European Central Bank policy maker Klaas Knot said that having “a deep and comprehensive trade deal” that covers financial services would be preferable as the U.K. prepares to the leave the European Union.
Speaking in Amsterdam on Wednesday, the Dutch governor warned that a no-deal Brexit remained a possibility in 2020 if future arrangements are not agreed. Such a scenario could lead to trade between between the EU and Britain falling by an average of 20% in the following years.
“In short, even though we have now avoided a no-deal Brexit at the end of this month, we still face continuing uncertainty well into 2020,” Knot said. “We still do not know what the relationship between the U.K. and the EU will look like from next year onwards.”
The initial signs are not encouraging. The EU is on course for a clash with British Prime Minister Boris Johnson after Commission President Ursula Von Der Leyen warned on Wednesday it will be “impossible” to get a full deal before his year-end deadline.
Knot said trade in financial and non-financial services was particularly important to the Dutch economy. Much would depend on how far Britain is willing to go to align with EU regulation, he said, adding there was a strong case for that when it comes to financial services.
U.K. regulators could play an important role in upholding financial regulation that they have shaped to a significant degree after the debt crisis, according to Knot. It will also be in the interest of the City of London as it will directly impact the extent to which financial services can continue to be provided to EU customers.
Brexit has prompted many British firms to move to several EU financial centers including Frankfurt, Dublin, Paris and Amsterdam to make sure they could continue to serve EU customers.
“How far this trend will continue will largely depend on the future trading relationship,” he said. “Concluding a new trading relationship will be a major challenge in 2020.”
Regarding the U.K. financial system’s future level of integration with the EU, ECB Vice President Luis de Guindos told the same conference that the benefits should be weighed against potential risks to financial stability, investor protection and the integrity of the single market.
“This path will not be easy for either side of the Channel,” he said. “The risks linked to regulatory divergence and a potential race to the bottom should not be taken lightly.”
In the meantime, Brexit should provide an impetus for the EU to create fully-fledged capital markets and banking unions, he said. The same point applies to a region-wide deposit insurance scheme, where Guindos hopes the political deadlock will end in 2020.
“Further work on these agendas will enhance the attractiveness of the EU capital markets on the global stage beyond Brexit,” he said.