588 companies have been quoted on London markets. However, the ability of these institutions to disseminate their services across the EU and other European countries might dwindle after a change of passporting rights (Finch, 2017). Also, the London Metal Exchange is a noteworthy aspect of the city of London as it deals in nearly 80 percent of the non-ferrous metal trading business. Therefore, London has established itself as a dominant figure in global financial services too. The city has the makings of a center for global finance.
London’s unlimited reach extends to the entire UK that boasts the most private equity investments and funds. These funds seed nearly 3800 organizations that have a workforce of nearly 1.2 million people globally. Furthermore, crowdfunding within the UK only follows that of the US. Companies like Seedrs have benefited from such financial services raking in about 2 million pounds from crowd-sourced funds at the moment (The City UK & City of London).
Emerging markets have developed to increase the market of the financial services demanded in London. As mentioned earlier, London acts as the entry point for most emerging businesses that intend to permeate the European market. Moreover, these emerging markets have shifted the focus of the global financial system from the transatlantic to others regions. Unlike other major cities, London has a time zone that overlaps with the business hours of most global economic hubs. This advantage is a function of the geography of the city. This placement allows for human-human interaction that is more diverse than the algorithmic processes that are automated. London’s positioning enables it to partake in business in markets that are yet to be explored fully.
Moreover, London periodically, and with some regularity, receives the spoils of war following the issues with trading in other markets. Bureaucracy is a hindrance to the intention to partake in market processes that are beneficial to the region. However, following economy-crumbling eventualities like the Enron scandal, it has become a mainstay within the financial systems of New York (Sarbanes-Oxley Act) and other areas that drive their traders to a less regulated market. For a time, London was the less-regulated. Consequently, a significant number of business of foreign origin chose the lighter burden of a London listing for their businesses (Davidson).
As banks and insurers stage a mission to turn Frankfurt, Paris and Dublin into the "New London", there is limited hope for a similarly performing financial center in another place in Europe (Chapman, 2017). Just by hinting this plan, the banks raised GCFI ratings of these cities; however, their accolades were not won through cultured historical competence and hard work as in London. However, John Cryan, Deutsche Bank’s chief executive officer, bashes Frankfurt saying it still needed, "…more attractive, urban residential areas, enough international schools and a dozen additional theatres and a few hundred restaurants" (Treanor, 2017). This opinion was mirrored in Deutsche Bank’s 25-year renewal of its lease within London, affirming the resilience of the city’s potency as a financial hub of the region (Wales, 2017). According to Synechron, a US-based consulting firm, Deutsche Bank’s relocation to Frankfurt had an estimated cost of 50000 pounds per head aside from the emotional trauma of alienation from friends and the migration of entire families. The decision to remain in London outweighed the presented options. Moreover, the 251 other foreign banks and more located within the city might confer similar protection against sabotage by the union in case of a hard Brexit that intends to harm the UK economy (The City UK & City of London). Besides, 31 of the business in the FinTech50, a list of 50 European companies that are revolutionizing financial services as chosen by industry experts, have their headquarters in London. The FDI within London alone justifies the abandonment of the rest of the union for a leading financial center. Alternatively, by 2021, London’s GDP is set to grow at 2.3 percent annually unlike Frankfurt’s 1.6 percent and Paris’ 1.5 percent (Wales, 2017). Seemingly, London’s rivals in the financial sector have yet to amass the strengths that London flaunts on the world stage of economics.
London holds the trifecta of modern business, technology, banking and governmental support. Looking at other financial centers, they possess either one or two of these perquisites. Silicon Valley, digitization; Washington DC, policy-making; and New York; financial services tradition: however, London marries all these three heritages to stand out as an exceptional city within the world. The trying political times of the next few years might shave off a sizeable chunk of the financial sector within London; However, the city will remain a dominant market force as most of its business comes in through it inherent trifecta of modern business that are more lucrative than the traditional systems set up in other areas to compete London’s success.
Links Between London’s Financial Markets and The EU
The United Kingdom imports as well as exports various commodities to and from other countries in the European Union and the world as well. The most significant concentration of imports by the United Kingdom from other countries is in the financial sector that accounts for more than 45 percent (Booth et al, 2015, p.24). Other commodities and services imported by the United Kingdom in order of their significance include mining industry, ICT, oil, pharmaceuticals, and chemicals respectively. The FDI stock still has European investors as the majority standing at 58 percent. The United States remains as the most significant single source country in the FDI at 29% (Booth et al, 2015, p.24).
The EU, however, remains has the largest and most significant demand for exports from the United Kingdom. As an EU member, the United Kingdom boasted a business passport that provisioned union members the guarantee to have smooth business transactions with British citizens over time. Nevertheless, the procession of Brexit, it’s a bit more complicated for British citizens to do business with the rest of the European Union. This shift is due to the increased requirements and taxation needed for members of the union as well as British citizens need for business transactions.
