Carney right. Brexit bigger risk to EU than the UK

The Governor of the Bank of England has caused some bafflement with his comment yesterday that Brexit is a bigger risk to the EU than the UK. The usual suspects who highlight every warning of supposed Brexit doom seem (how strange!) to be making very little of Mark Carney’s observation in front of the Treasury select committee. It’s almost as though it doesn’t fit with the accepted narrative. Haven’t lots of bankers threatened to leave the UK and move their operations, which will surely hit tax revenues and employment in the Square Mile, unless there is a transition deal done by the government to make Brexit easy for bankers?

Yes, although it is unclear whether a bunch of bankers saying “save us, do what we want, or we’re off to France” will be popular with the British public. Sometimes I wonder whether certain senior financiers live in the same country as the rest of us.‎ Have they not been paying attention since June 23rd? Many voters hearing the threat of big banks moving operations to France will respond by offering the bankers lifts to the airport or the eurostar departure lounge at St Pancras station.

But as Carney now points out, for all the hype and panic the impact of there being no transition deal would be bigger in the eurozone than in the UK: “The consequences would be greater for Europe than the UK.”

One should never say “I have been banging on about this for ages.” It is undignified, vain and needy to say so. But I’ll break that rule this once. I have been banging on about this for ages.

London as a global financial hub is the centre of the eurozone. The eurozone is really a giant debt machine. The City makes it go round, because it clears and settles so much euro-denominated business. If the ECB decides that London is forbidden from clearing and settling euros (and it is difficult to see how it could do this without also cutting out New York) then it is creating a recipe for a massive shock to the eurozone financial system, as access to capital and expertise disappears.

It is a little like the old adage about owing the bank a thousand pounds being your problem but owing the bank one million pounds being a problem for the bank. Well, as I said, the EU and the eurozone rely on London to make its world go round. This is not an arrogant boast, simply a statement of reality. Punishing the UK and the City would be an act of EU self-harm. That is self-harm of which the EU is capable. They invented the eurozone after all. But we should be clear. The eurozone has a problem and would be better off with a sensible deal.

In foreign exchange trading, in the vast OTC‎ (over the counter) derivatives business, in swaps and in access to bank lending, London is king in Europe. Frankfurt is tiny in comparison. Paris is in France, with stupid labour laws. Dublin is lovely but also very small.

There will – of course – be some movement of jobs. There always is ebb and flow, and finance anyway is in the course of being disrupted by digital innovators and technological change. London is rather good at adapting to such changes because it has been doing it for centuries successfully.‎ It is adept at finding other things to do and new ways of doing business.

Now, there are ways in which the EU can prepare to handle the shock of breaking with London if that is the option it chooses – if it is demanded by the wilder federalist romantics in the European Parliament who seem to understand nothing about how their beloved currency actually functions.‎ People better qualified than me contest that with some proper planning the eurozone might be able to insulate itself, and lure some international firms to do the work needed within the boundaries of eurozone. But it is difficult to see how disruption for businesses in the EU that need to source capital and and undertake transactions would have no cost for the hardly rock-solid eurozone. We’ll see.

What is clear is that one of the major goals of British Brexit policy – for the sake of the European economy and financial stability – must be to persuade the ECB and politicians in the EU that the UK plays a vital role in keeping their show on the road.