Diamond Says Brexit ‘Net Positive’ as Ermotti Sees Europe Doomed

Bob Diamond says Brexit is bringing the Continent together, or at least benefiting its banks. That prompted Sergio Ermotti, days after Germans gave Angela Merkel a weaker mandate, to say the European Union is broken.

Ermotti, head of Switzerland’s UBS Group AG, warned Europe is doomed to fall behind the U.S. and Asia unless the EU breaches the “taboo” of closer federalism. He struck a gloomy note in response to Diamond, the ex-Barclays Plc boss turned optimistic investor in Greek and Italian banking, who called Brexit a “net positive” for European bank reform moments earlier.

“I don’t think Europe in its existing form has any chance to succeed,” Ermotti said at a banking conference in Milan Tuesday organized by Bloomberg. “If you want to succeed, to compete against China and the U.S., you need to have — which is a taboo right now — a more federal model: one defense, one foreign policy, one minister of finance.”

The chasm in perceptions reflects that of the financiers’ counterparts at the Brexit negotiating table, who have so far failed to find common ground on the implications of the departure of the U.K., home to the EU’s dominant financial center. Their diverging views also highlight the challenges facing the region and its banks, which have struggled for years to boost profitability in a still fragmented market.

Non-European Winners

French President Emmanuel Macron, in a speech on Tuesday, will make proposals for an overhaul of the EU in areas ranging from defense to the economy, but his push has been complicated by Germany’s election on Sunday, which saw parties more hostile to European integration than Merkel’s past governing coalition strengthened.

The main winners of Brexit, Ermotti said, will be New York and Asia, while Europe in its current form is doomed to fall behind both regions. He also said Europe is hobbled by its lack of a deep market for securitizations. To boost profitability, Ermotti, whose bank is among the few remaining global investment banks in Europe, said smaller lenders will need to consolidate, while larger banks must reduce back-office expenses by using more technology.

Also on the panel were Mediobanca SpA Chief Executive Officer Alberto Nagel, Societe Generale SA chairman Lorenzo Bini Smaghi and Intesa Sanpaolo SpA’s Carlo Messina, who all struck a cautious tone on Brexit but weren’t as downbeat as Ermotti. Nagel warned of colonization of Europe by U.S. banks; Ermotti’s call for stronger European investment banks was echoed by Bini Smaghi, who said continental Europe needs to make up its mind what kinds of banks it wants.

U.S. Competition

“In Europe we have a strong, strong competition from American banks,” Bini Smaghi said. “We have to think about, in continental Europe, what kind of model we want to have for the financial sector and how to promote the investment banks that we have.”

Diamond’s optimism was an outlier. Though he voted for Britain to remain in the EU, he said Brexit will bring renewed “impetus” for reform and the deepening of the region’s capital markets that Ermotti and others want.

“No one wants to say Brexit is good or Brexit is bad,” Diamond said. “I have already seen it has been somewhat of a catalyst for pulling together within continental Europe.” Labor-market reform and “banking reform, deepening of the capital markets, is low-hanging fruit.”

Diamond said that consolidation will bring opportunities for investors in the region’s banks, particularly in countries such as Greece, where his firm already invested in a lender, and Italy, where he’s looking for deals.

“We’re very bullish on Europe, we’re very bullish on banking in Europe,” he said in an interview after the panel discussion. “I say that recognizing that I have not been bullish on Europe as an economy, as an investment opportunity, in at least 12 years.”
Source: Bloomberg