In spite of the European Union being the UK’s largest export market, the proportion of exports to the non-EU members of the world over the years has also been increasing. In the year 2013, the United Kingdom exported up to 44 percent of the exports within the European Union. The value, however, fell short of the amount it exported in 2003 at 53 percent (Booth et al, 2015, p.24). Overall, facts indicate that the United Kingdom runs a trade deficit with the European Union. However, the United Kingdom masks the services with more exports in the service sector to the rest of the European Union. According to statistics, the UK exported goods worth 155 billion euros to other EU countries in 2013. The exports formed a total of 50.5% of the total exports of the country to other countries all over the world. On the other hand, the United Kingdom imported goods worth 221 euros from other countries in the European Union accounting for an approximately lower percentage as compared with 2013 by 64 billion euros. The reason behind the drop in trading resulted from the effects of Brexit that face the united kingdom at the moment. On the other hand, the United Kingdom exported a total of 72.8 billion to other countries in the European Union in the service sector accounting for a total of 36 percent of the total export by the nation (Booth et al, 2015, p.26). Since 2010, the EU’s market has stagnated with the United Kingdom overseeing the balance between the rest of the non-EU members with member states. Therefore, the resignation of the United Kingdom could mean the failure of the European market in the business sector not unless strategies are put in place to curb the same.
With the incoming of globalization and the rise of various markets in the global scale, demands have transformed to fit in the global trade. The exit of Britain from the European market, therefore, has less significant effects on the on the British doing business with other countries around the globe. The United Kingdom, therefore, has a wide range of market to do business with as compared to previous years where it depended solely on the European demand for both imports and exports. According to Booth et al. (2015), the larger share of exports from the United Kingdom within the auspices of the European Union, 35 percent of goods are in sectors where the European Union imposes high tariffs (p.26). These sectors include exports such as cars, food, clothing, and chemicals. This makes the United Kingdom a big benefactor from the European market in general. Given the onset of Brexit, these commodities become vulnerable.
The onset of Brexit, therefore, has various effects on the European market as Britain plays a significant role in both exports and imports. As we saw above, Britain exports more of the service sector than other countries in the European Union. This exit leaves a significant void as the UK is absent from its critical role in the EU. Members of the European Union will suffer from reduced skilled labor they get from the European market. Britain will, however, suffer from lack of spare parts and goods they import from the other countries to serve as raw products for their manufacturing sector.
The relation between Britain and members of the European market, however, face diversity and change. The globalization markets dictated that there is an open market for any country to do business with any other nation within the globe. Goods are no longer made in a specified place on earth as the market opened up more. The emergence of complex supply chains in the market dictates a more natural movement of goods and services through the borders. The only disadvantage of this is it makes goods cross boundaries severally before the final product is assembled. This, on the other hand, makes it expensive to do business within the market. The relationship of the EU and the UK will, therefore, not shift as much because of Brexit given the globalization of markets for various products and raw materials. The service sector, however, will face the most significant loss as a movement of people between the different countries will be directly affected.
Foreign Direct Investment in the Financial Sector
Foreign direct investment pertains controlling ownership of business investment in one country using a given entity found in another state either within a typical business market or globally. The two critical strategies employed within the foreign direct investment include either using the organically control by expanding branches of a company to others within a given region or globally. The second method involves buying a company in another country within the same geographical area or globally by another nation instead termed as the inorganic investment.
The United Kingdom government uses the foreign direct investment in both acquiring new assets in another country within the European Union or globally. The export of skilled workforce to other countries acts as an external investment for the United Kingdom. Through this, the United Kingdom government uses the experienced labor export to gain experience in the other countries. The government, in turn, gains with foreign investors as many of the skilled laborers, in turn, invest in the given countries. The induction of the Brexit, in turn, will hamper the movement and working of Britons in the other nations hence reducing the foreign investments.
With the diversity of the European market and the worldwide marketization of goods and products makes the federal direct investment of the UK government the primary rescuer after Brexit. The British government invested millions of pounds in establishing the Britam Investments in most of the foreign countries with most being United Kingdom former colonies. The investment has, in the long run, helped most of the states it is invested in creating jobs and marketing the British government. In conclusion, the direct investment in other countries by the British government forms a strategical placement of the nation not only in its former colonies but the globe a whole.
