2017 has seen some antagonistic forces, whose resultant seems uncertain. On the one hand, people are talking about the steps that are to be taken with a view to consolidating the single market and achieving banking union. On the other hand, negotiations caused by Brexit between the European Union (EU or the Union) and Great Britain have been initiated. A brief review of such contradicting trends observed within the Union is shown below.

1. Towards consolidating Banking Union (Centripetal Forces)

At the end of 2016, the European Commission (the Commission) publicly announced the new reform package meant to consolidate EU banks' resilience and secure financial stability within the Union. Such proposals envisage a continuation of the reforms initiated further to the financial crisis, and are indirectly aimed at completing the banking union. Amongst the targeted objectives, the Commission specifies the increase in the EU institutions' resilience and consolidation of financial stability, and improvement of the banks' lending capacity. Also, the Commission envisages a facilitation of the banks' role in building more active and liquid EU capital markets to support the creation of a union of capital markets.

Moreover, ESMA together with the relevant national authorities (ASF, in the case of Romania) is interested in a convergence of regulations within Member States, the primary target being to transpose MiFID II/MiFIR in domestic legislation. At the same time, protection of investors is envisaged, as set against the background of cross-border transactions (inside the Union), whose stimulation is contemplated.

Other measures taken at the level of the Union with a view to developing the European Single Market (mainly the single market in financial services and the digital single market) include homogenisation of domestic legislation on consumer credits and mortgage credits, respectively, to promote cross-border credits (once again, inside the Union). At the same time, with a view to developing the digital single market, regulations were inserted, directly applicable in all Member States, with respect to electronic identification and trusted services for electronic transactions. All of the above offers a perspective on the steps taken to consolidate the Union and increase the integration degree.

2. Disturbing Elements (Centrifugal Forces) Brexit

At the end of March 2017, based on Article 50 of the Treaty of Lisbon, Great Britain formally notified the Union on the initiation of the negotiations for Great Britain's exit (Brexit) from the Union. Negotiations, whose duration is forecasted to last for at least two years, are meant to conclude an agreement setting forth the Brexit terms. Amongst the difficult topics of the negotiation, one may also find the conditions in which Great Britain shall have access to the Single European Market, including in terms of financial services. It is likely that, as of Brexit, London financial institutions will lose (or have their) freedom of establishment and freedom to provide services (limited), which freedoms are given solely to Member States of the Union.

Also, upon Brexit becoming effective, the Union legislation shall cease to be applicable to persons in Great Britain, and shall be replaced by domestic legislation. Thus, all regulations listed in the first section of this article will no longer apply to Great Britain. Basically, this could mean a "deregulation" process to be enjoyed by the financial institutions operating in Great Britain (since the hefty and often complicated legislation required within the Union will no longer apply to them).

Given London's role of main financial centre within Europe, it is likely that all the above will have a major impact on how certain European financial institutions operate.

Political Uncertainties

In a regional conference on investment climate I have recently attended, most participants identified the political risk as the main cause affecting current investment behaviours. Considering that political discourse became more radical in many of the Union's countries, national elections scheduled for this year are looked upon with concern. The European integration process may be affected by the success of certain political players with an anti-European discourse.

Normalisation of Monetary Policies

Another element of concern for the financial markets is related to the impact which the process of normalising the monetary policies promoted by central banks could have. Since macroeconomic conditions improved (economic growth close to its potential, upward trend inflation, improving labour force market), central banks are expected to terminate extremely accommodating monetary policies, implemented throughout nearly the past 10 years (a normalisation process already started by FED – USA's Central Bank). Thus, the reference interest rates are expected to go on an upward trend which will result in the credit becoming more expensive.

Considering that the debt ratio in Europe continued to rise throughout the last years (both in terms of public, and private debt, equally in absolute terms, and by reference to GDP), the increase in the interest rates may have a major impact on the capacity to sustain the debt service.

At the same time, although the process of reducing the portfolio of bad debts held by the banks is conducted in certain European jurisdictions (Romania being one of the most active in this respect), the volume of bad debts remains high. Given that it is identified as one of the factors affecting the European banks' profitability, institutional solutions are currently sought (both at a European, and domestic level) with a view to decreasing this indicator.

3. Conclusions

Further to the implementation of institutional reforms at a European level, European financial institutions are better capitalised and more rigorously supervised, as compared to 10 years ago. The steps made towards achieving the banking union, mainly by the single supervisory mechanism (SSM) and the single resolution mechanism (SRM), contribute to the securing of European financial stability.

Such stability may be disrupted mainly by political uncertainties and prospects of an increase in the credit cost, further to a normalisation of the monetary policies promoted by central banks.

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