EU braces for an incredible shrinking feeling post-Brexit

By Dan Atkinson

Britain’s planned departure on January 31 will pull one of the union’s big four economies out of the bloc, with market consequences

As Britain’s “Brexit Day” of January 31 approaches, the mood in European chancelleries and European Union institutions can be summed up in a few short words: it wasn’t meant to be like this.

European unification was supposed to be irreversible. True, Greenland voted to leave the bloc in 1985, but this could be shrugged off, given the territory’s 57,000 population is little more than half that of Lincoln, one of England’s smaller cities.

Furthermore, Greenland is not even a proper country, being a territory of Denmark, which remains an EU member state. Britain, by contrast, is one of Europe’s so-called big four, being, along with Germany, France and Italy, an EU member that is also part of the Group of Seven leading economies. The others are the US, Canada and Japan.

No-one knows what impact UK departure will have on European markets, not least because the shape of a future UK-EU trade deal, assuming one can be agreed, is currently unclear. However, one immediate impact will be that Europe’s premier financial centre, the City of London, will be outside the EU.

Reaction to this in the remaining EU 27 varies. Some hope that a rival centre, such as Paris or Frankfurt, can be built up, perhaps by tilting the rules on dealing in euro-denominated securities to favour EU-domiciled markets. Others, by contrast, want to make City compliance with EU regulations a precondition of a trade deal.This would prevent the UK from reinventing the City as a freewheeling offshore centre that could undercut continental markets.

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And there are those who take a more sanguine attitude, pointing out that the City has always been a place apart from the continent’s financial centres, not least because the UK declined to join the euro and retained its own currency.

For the foreseeable future, it seems likely that EU companies and governments will continue to raise money in the City, with its uniquely deep and liquid capital markets. But in the longer term, the market consequences of the pending UK-EU divorce could be very significant.

FURTHER READING: UK Parliament prepares to pass Brexit bill

FURTHER READING: Trump plays down prospect of post-Brexit trade deal with UK

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