Also according to other sources, should the United Kingdom fail in securing deal to stay within the internal market it may lose pass porting rights. The pass porting rights will affect the United Kingdom more that I will have effects on the whole continent. The exit of the United Kingdom as in the Brexit makes the country have both benefits and losses too. The United Kingdom mainly exports skilled labor in the service sector. The Brexit will stands to change the country’s economy. Most of the negative effects will be faced by the European Union as compared to the effects felt by the British government as a whole.
EU’s reach on the FDI of the Financial Sector in the UK
Globally, United Kingdom has been ranked fifth in countries receiving foreign direct investment. This was according to a survey done by the United Nations conference on trade and development as of 2010. The UK happens to hold numerous strengths that protect investors. They include transparency on condition of the transaction, manager’s responsibility, shareholders power in taking legal action, and investor’s protection
Furthermore, it is first in the European Union on speeding up formalities at 13 days compared to 32 days averagely in Europe. Also, taxation is cost friendly making it an excellent target area. London has also been an honorable mention as a global influential center. Additionally, organizations set up in the UK are treated as any other firms regardless of their origin. However, as much as the UK has its share of robustness, a few infirmities are involved. This includes its excessive involvement in the GDP, poor quality infrastructure and a pretty high level of competitiveness from industrial companies.
There are also a few specific procedures required for foreign investment. These include freedom of establishment, which involves no exceptional nationality necessities on directors or shareholders. Another will be on the acquisition of holdings, where it is legal in the UK to hold a significant interest in a local company. Finally, a competent organization for the declaration.
The European economy also contributes to FDI in the UK’s financial sector through food industry. This is primarily through total real assets and employment in foreign-owned firms. A test known as 48 5-digit sectors in the food industry helps to assess FDI in the food industry. It determines price convergence which is significant in deciding FDI both inside and outside the EU. Furthermore, it is relatively cost insensitive since FDI from other EU states is intent on the level of firm-specific assets and skills in the sector.(Girma & Wakelin,2002, n.p.)
Since 1987 to 1996, there has been a threefold increase in FDI from EU. This is regarding the manufacture of food, drinks, and tobacco in the UK, increasing in EU FDI in the food retail sector. Additionally, intra-EU FDI has risen in the food industry from both European economy and foreign ownership. Moreover, the European economy together with us enact about 16% of manufacturing investment in the UK. Price factor happens to be a significant factor in impacting FDI within and out EU.
Also according to another survey, should the UK fail in procuring an offer to remain within the internal market, it loses its pass porting rights for EU financial services and ingression of euro clearing and settlement which make London captivating as a financial center.(Campos & Coricelli, 2017, n.p.)
UK’s involvement with the EU has helped in decreasing of trade costs. This is because the European Union forms a means to perceive economies of scale, whereas the UK reverberates from higher specialization across lines of comparative advantage. This helps in product proficiency and allocative productivity. This expands competition in product market having a result in price margin costs lowering and decrease in market power (Nicholas,2016).
Also according to another survey, since the UK joining the European economic community in 1973 there has been an Improvement in the financial performance recorded. In comparison to countries such as France and Germany which were non-members. The UK due to its membership with the European community has improved the performance of British economy as evidenced by Bank of England stating the matter. In summary the timing of the UK to join the European community was right in playing an important role in its growth rate performance, lest it have lag behind as it counterparts France and Germany (Bank of England, 2015).
Badinger, another source states that the impact of the European community on the size of income but not heightened rate. This is proof by analysis of the impact of trade liberalizations using various approaches. It argued that there were growth regressions in the role with growth an investment. An example was in trade liberalization where as much as it increases the economic growth rate the European economic integration does not reinforce the projections. (Badinger,2005).
Also according to another source yearly income generated from joining the European community generated 10% of GDP in comparison with the net budgetary income and net cost of regulation which stood at 1.5 percent GDP. (Frankel & Romer, 1999).
Brexit would have an adverse effect on UK’s financial sector, since it will be left to surrender some of its advantages obtained as being a member of the European community. Some of the benefits include negotiation on a single market which would be tough as a single entity. Moreover, relinquishing commitment technology that is extended through membership and thus limits a future based on protectionism.
European Market vis-a-vis the UK Financial Sector
In 1973, Britain joined the European Economic Community. There was a rise by 95 percent of the domestic product per head in the three countries in 1973 that is, Italy, France and West Germany compared to only 50 percent in Britain. Since Britain joined its gross domestic product per head began to appreciate in more than 40 years slowly and became more prosperous than the three countries from 1965. European Union opened a market after the UK joined and by that, it made them more productive.
It boosted the UK trade whereby their partnership had faster growth than before while they were in solitude. By UK opening up to trade they rose again after encountering failures (Schutes, M, 2015). The trade liberalization was an essential factor for improving competition whereby it improved industrial relations, management was made better, and weak firms had to be removed. There is a benefit that UK gets after being part of the EU single market that includes; agreements in trade, being able to maintain the British jobs, it provides subsidies which British farmers; they help to bolster agriculture and ensure the stability of employment for those involved in farming.
The benefits can are evident in Britain due to the openness to the world market. There is a demonstration by the economist that the main reason for transformation was because of Britain membership with the EU which led to positive impact since there was significant direct foreign investment, trade gains, competition and finally innovation. EU benefited the Britain country directly by a rise in 10 percent prosperity and therefore by exiting the EU may jeopardize the gains in the UK from increased competition and openness. Its membership made convenient for them to sell their products to other countries.
The EU has an impact which is positive on businesses according to members of Confederation of British Influence (CBI) and small and medium-sized enterprises (SMEs). The estimates done by the CBI is that the worth of the membership is 4-5 percent of the GDP in the UK. It was reported that EU accounted for 44.6 percent of all UK goods and services exported and 53.2 percent of the products and services imported. A research done was published that the contribution to the UK economy that was generated from the exports to the EU was around a third of trade with the European Economic Community (Dhingra et al., 2016, p.1 3).
This unity gave freedom of people to live, work and retire anywhere in Europe. Citizens can move freely across the continent. Another benefit is that the UK citizens can retire anywhere in Europe and they are in a position to still be given pension provided they are registered in the UK. Citizens who worked and lived in the United Kingdom are allowed to apply the entitlement of a premium in accordance with their record of insurance and contributions as far as social security is concerned.
Most gains that are acquired from immigration go to the immigrants. The free movement of people has not led to the rise of the British prosperity but apart from the net benefit to public finance of importing workers. There was a global financial crisis which struck Britain that it found itself being exposed to assets of foreign entities that were held by UK banks. It made Britain go down economically (Breinlich et al., 2016, p. iv).
Financial services constitute an essential net export for the economy of UK. There were consequences of Brexit which was the decision that the UK made on June 23rd, 2016 to leave European Union. Them leaving the EU that is ‘tender’ Brexit, UK stays within the single market will reduce the risk for the Country since to will give access to financial services firms to proceed depending on administrative rights of passports. The UK is leaving the EU completely; it may be able to benefit from the EU’s third country for services regarding finances. It will be costly for UK firms to export goods and services to other countries. EU will encounter a loss since UK specializes in capital markets services for which the EU is over-reliant on banking. In the event of hard Brexit, these firms may be in the ability to have a competition efficiently from New York as from London and if soft Brexit it is politically impossible (Amour, 2017, p. S54).
Since the UK plans to leave the EU, there has been the possibility expression of exclusive negotiations for London to have access to the single market. The authorization of such access is granted by the financial regulator of a state member, and since the Brexit, the approval of the European passport will not be deemed. When awarded the average momentum of the pursuit of interest of the economy by financial services firm and also the competition brought from it creates assurance of having the ability to access financial services that they require post the Brexit without the services being distracted.
There is the accessibility of many investors funding through the capital markets to purchase their security that is the debt or equity. The securities issued are sold internationally since the investors are based in many countries. The functional way of ensuring that the financial markets perform correctly is to make the value chain entirely autonomous under the control of the users and the investors.
Passport Rights
Passporting rights in the United Kingdom either directly or indirectly affect the financial sector in the country. Passporting rights directly affect the financial sector of the country by determining the boarder costs of importing and exporting commodities in the country. The harder the rules as pertaining pass porting rights the higher the coat of doing business. Passporting rights also indirectly affect the financial sector of the country by affecting financial institutions and its employees. The cost of living and working in the financial institutions and banks for foreigners increases with increased rules pertaining passporting.
According to the passport rules in the European Union, financial companies sell services to the 28 members of the union. The British government intends to strike a deal with the financial companies to enable them to continue operating in the country. This arrangement allows for them to issue out passports to members of the British population even after Brexit. Previously, British citizens could travel and do business in any country in the European Union using their British passports. The withdrawal of Britain from the European Union hinders British citizens from enjoying the privilege anymore. This in turn has various effects on the financial sector of the kingdom. Hampering the liberal transit of people and goods between UK citizens and other member EU member states has a significant effect on the economy of the country and to the individual British citizens. The passport serves as a system of universal shared financial rules shared by the countries that signed up to them. Out seas, financial companies use the passport rights to set up companies in a state within the European Union and use this to serve other countries on the continent. The loss of the passport rights by the United Kingdom makes it difficult for international companies to set up offices that serve other countries in the continent. This situation in turn negatively affects the nation economically. Foreign companies hence relocate to countries within the union with a more lax passporting policy as it enables their access to other countries in the continent (Booth et al., 2015, p. 43).
