Brexit deal: EU may threaten ‘to block’ City’s access to its markets

Croatias prime minister, Andrej Plenkovi, hinted at move to ensure level playing field

The EU will be unashamedly political and block the City of Londons access to European markets if Boris Johnson tries to exempt the UK from its laws.

Croatias prime minister, Andrej Plenkovi, whose country is taking over the presidency of the EU, made the blocs intentions clear after the prime minister insisted the UK would not be aligned to the blocs regulations.

Asked whether the EU would use its power to switch off the Citys ability to serve European clients to gain leverage in the coming negotiations with Britain, Plenkovi said: I wouldnt go into the vocabulary of weapons but what I have learned in international and European negotiations [is] that all arguments and considerations are treated as political.

A major issue in the EU-UK negotiations over the future relationship concerns the extent to which the British government wants to diverge from the blocs rules in various sectors of the economy.

The outgoing governor of the Bank of England, Mark Carney, said this week that it would not be appropriate for the UK to be a rule-taker in the field of financial services after Brexit.

The European commission president, however, warned of the economic costs of seeking a loose relationship with the EU. Ursula von der Leyen was also speaking in Zagreb following a meeting with Johnson in Downing Street.

We have to find a good balance between divergence and being close to the single market, she said. There is a difference in being a member state and not. And there are trade-offs between regulatory divergence on one side and access to the single market. This room now has to be explored in the coming negotiations. In June we will take stock of the progress.

The European commission will make a unilateral decision before the summer on whether it recognises British regulations and supervisory bodies as being sufficiently robust for its financial services sector to continue to work for EU-based clients.

The City earns about 205bn a year from European demand for financial services. Trade experts have described the so-called equivalence decision as vital for the UKs financial services sector, which generates 11% of total tax revenues.

British banks, traders and insurance firms will lose their automatic passporting rights to work for EU clients at the end of the transition period. After 31 December 2020 they will instead be reliant on the commission providing temporary rights.

In an internal briefing for EU diplomats on Friday, commission officials said it would not be business as usual for the City of London after Brexit as a consequence.

Diplomats were advised that there was still a significant risk the City would not even be given temporary rights after what officials said would be a granular assessment.

One senior EU diplomat said: Financial stability requires both sides to quickly agree an equivalence framework. And whilst the preference of the industry to continue on the same basis EU member states will need to be absolutely sure there is a level playing field with appropriate governance.

The source said the EUs demands would be unprecedented. We have to go well beyond the baseline provided in US cooperation or the more recent Swiss practice, the diplomat said.

The commission has highlighted 40 areas where it may judge the UKs systems to be equivalent but even under such a ruling access can be withdrawn or restricted on a sector by sector basis with just 30 days notice. Previous EU equivalence decisions have also been linked to broader political questions rather than being confined to technical judgments.

David Henig, the director of the UK trade policy project at the European Centre for International Political Economy, said: Apart from access to UK fishing waters and level playing field conditions typical of trade agreements we have heard little from the EU about their price for preferential UK access or equivalence, which given they are the larger market, could be high.

Options such as preferential access to UK labour markets and deeper ties to the EU regulatory system are bound to be considered.

Read more: