"Interests and alliances"
Opening remarks by Klaas Knot at the
SUERF conference 'Forging a new future
between the UK and the EU'
Amsterdam, 8 January 2020
The SUERF Conference of January 2020 brought together thought leaders from
policy making, academia and industry, to discuss the economic implications of some
of the challenges uncovered by Brexit and other recent events on both sides of the
Channel. Because the conference was held at De Nederlandsche Bank in
Amsterdam, Klaas Knot was invited for an opening keynote speech. In it, Mr Knot
offered an optimistic view on the future relationship between the UK and the EU,
based on the shared interests and the current and possible future alliances.
It is my pleasure to welcome you all here at the Dutch Central Bank. And a special
welcome to our distinguished speakers and panelists. A new year, a new decade,
and a good moment to discuss the future relationship between the EU and the UK.
Indeed, political developments over the coming months will be vital in shaping this
new relationship.
Henry Kissinger - the former US Secretary of State, famously said that "America
has no permanent friends or enemies, only interests. This echoes what Lord
Palmerston - the 19th century UK prime minister - once said: "the UK does not have
eternal allies, nor perpetual enemies, but eternal and perpetual interests."
Let me now fast forward to today's world of Brexit. Obviously, a politician or political
party can persuade people to vote to leave the European Union. A member state
can decide to abandon a treaty, or to withdraw from an agreement. Every nation
has its own - sometimes narrow - political interests. These interests clearly matter
over the course of history, and they probably will continue to do so for a long time
to come.
When Kissinger and Palmerston contemplated the alliances and interests of nations,
they of course considered that the interests of nations can diverge. And alliances
could therefore be temporary.
But let us now take a different perspective. A perspective that also rings true. And
which offers us a more optimistic view.
First, nations do not just have divergent or competing interests, but also enduring
common interests. Indeed, the EU and the UK continue to face very similar
challenges and opportunities. Some of which will be discussed today and to which I
will return shortly.
Second, alliances may indeed be temporary, such as the UK's membership of the
European Union. But at the same time, other alliances between the EU and the UK
will endure. One example is our common determination to green the financial
system by means of the Network for Greening the Financial System. Also, new
alliances may emerge, such as a future trade relationship between the EU and the
UK.
I would now like to further elaborate on the EU's and UK's shared interests and
future alliances. And I will do so along the lines of the three main topics that will be
discussed in today's key addresses and panel sessions.
First and foremost, the main question in 2020 will be how far we can get and how
fast we can move in agreeing a new and ambitious trade relationship between the
EU and the UK and the degree of alignment on financial services therin.
We economists all know very well: a key factor in explaining trade patterns and
trade intensity is geographical proximity. Of all the possible consequences of Brexit
- and they are many! -the geographical position of the UK is not one. Nothing will
change that. The distance between Dover and Calais remains 33 kilometers. Or to
be precise: 33.3 kilometers between the white cliffs of the South Foreland near
Dover, and Cap Gris-Nez in France.
However, regardless of our close geographical proximity, the political decisions that
will be made over the coming period will be key in determining the nature and
volume of future EU-UK trade. For example, trade between the EU and the UK could
drop by an average of 20% in the years after a possible no-deal Brexit.1
Indeed, in economic terms there may be little difference between a no-deal Brexit
that could have occurred on the 31st of January, and a hard Brexit that could still
occur at the end of 2020. This would happen if the EU and the UK are unable to
agree on a timely trade deal. And if there is no mutual consensus on extending the
transitional period beyond 2020.
And even if a timely trade deal were to be reached, it is unclear whether services
would be part of such an agreement.
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. Because we still do not
know what the relationship between the UK and the EU will look like from next year
onwards.
As a central banker and supervisor, I am responsible for the financial sector and
financial stability. So from my perspective, a deep and comprehensive trade-deal,
including services, would be preferable. Trade in financial and non-financial services
is also particularly important to the Dutch economy. In 2018, Dutch services
exports to the UK amounted to 23.8 billion euro.2
Of course, in practice much would depend on how far the UK is willing to align with
EU regulation post-Brexit. I think the case for this is strong, for example in relation
to financial services.