The loss of the passport rights also increases the cost of doing business between Britain and not only other member states of the EU but also members of other countries globally. Taxation of goods that cross the border between Britain and other countries increases as the rules and requirements to do business too increase. Members of the United Kingdom have to give more conditions and reasons to cross the border and also do business. This situation, in turn, makes goods more expensive hence negatively affecting the country’s economy (Pain, & Young, 2014, 19). According to the Financial Conduct Authority, more than 5,500 companies in the United Kingdom directly rely on pass porting rights. The combined revenue generated from these company amounts to nine billion Euros. The loss of the pass porting rights, therefore, means the loss of the revenue collected from these companies. The loss of the European Union financial passport hence negatively affects the economy of the country.
The loss of the financial passport also has adverse effects on banks in the United Kingdom. The loss of the passport in rights means that international banks have to move people around and even change sites of operations. This challenge needs a significant amount of time hence the need for a transitional time as long as ten years to relocate to other cities outside the United Kingdom. The less amount of time puts many banks in the danger of shutting down operations and closing doors. In turn, this scenario has an adverse financial effect on the country’s economy.
The loss of financial passport rights also has negative effects on financial jobs in the United Kingdom. The exit of financial companies and banks from Britain puts the country at risk for many of its citizens who work in these institutions lose jobs. Evidence shows that around 16,000 people in the United Kingdom work in banks and other financial companies in the country. Loss of employment by this number of people puts the nation at risk of economic turmoil (Dhingra, S., Huang, Ottaviano, Paulo Pessoa, Sampson, & Van Reenen, 2017, p. 675). The increase of unemployment because of the loss of passport rights and the exit of financial companies and banks also puts the country vulnerable to the increased crime rate. Usually, the previously employed but now unemployed citizens will look for other means of sustaining their lives after the loss of their jobs. This scenario forces most of the individuals to turn to unorthodox methods of financial gain. The outcome of the situation means a further negative financial gain in the country because of foreign investors fearing to add to the FDI of the country.
The loss of the pass porting rights also puts the country at risk of not only attracting foreign investors but also scaring away the already existing ones in the country. The increased cost of doing business in the country resulting from the denial of free movement within the countries of EU members states means less foreign investors in the country. The United Kingdom hence loses the revenue it gains from these foreign investors resulting in a negative effect on the country’s economy. The United Kingdom’s tourism sector will also have negative effects on it. Tourism forms a significant part as well as contributing a relative percentage on the economy of a country (Dhingra, Ottaviano, Sampson, & Van Reenen, 2016, p. 17). Apart from this, tourism also markets a country and even opens gates for investors in the country. The loss of the pass porting rights by the state negatively affects the tourism sector hence directly affecting the economy of the country due to hampered boundless migration of people between Britain and not only other member states of the EU but also members of other nations all over the continent.
The United Kingdom, being a manufacturing country, makes it depend on imports and exports to run the industry. With the loss of pass porting rights comes with the loss of privileges to export and import goods. The negative effect on the manufacturing sector results in directly affecting the financial sector in the country. This is through a reduction in the taxes sequestered from the manufacturing sector. Exports, as well as imports, become expensive with the extra taxes imposed on them as a result of increased border rules between Britain and other countries. This results in loss of jobs of citizens working in the manufacturing sector. Many of the manufacturing industries get shut down hence crumbling the economy. Foreign workers and experts in the manufacturing industries also have to pay extra taxes to operate in the country thus facilitating their exit from the United Kingdom for greener pastures. This means negative economic effects to the country that majorly depends on the manufacturing industry.
In conclusion, pass porting rights have both a direct and an indirect impact on the financial sector of the United Kingdom. The direct effects include the increased restriction of movement of goods and people between Britain and other countries. The resultant effect of this is the increased cost of doing business in the country hence having a negative effect on the country. The indirect effect of loss of pass porting rights on the financial sector is the loss of skilled manpower from other countries working in financial institutions and banks in the country.
UK Single Market Passport
This passport is legislated to allow financial collectives in the UK which are under a single EU’s single market to offer their goods and services in other states which are members based on their state home authorization. It was introduced in the year 1995 which led to expansion and deepening due to series of directives (Sam, 2016). For example, a firms headquartered in UK, London transact their financial services with a party in Prague conveniently if and only if the company is within Preston. This kind of liberty is the significance of having the single open market for the financial sector.
Therefore, when a financial service or rather a bank is authorized and established in a single EU country then it can lead to the application for the clearance to avail defined services within the EU or have that ability to establish various subsidiaries in EU member states having less additional authorization requirements across EU (H. S, 2016). There are various types of passports each performing different task of financial service namely; marketing services which includes management of assets, sales and trading, core banking services like loans and deposits, electronic money services and finally the payment services.
