Barney Reynolds, a leading UK and international financial services lawyer and a partner at Shearman and Sterling LLP, made his dramatic prediction days after the publication of a new paper in which he sets out precisely what risk the eurozone is running – a risk which threatens to engulf the world in a fiscal “contagion” quite separate from the ongoing coronavirus – which he said was exacerbating things still further. The eurozone, officially known as the euro area, which was established in January 1, 1999, is a monetary union consisting of 19 of the 27 EU member states, all of which have adopted the euro as their currency. The UK opted not to join, instead retaining the pound. Brexiteer Mr Reynolds, who co-authored the paper, Managing Euro Risk, with David Blake and Robert Lyddon, told Express.co.uk Britain’s departure from the EU posed a specific risk because the bloc was pushing for the UK to adopt EU rules with respect to financial services, with London-based businesses transferred to the EU’s management.
He said: “The nub of it is that the eurozone states are running a currency system which is half-finished with the result that it is extremely risky.
“And that risk is not being run principally by them since the set-up offloads it – it defaults to the rest of the world.
“So our pensions and investments are running that risk.
“Apart from the fact that right now the Bank of England mitigates that risk.
“So the Bank of England stands as protector to the global market from that risk because we host the market here.:
After Brexit, the dangers were compounded because the EU, and the French in particularly wanted more financial businesses to be relocated to France and the eurozone in general.
Mr Reynolds said: “But that then means that the mitigation effects that the Bank of England apply disappear and in fact much more business will be conducted under the flawed rules that they have got.
“And the EU27 laws and their supervisors do not counteract the systemic risk created by the Eurozone in the way that the Bank of England does.”
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They’ve basically got a nuclear reactor with a crack in the core and they are asking financial businesses to move their houses to be next door to the nuclear reactor
He added: “They’ve basically got a nuclear reactor with a crack in the core and they are asking financial businesses to move their houses to be next door to the nuclear reactor.
“Obviously that is exceedingly risky because in reality the inter-connectivity of the financial market and the fact that global banks have to stand behind their subsidiaries means that if there is massive risk embedded in those EU27 entities, it is transmitted into the rest of the world and back into our savings and investments without anyone protecting us from it anymore.”
In such circumstances, financial “contagion” would sweep through the markets, with the whole system seizes up as a result, he warned.
He added: “The solution is they give us enhanced equivalence, on the basis I have set out already, and they have then to do it on the basis that all our institutions stay here, and all of the global market stays here completely without any amendment.
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“We operate across the whole EU under UK law, ignoring EU law, so that everyone is regulated safely and properly.
“And we not only are not a rule-taker but we are not going to pay any regard to their rules because we are going to have to manage this safely.
“So we will apply the international Basel standards and that’s it – we won’t commit to anything else, because many of their other rules are shaded to try and paper over this problem which they have got.
“They are sitting on the half-built, cracked nuclear reactor.
“Because coronavirus is going to depress economic activity.
“The eurozone is built on the assumption of some level of intrinsic growth.
“If the economies start contracting and non-performing loans across Europe go up in value, with more and more people defaulting and not performing on their mortgages and so on, basically the financial system goes bust.”
Mr Reynolds said for the UK to be able to mitigate Eurozone risk with minimum disruption a system of what is known as Enhanced Equivalence was crucial.
Such a system would need to be enshrined in a free trade agreement (FTA) or multi-regional agreement (MRA) agreed between the UK and EU, and would need to be inclusive of commercial banking and primary insurance, as well as filling in the other gaps.
Key elements would be adherence to Basel Rules, a global, voluntary regulatory framework on bank capital adequacy; predictable, binding, independent (expert) adjudication; collaboration on for example a Capital Markets Union; and a commitment to systemic risk and consumer protection.
Mr Reynolds said detailed arrangements needed to include:
- Separate, severable, sub-sector by sub-sector approach
- Binding, with adequate notice periods
- Across all financial sectors (given interconnectivity)
- Presumptive equivalence for all new passport measures
- No “cliff edge” provision with in-flight contracts to run off to completion at moment of withdrawal of equivalence for a sub-sector
- No “strings attached”
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