First, much of EU post-crisis regulation has been shaped to a significant degree by
UK regulators, supervisors and politicians. This would give them an important stake
in upholding those rules post-Brexit.
Second, - and this is also one of the panel discussion topics of today - it is in the
interests of the City of London to align sufficiently with EU regulation. This is
because it will directly impact the extent to which financial services can continue to
be provided to EU customers from London.
London is - and under all scenarios will probably remain - one of the world's most
important financial centers for the foreseeable future. However, as a consequence
of Brexit, we have seen UK firms move to several EU financial centers. These firms
wanted to be safe in the knowledge that they could continue to serve EU customers.
Frankfurt, and to a lesser extent Dublin and Paris, have attracted bank operations
from the UK. Asset management firms are moving to Luxembourg. Amsterdam has
attracted a substantial number of trading platforms and payment providers. How far
this trend will continue will largely depend on the future trading relationship
between the EU and the UK. As I said, concluding a new trading relationship will be
a major challenge in 2020.
Other challenges go far beyond the 2020 horizon, and also transcend the future
trade relationship between the EU and the UK: Tackling climate change is one of the
key challenges of our lifetimes. This will be the second key theme of today's
conference.
As you know, much of the Netherlands lies below sea level, so our country is
particularly vulnerable to rising sea levels. But large areas of the UK are vulnerable
to rising sea levels too, including parts of London. Not to mention more flash
flooding and coastal erosion. The increased frequency of severe weather events
such as heatwaves and storms will affect both the UK and the EU. After all, climate
change knows no borders.
We collectively face the consequences of climate change and this calls for collective
action. From the very start, the UK has been an inspiring companion in joint efforts
to tackle climate change by putting climate-related risk on the agenda of central
banks. And in supporting the growth of the green finance market.
At the initiative of the Banque de France, eight central banks established the
Network of Central Banks and Supervisors for Greening the Financial System at the
Paris "One Planet Summit" in December 2017. Both the Bank of England and DNB
were part of this initial coalition of the willing. Since then, this network has grown to
54 Members and 12 Observers representing 5 continents.
The Bank of England greatly contributed to the achievements of the Network for
Greening the Financial System and the rapid expansion of its membership. And the
Bank of England will undoubtedly continue to contribute to the important work of
the network in the future.
The importance of EU-UK cooperation on climate change, of course transcends the
efforts of this network. We also need global and aligned action to limit our carbon
emissions and to minimize the effects of climate change. As carbon prices increase
over time, coordination between countries becomes increasingly important to
ensure a level playing field for carbon-intensive sectors.
I hope today's discussion can provide further insights on the role that academics
and central banks can play in this respect. And I trust that the EU and the UK will
continue to collaborate closely on this, given that we clearly have a shared interest
in doing so.
Likewise, the third topic of today's conference - regional economic inequality - is
clearly also a subject that transcends the topic of Brexit.
Nonetheless, the lack of regional economic opportunities may not only have
contributed to the UK's Brexit-vote, but Brexit itself will also impact regional
economic prospects. Not just in the UK, but also within the Netherlands and other
EU countries.
For example, a study by the Netherlands Environmental Assessment Agency, shows
that - in the event of a no-deal Brexit - the regional impact in the Netherlands
differs significantly: regions in the Netherlands with relatively less economic
activity, will probably take a bigger hit.3
The European Union has several policies and programs in place to support regional
economic development, such as the European Regional Development Fund. Brexit
will not make it easier for the EU and the UK to cooperate in addressing the
challenge of tackling unequal regional economic opportunities. However,
investigating and implementing effective ways to tackle regional inequality, remains
a shared interest to all of us.
Let me conclude by stressing that while the UK will now leave the EU, other
alliances between the continent and the UK will remain in place. Central banks and
supervisors on both side of the Channel will continue to coordinate our efforts in the
IMF, the FSB, the BIS and other standard-setting bodies. EU-UK cooperation within
the Network for Greening the Financial System demonstrates that our combined
impact is greater than the sum of our individual contributions. And new alliances
between the EU and the UK will no doubt emerge in the future.
Specific alliances may change over time, but the most important challenges facing
the EU and the UK will continue to bind us. Indeed, ultimately, we will always be
only 33.3 kilometers apart.
I wish you all an inspiring day and thank you for your attention.