These passports are fixed in a certain EU Regulation with the basic rules for that activity is established. For instance, in bank in the UK may use its Fourth Requirements Directive (CRD) passport to provide consultancy services, custody or lending or deposit offers to a company in other EU member states. A UK-based bank as far as market service is concerned it may use Markets in Financial Instruments Directive (MiFID) passport to to ease the logistical burden of operating in another EU state to safeguard them from acquiring loans, issuance of debt or rate exchange exposure through markets which are based in London.
MiFID passports enable banks within the UK to provide private baking services to clients in EU state to arrange a line of credit, to advise on planning financially or in managing a portfolio on investment. Both the banking and non-banking facilities in service payments use the Payments Service Directives (PSD) passports in order to provide the payment services to EU-based clients. Similarly, for the non-UK EU banks that use the UK as a hub also provide services that are the same to the above using UK operation in serving their customers in their local market or in EEC market.
The reason why the passport is essential in the single market it is because it usually provisions a different variety of an activity enabling the banks to meet the demands of the clients and also businesses. The above mentioned passports form the framework of a single market for the EU financial sector and are useful to allow for the consistent procession of trade in the EU. They are essential since UK is the largest exporter which exports over 20 billion Euros of services to clients in EU in the year 2014 and also assisted in the providence of hundreds of billions of euros in the finance.
The assumption based on this system of passport is that the financial services and the banks that are authorized in EU should meet similar standards. This reinforcement is done by a supreme level of cooperation regulatory between the authorities of national moniroring in the EU, inclusive of the amalgamation of supervisory functions for states in EU that take part in the banking union. More so, there are two essential features of a passport: first, it enables the banks and the firms of financial services to sell their products and services across the borders of EU. Secondly, it enables the banks and also the financial services to establish branches in other EU states.
It was clearly stated by the European Commissioner that UK will financially lose passports if it absolves itself of the EU. There is no hope if the UK retains the “hard brexit” which is completely withdrawing from the single open EU market. This analogy comes from Valdis Dombrovkis, the European Commission’s vice president. He declared that the EU passports and the EU single market complement each other. Therefore, in case the UK purposes to exit the single market automatically its financial institutions will not have access to the EU passports (Acton, G., & Marx, W, 2017).
A question is raised whether the UK can depend on equality in particular sectors or they can establish a mentionable presence within the EU in order to maintain the passport of EU. It is seen earlier that this passports rights permits the firms in financial services offered in the EU to operate and give services across the European Economic Community which is inclusive of Lichtenstein, Iceland, Norway and also the member of states in EU. It is evident enough to see in the year 2016 the insurance and the financial services made a contribution of $157.46 billion in the gross value added (GVA) to the economy of UK that comprises of 7.2 percent of the aggregate, as reported by government officials.
According to Colson, T. (2017), when UK is exempted from the EU single market, banking serivices will be limited, meaning it will be able to obtain a narrow portfolio of services of financing from the bank based in the UK for the services for which equivalence is issued or rather a national country-by-country regulatory regime is available and its financial development is limited by the lack of funding which may lead to acquiring financing elsewhere.
It can be seen that depending on legal domestic status of EU standalone countries in lieu of the pan-EU passport regime will be expensive, complicated and more limited (Lukies, A, 2016, June 09). It will lead to EU being curtailed in their capability to contract with banks based in the UK from inside the EU. There are rights to sell services directly to UK clients by banks that are based elsewhere in the EEA; this will be in the area where UK regulatory authorities control. Many of the branches of EEA banks have been established to assist the clients of EU have access to London Capital and securities markets; it would have an effect in serving clients in the EU.
The loss of these operation rights are services which are depended by UK and EU customers including the job developed to undertake the activity. There will be reviewing, reauthorizing and restructuring of the services. These will need to negative outcomes which will consume time, costly and disruptive (Ben Chu, November 20, 2017). There will be a fall in the UK’s viability for its service in the single market and it will lead to unavoidable impacts towards the job created in the UK and the services that the UK provided.
There are suggestions that actually a passport is not need in the wholesale markets, since it only permits the license to offer products and services and the companies which are in other EU member states would still buy due to the right given to them. Without a passport right it said to be true that a company that is located in Germany would make a phone call to the bank in London and inquire to purchase an interest rate hedging product. Unfortunately, banks in the UK would not be in a position to market or sell to clients in EU, which is a disadvantage (Ben Chu, November 20, 2017).
