Brexit and the Future of London’s Finance: Understanding the EU's Economic Dilemma

I certainly hope so. I hope that the UK's future lies in sustainable real industry rather than merely staying in the service sector. A resilient industry that rewards the next generation with a viable economy amid dwindling natural resources and a growing population is the goal we should strive for.

defining the economic landscape beyond Brexit

Unusually, this is a sensible question. If London aims to maintain its position in retail finance, it must commit to being an EU rule taker. However, the City of London should focus on wholesale finance. With the deep connections and substantial liquidity, London can serve as a trusted mediator between trading blocs. Operating in a well-known language, it can act as the world's finance dealmaker. Additionally, it's worth noting that the EU will likely not survive for much longer.

Understanding the EU's Economic Situation

Read on for a deeper understanding of the EU's economic challenges. Understanding macroeconomics is crucial to grasp the current predicament.

The EU's financial system is in a precarious state, with significant risks and potential issues that might lead to a widespread systemic crisis. The Eurozone's banking system is particularly fragile, with escalating non-performing loans and vulnerabilities that place the entire system in jeopardy. Here's a closer look at the components of this economic crisis.

The Commercial Banks' Dilemma

Commercial banks in the Eurozone are facing a substantial crisis. These banks are loaded with non-performing loans, which are debts that are expected to become losses. These non-performing loans are invisible to the naked eye but represent a significant risk to the financial system. The challenge is exacerbated by the lack of undercapitalization in these banks, making them a systemic risk. They should not be trading at this stage, but they continue to do so due to investor faith in the central banks' ability to maintain the stock market's upward momentum.

TARGET2 and the Eurozone Monetary System

The Eurozone's monetary system, specifically the TARGET2 settlement system, is another critical factor in the current economic crisis. TARGET2 is a system that allows for cross-border payments within the Eurozone. However, the current imbalances are worrisome and indicate the severity of the economic situation. Germany, for instance, is owed €1.15 trillion, a figure that has increased by 27% between January and September. Italy, Spain, and the ECB itself have also increased their debts, contributing to the €1.3 trillion imbalance.

The Risks of Non-Performing Loans

The non-performing loans issue is compounded by the second wave of the COVID-19 pandemic. European businesses are being bankrupted, and the first wave's non-performing loans have not yet fully worked their way into the financial system. These figures will be exacerbated by the second wave, leading to a cycle of increasing non-performing loans and systemically weakening banks. The game of passing the parcel, as it were, will continue until the system crashes. Unfortunately, few understand TARGET2, and those who do are silenced out of fear. Market assessments of individual banks are likely to be the trigger for a widespread systemic crisis in the Eurozone.

Conclusion

Understanding the EU's economic situation is crucial for making informed decisions. The current state of the Eurozone's banking system and TARGET2 imbalances indicate a deep and complex economic crisis. London should pivot towards sustainable real industry and focus on wholesale finance to secure its future. The path ahead is uncertain, but with a deeper understanding of economic challenges, we can navigate the complexities and build a resilient future.