The geoeconomics of the Single Market for financial services

JCMS |

by Lucia Quaglia (University of Bologna) and Amy Verdun (University of Victoria)

The European Union (EU) has created a Single Market in financial services, the evolution of which has become entangled with geoeconomics, i.e., ‘the systematic use of economic instruments to accomplish geopolitical objectives’ (Blackwill and Harris 2016, p. 1). The main rationale of geoeconomic measures is not the achievement of mutually beneficial economic gains, but rather the pursuit of geostrategic advantages by seeking relative rather than absolute gains.

In our recently published JCMS article, we offer four metaphors – ideal types – borrowed from ancient military formations and tools, to characterise the geoeconomic usage of the Single Market in finance for defensive and offensive purposes. The EU can deploy its Single Market as (1) a ‘shield’ (for instance, to deflect the extraterritorial effects of third-country regulation) and as a ‘sword’ (to project its regulatory power externally), sometimes in an uncoordinated manner. The EU can deploy its Single Market (2) as a ‘testudo’, which is a military formation whereby a group of soldiers protect themselves on all sides by using their shields in a coordinated manner. The EU can use its Single Market as (3) a ‘phalanx’, i.e., a military formation whereby a group of soldiers deploys shields and spears in a coordinated manner for defensive and offensive purposes. Finally, groups of member states can deploy the Single Market as (4) ‘scattered commandos’, in an uncoordinated manner.

We consider three case studies that concern the EU and other major jurisdictions – namely,  the United States (US), the United Kingdom (UK) and Russia – and that range from incipient geoeconomic use to outward weaponization of the Single Market in finance.

The first case study concerns the post-2008 crisis transatlantic tug of war in regulating global finance. In fact, after the Great Financial Crisis, the EU and the US adopted more stringent domestic regulation across a variety of financial services, but, initially, they acted unilaterally and set out to export some of their rules to third countries, including each other. A variety of transatlantic regulatory disputes ensued and were eventually resolved mostly by ‘mutual accommodation’, whereby the EU and the US adjusted domestic rules (or their application) so as to minimise cross-border regulatory clashes (Posner and Quaglia 2023). In this instance, the EU used the Single Market in financial services as a shield to deflect as well as push back against the extraterritorial effects of US financial regulation, and as a sword to project its regulatory power externally.

A second notable instance of the geoeconomic use of the Single Market in financial services, this time as a testudo, occurred during the Brexit negotiations, i.e., the negotiations concerning the UK’s departure from the EU and the subsequent EU-UK economic and political relations. The EU acted as a block and forced the UK to accept EU terms, ensuring that the interests of the EU as a whole were protected and so was the integrity of its Single Market (Verdun 2023). Some geoeconomic considerations informed how the EU negotiated with the UK because EU positions were driven more by relative than absolute gains. In fact, both UK and EU financial sector businesses were interested in a special deal; yet it was more the goal of keeping the Single Market intact and maintaining clearly demarcated inside/outside borders of the EU polity that prevailed over considerations of economic gain.

Finally, the EU deployed the single market in financial services as a tool of economic warfare against Russia. After the full-scale Russian invasion of Ukraine, the EU ‘weaponised’ its Single Market in finance vis-à-vis another major international power by adopting financial sanctions against Russia. These sanctions included: the removal of selected Russian banks from the SWIFT messaging system to disconnect these banks from the international financial system and harm their ability to operate globally; restrictions concerning the access of certain Russian entities to EU capital markets; prohibition for EU banks to accept deposits exceeding certain amounts by Russian nationals; prohibition for EU central securities depositories to hold accounts of Russian clients; prohibition to sell euro-denominated securities to Russian clients; the prohibition of transactions with the Central Bank of Russia and the freezing all its assets (Quaglia and Verdun 2023). These sanctions had defensive and offensive purposes, featuring the geoeconomic use of the Single Market in finance as a phalanx.

Moving forward, it could happen that, if the coalition of EU member states supporting sanctions against Russia falls apart, or if the EU deploys other financial instruments (e.g., the euro or Banking Union) against Russian aggression, the most apt metaphor to use with reference to the geoeconomics of the single market is that of Scattered Commandos. This situation might occur especially if member states have competing preferences, thus the EU is internally divided, while the liberal international order is under siege.

Critics have pointed out that the geoeconomic usage of the market may serve as a double-edged sword: it is at once an instrument of foreign policy, but also creates incentives for players that are being pushed out to set up alternative financial instruments or markets, thereby risking the upsetting of the orderly functioning of the global financial system. Indeed, if the financial system continues to be used as a weapon, it would provide a rationale for a parallel financial system to be set up and become mainstream, thereby undermining the global financial system. In this respect, the weaponization of finance and the use of blockages as a weapon could set a bad precedent.

Acknowledgements

This blogpost draws on a longer academic article by both authors published in JCMS: Journal of Common Market Studies. It contains a detailed list of references, sources and interviews.


Lucia Quaglia (DPhil and MA University of Sussex) is Professor of Political Science at the University of Bologna. She has published 9 books, 7 of which with Oxford University Press and more than 60 articles in refereed academic journals. She has guest co-edited 5 special issues of highly-ranked academic journals.

 

Amy Verdun (PhD EUI, MA University of Amsterdam) is Professor of Political Science at the University of Victoria, BC, Canada and is a visiting Professor in European Politics and Political Economy at Leiden University. A former co-editor of JCMS, she publishes in comparative politics, public policy, political economy, and EU studies. Follow Amy on X (Twitter) here.