Challenges for the Financial Sector in the UK
Under previously unchanging open market conditions, the European banking system was still shaky as it is now. The banks are overwhelmingly big considering their insufficient capitalization and dismal loan portfolios. These challenges ominously mirror those of the 2008 financial crisis that crippled the global economy. The Net Interest Margin (NIM) continues to drop as loan defaulters continue to reduce the revenues realized by banks. This factor raises strains to the entire financial sector as the NIM id the primary income source for banks that now now have little to offer shareholders in terms of dividends and returns. On average, the NIM for banks within the EU stands at a measly 1.2 percent which is way below the historical standard of 3 to 4 percent (International Banker). With inflation expected to rise from 1 percent in 2016 to about 2.75 percent in mid-2018. Therefore, the future of the European financial sector remains indeterminate.
As a self-preserving strategy, the banking sector would increase interest rates and the housing market and household budgets are likely to be affected. Worse still, the financial sectors of countries like Italy are likely to suffer more with the issues that are currently facing the banking system. Moreover, the uncertainty around Brexit and the subsequent financial policy would have significant implications on the span of the financial services offered within the UK. As the UK exits the union, the new open market policy is keen to ensure that they feel the pinch of their decision to exit. Other challenges such as cyber crime, the uncharted risks of banking technology and the overall reputation of the banks mar the progress of the financial sector of Europe and, in essence, the United Kingdom.
The financial services and insurance sectors of the UK are a hard bargain in the face of the outstanding challenges. In UK alone, these sectors employ about 3.6% of the workforce (Booth et al., 2015, p. 42). A negative shift of this figure would translate to a noticeable change in livelihoods of significant portion of the population. Moreover, Booth et al. (2015 )the financial sector exports nearly 41 percent of its services to the EU that constitute 9.3% of the total exports from the UK (p. 42). Therefore, the impending transformation of the financial sector among others in the near future is likely to disrupt the economy of the UK.
Brexit
The EU does not treat deserters in the same light as its members; possibly, the UK’s resignation from the body would give it “third country” status access (highly restricted) to the open market. Alternatively, the UK can reciprocate Norway’s middle road that allowed participation in the EU market zones absent of a vote on the organization’s board. This form of participation comes with it helplessness in enforcing the agendas of the UK in the market. Therefore, its participation will most likely be sidelined by the policies of the future that would be enacted in the UK’s absentia.
The primary disruptions within the financial sector expected from this fallout with the EU include the loss of their single market “passport”. These services would lack access to foreign EU markets without their reestablishment as branches in other areas aside from London, the financial hub of the world. The costs of such an endeavor would be crippling to the banks and their resources. Consequently, Deutsche Bank is among the key players of the industries that have opted to stick it out with the UK despite the looming threats to the financial sector at the finalization of Brexit. It is clear that losing the single market passport would hurt the performance of the UK’s substantial financial services. However, the industry could survive owing to the dependence of the EU on the UK’s finance sector. Therefore, the UK’s robust financial sector could be a bargaining chip for better terms for the financial and other sectors following Brexit.
Moreover, the politicization of the negotiations regarding Brexit could interfere with the fair deliberation of the issues. The EU and the UK will be locked in negotiations over the next few years to find the objectively fair policies regarding their new relationship. However, the EU’s parliament has never favored the “Anglo-Saxon” framework of finance; thereby, the UK’s financial sector is likely to be subjected to a more regulated framework of accessing the open market that could hurt its performance. Besides, the trade surplus of £19.9 billion that the UK benefits from its former relationship with the EU would be hinder a favorable outcome from the negotiations (Booth et al., 2015, p. 43). In addition, the effect of losing their vote in the EU would leave the 36 percent-strong European finance market in the UK toothless with the lack of a vote in the EU that governs a significant share of the European market (Booth et al., 2015, p. 43). The UK will experience an uphill task trying to recover the accessibility of regional funds and banks.
Considering that 49 percent of the FDI in UK originates from financial services, Brexit stands to have far-reaching effects on the economy of the UK (Booth et al., 2015, p. 42). Deutsche Bank’s resilience in the UK market is likely a poor decision on its managers (Treanor, 2017). To maintain access and funding within the open market conveniently, the sector’s firms could benefit from the mobility of their industry to maintain their high performance within the European market. However, Deutsche Bank and its affiliates who choose to remain behind realize that the UK’s financial establishment stands firm owing to its inherent perquisites rather than those from its association with the EU. Its far-reaching contexts of language, legislation and global power are fixated despite Brexit (Booth et al, 2015, p. 43). Therefore, the effect of Brexit on the FDI is still unpredictable despite the existing biases and establishment of future probabilities.
