Policy brief

The European Union’s post-Brexit reckoning with financial markets

In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual

Publishing date
13 May 2020

In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual outcome, given the dominance of politics over considerations of market efficiency. The EU will thus face a great deal of readjustment and regulatory realignment of its market for financial and other services.

The future relationship will start out with closely aligned regulations which will allow equivalence, and therefore seamless transactions, to continue in many sectors for a number of years. As regulatory autonomy has been one of the main Brexit rationales, we expect divergence to increase after a couple of years. The UK will become a third country for financial service transactions, dependent on temporary equivalence rulings, whereas in the past it could do business under a comprehensive regulatory passport.

London will remain a global financial hub, even as EU companies move operations out of the UK, set up additional licences and distribute activities across the EU. This will result in duplication and thus higher costs in both the UK and the EU as market participants strive to adjust to a future structure that will remain highly uncertain for years to come.

In the EU-UK negotiations on financial services, the aims should be to seek an agreement to provide stability for a defined, though limited, time period; a plan for how to manage divergences and the regulatory barriers that may result; and an EU reckoning with what kind of financial market it wants. This would ensure a stable transition to what we assume will be a structurally very different link than existed when the UK was part of the EU.

The UK has historically been both a business centre and policy leader in the financial sector. In its absence, the EU will need to decide how prominent a role finance should play and where regulatory and supervisory responsibilities should be located.

Brexit can act as a catalyst for the EU to address what its capital markets should look like and how to get them there. The challenges of restructuring and recovery in the wake of COVID-19, of ensuring confidence in the euro and of preserving pensions systems all require highly integrated, functional and fair financial and capital markets, as public budgets are highly under stress. These integrated markets do not exist in the EU. Action now is of the essence.

About the authors

  • Thomas Wieser

    Thomas Wieser was President of the Euro Working Group and of the European Financial Committee of the European Union until February 2018. The role had been a full-time position since October 2011, following a decision to make it so by EU Heads of state. He previously chaired the Committee between March 2009 and March 2011.

    Before becoming President of the EWG/EFC, he was Director General for Economic Policy and Financial Markets in the Ministry of Finance, Vienna. There he was in charge of macro-economic policy, international and EU affairs, financial market legislation, and export credits and guarantees.

    He also has a strong academic background in Economics. After a degree in Economics (University of Innsbruck), he pursued post-graduate studies in theoretical and mathematical economics, and taught at the University of Colorado, Boulder (Fulbright scholarship) as well as the Institute of Advanced Studies, Vienna.

  • Rebecca Christie

    Rebecca Christie joined Bruegel as a visiting fellow at Bruegel in March 2019 and currently she is a non-resident fellow at Bruegel. Prior, Rebecca was a political correspondent in Brussels for Bloomberg News from 2011 to 2016. Most recently she served as the lead author on the European Stability Mechanism's institutional history, "Safeguarding the Euro in Times of Crisis: the Inside Story of the ESM". She has also served as an expert adviser to a European Economic and Social Committee panel on taxation. She is an experienced panel moderator and has provided occasional reporting and radio commentary on Brexit to Irish broadcaster RTE and to the BBC.

    During a 22-year career in daily journalism, Rebecca wrote for a broad range of newspapers and wire services, from the Bend (Oregon) Bulletin to the UK-based Financial Times. She was a Washington correspondent for 7 years with Dow Jones Newswires and the Wall Street Journal, covering the U.S. Treasury, the Federal Reserve and the Pentagon. She joined Bloomberg in 2008 as senior U.S. Treasury correspondent, a post she held for three years before moving to Europe.

    Rebecca studied classical languages at Duke University and public policy at the LBJ School of Public Affairs at the University of Texas at Austin. At Bruegel, Rebecca will be working on financial services policy and Brexit, and also collaborating with other scholars on a range of research topics.

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