Managing Brexit risks is necessary but not sufficientby Jonathan Portes / December 23, 2019 / Leave a comment
The choice of Andrew Bailey as the next Governor of the Bank of England has been almost universally described as unexciting but safe—signalling the government’s desire for a steady pair of hands, who will not rock the Brexit boat either in public or in policy terms. And indeed on Brexit the Bank has little to gain by making waves. But that doesn’t mean it, or its new chief, will have an easy job.
The most urgent task will be to manage the UK’s disengagement from the EU single market, as far as financial services are concerned, while protecting the competitive position of the City. Brexit means the UK will become a third country from the point of view of the EU’s financial regulators.
That does not mean that the UK and the continent will be cut off from each other. The new relationship is likely to be governed by the EU’s “equivalence” regime, where EU regulators determine when a third country’s regulatory standards are up to EU standards.
Securing equivalence—in a dozen or so different areas—is emphatically not the same as the EU’s “passporting” regime, which the UK will lose access to after the end of the Brexit transition. Equivalence is incomplete, piecemeal and unilateral, meaning it can be withdrawn at any time. But failure to secure equivalence would be very damaging indeed—and time is short, with an initial deadline of July. And the UK will need to put its own regime in place too.
This will mean a lot of detailed, unglamorous work in a short time. The UK has long faced the challenge of maintaining the economic and fiscal benefits of having a large and highly productive financial sector while managing the associated huge risks to financial stability. Leaving the EU doesn’t change that basic dilemma, but it does sharpen it. European regulators and finance ministries know that European businesses need access to the City—for the moment.
But the need to worry about the direct implications of Brexit for the City shouldn’t mean that the Bank takes its eye off the wider economic ball. The Carney period was one of unprecedented stability in monetary policy—with interest rates not going higher than 0.75 per cent or lower than 0.25 per cent. Perhaps in…