Alternatively, Brexit brings with it an autonomous economy that grows organically absent of the reach of the redundant agendas of an open market. The US and Asian markets are formidable partners that could change the nature of the UK’s relationship with other financial sectors that compete at the global level (Duffy, 2017). These new relationships could improve the UK’s competitive stance as its agendas would grow relative to the diverse global financial market rather than the regionally enclosed system it had adopted with the EU. The EU has a hold on the activities conducted in its member states that limit the progression of the various sectors of the nations. The unrestricted regulation of the UK economy gives room for the development of the lagging industry sectors. However, the financial sector is among those that will decelerate its performance on the revocation of the UK’s single market passport. Therefore, the UK will be in constant turmoil trying to achieve the financial sector’s former glory.
Brexit has various advantages and disadvantages to the United Kingdom government. Most of all the benefits surpass the disadvantages. The creation of a global market in the marketing department has helped the UK government in improving its relationships with other European Union member states and globally. The British government mainly exports services, and this helps most of the members of the financial sector as well as banks in the continent in meeting their business demands. The withdrawal of the UK faction of government from the European Union will have various effects on the economy of the European Union entirely. Even though Brexit offers a more independent form of economics to Britain, it also comes with various adverse effects. Britain will suffer the loss of the European Union market but will also have the global partnership and exchange to utilize. Most financial sectors in the British economy will have to crumble before the significant industries establish themselves. Other countries in the European Union also will face the challenge of dealing with the withdrawal of an economic giant within the European Union. Eventually, the United Kingdom as a whole will have to cope with the European market.
Overall, Brexit’s significance is that the UK would gain flexibility in the trade partnerships it makes. This prospect might seem reckless and possibly costly to a number of industry sectors; however, the financial sector stands to remain sturdy as its primary assets are inherent to the standalone UK perquisites.
Alternative Relations
As mentioned above, Brexit stands to revolutionize the relationship of the UK with growing global markets. PriceWaterhouseCooper’s predicts that by 2050 Brazil, India, China and Russia stand to have more banking assets than European countries such as the UK, Spain, Italy, France and Germany. This changing trends signify the obsolescence of the close-knit relationship in the EU that does not promise much for the financial and other sectors in the future. Alternatively, other regions are developing with contemporary and improved systems that have more utility than the existing financial systems.
A revitalized focus on financial technology would enable the optimization of the sector. The fight against cybercrime has seen collaboration in industry leaders such as the largest American banks to improve the access to systems and expertise that could counteract the threats presented by this vice. The protection of the banking system is a vital construct of the financial sector. Cybercrime cripples the financial system in more ways than publicized. The financial system that culminated in the EU is as rigid as it is vulnerable. The probability of a more regulated market rather than a modernized system that appreciates all the nuances of modern finance that protect against developing challenges to the sector.
The dissemination of IT-based financial systems has resulted in disruptions in the financial sector that have caused a change in financial systems. E-commerce, cryptocurrency and mobile technology have increasingly permeated the sector. There financial sector is yet to determine the usefulness and reliability of some of these aspects in their operations. The interaction with other markets with these systems could return the nation back to its previous level of access and funds without the need for geographical relationships. The direction of the IT nuances of the financial sector have to integrated optimally to affirm that the resulting system in its exclusive market that functions just as well, or even better, than the old one.
With Brexit, the UK has added to the many challenges that the insufferable banking systems have had to wade through through the years. The UK has strengths in its system that could enable its survival through Brexit and beyond. The EU, however, would have lost its most strategic financial hub. The UK has served as the entry point to the EU market; these new entrees would consequently follow the new heading of the UK’s relationship at the expense of the EU. Besides, the EU stands to
Conclusion
The UK benefits in numerous ways from its association with the European Union as much as there are number of inequalities that affect the optimal performance of its various industry sectors. However, the UK’s financial sector is a formidable one, rooted in century-old infrastructure and the intellectual capital to remain sustainable for generations to come. However, the EU encompasses a huge share of the single market that feeds in FDI and demand for the financial sector of the UK. Transforming policy relations due to Brexit, changing global demands, technology and cybercrime make it necessary to follow the global standard of the financial system. The EU limits the organic development of the various sectors of the economy with its single market policies based on watered-down trade agreements and redundant agendas. The UK, and London in particular, has established itself as a financial hub for the UK, the EU and the entire world. A disruption of the accessibility and funds in the European market might affect the banking systems within the UK. However, the relocation of these financial firms to other EU nations is an unlikely option as the costs of doing so are not worth the gamble. As it is, the UK financial sector feeds the non-EU member states’ FDI to the EU states. Lack of access to the open market would reduce the FDI of the UK; however, the UK’s financial is inherently self-sufficient due to its legislative system, political might and language that attracts a global demand. The future of the global financial sector is shifting towards Brazil, China, Russia and India. Strengthened relationships with upcoming industry leaders is paramount for the UK financial sector to match the best practices of their craft in such dynamic times.
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