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The City may be better off with a harder Brexit
The Big Boris bridge to Biarritz (Boulogne, surely?) seems to have sunk into the sea even before the first span could be assembled. This is because when Britain’s Foreign Secretary, Boris Johnson, suggested to President Macron of France this week that the two countries should build a bridge across the Channel – that’s 22 miles – there was widespread mockery and even some outrage about Boris’s suggestion.
Boris is public enemy number one for those who dislike leaving the EU precisely because he was a progenitor of the ultimate British grand project, that is Brexit. There is another reason the bridge across the Channel idea went down badly, however. Boris’s record to date on river crossings is not good. As Mayor of London he promoted a pointless cable car across the Thames and a garbage “garden bridge” to nowhere which cost £45m before being abandoned by his successor as London Mayor, Sadiq Khan.
I’m broadly neutral on the latest Boris bridge that won’t happen. If there ever is a demand for more crossings, then a second tunnel seems to make more sense than building a bridge over the world’s busiest shipping lane through which giant container ships and naval vessels sail. I mean, what could possibly go wrong? Quite a lot, at night, in the fog.
The fuss over the Boris bridge overshadowed the most interesting and consequential element of Macron’s visit to Britain. What stood out was Macron’s declaration that if the UK wants the City of London to have “access” to the EU’s financial markets after Brexit then it must pay into the EU pot and observe the rules of the Single Market, including accepting freedom of movement – a non-starter for many British voters.
Obviously, Macron wants jobs in the City to migrate to Paris as part of his needed effort to inject greater dynamism into the French economy. Perhaps he envisages hedge fund types, and investment bankers, driving their Aston Martins over Boris’s Channel bridge with the White Cliffs of Dover shrinking in the rear view mirror. This is a perfectly legitimate aim. France has strengths in finance and can grow them. In the late 19th century Paris and London’s financial markets complemented each other, but Paris was not London then and it is not now. London is an epic global centre in finance in a way that Paris is simply not.
Global finance tends to be about clusters and hubs, and London is the ultimate hub and cluster. This is not down to some innate British genius. But by a combination of accident, history, luck, and design, London is it. A report for the European Parliament mapped this out for MEPs in December 2016. It should have made for sobering reading in Brussels.
London powers the eurozone; it has the capacity and the depth of capital markets. As much as 46% of EU equity is raised in London. As much as 75% of the EU foreign exchange and interest rate derivatives trading takes place in London. In the EU wholesale market, about 78% of European capital markets and investment banking revenues are based in the UK, 55% of which come from clients in other EU countries. Some of this can be replicated elsewhere, but nothing like all of it or not in a hurry.
Those of us who point out the vital importance of London to the European financial system risk boring readers by repetition, although so widespread is the daft continuing assumption that the British are supplicants, and that the eurozone can withdraw from the City of London and feel no impact, that I think it is worth mentioning, a lot. Both sides need each other, if the financial system is to function well.
That being the case, even for Emperor Emmanuel it seems an especially tall order in a few years to undo mighty London and make Paris the new centre, with London having language, law, and an accumulated concentration of experience. So, let’s co-exist, if there is a little flexibility and we are all sensible about it. But there’s the problem right there.”If we are all sensible about it” seems not to be an option.
Sense and compromise seem increasingly unlikely to triumph in this area. The goods elements of the Free Trade Agreement that the UK seeks, and the EU is preparing for, seems, relatively, easier to resolve. Finance is beyond complex, and getting more so, partly because of the regulatory structures involved at the EU level.
At root on finance this is a question of the extent to which the UK and the City will agree to live under rules that stem from the European Commission. A vast superstructure of EU financial regulation, constructed in stages, sitting above national regulators and “coordinating” their work, is in place.
The approach reportedly favoured by the Treasury, the Bank of England, and the Financial Conduct Authority, is to sign up for as much as possible of this, soonest, so there is little change. The Chancellor Philip Hammond recently even gave the impression – before correcting himself – that the UK might pay billions of pounds annually for a continued “passport” to the EU for the City. That is ridiculously defeatist and craven. Would the EU then pay us the money back for access to London, which it needs?
Leaving the money to one side, the Treasury approach of signing up for the lot would mean the City would have to accept all of the EU’s rules on financial services, in the hope that it gets a “passport” of some kind. Short of that we would show our rules were “equivalent” to EU rules, and hope that is enough to avoid falling back on relying only on global standards. If the UK does sign up for the EU rules, the Bank of England envisages some later divergence, allowing us to do more of our own thing eventually, if the EU will allow it. The EU is not stupid and this seems unlikely.
Future growth is at stake. London has long been good at financial innovation. With finance developing fast, driven by technology, does Britain really want to be locked into the EU framework and constantly asking for permission? It doesn’t sound particularly appealing.
The latest initiative in EU financial regulation is a case study in what is wrong with its approach, and the UK is partly to blame, with our largest institutions having endorsed the idea. At the start of this year something dry called MiFID II came into force. The aim is to increase transparency and benefit the consumer in every area of financial trading and to harmonise regulation for investment services. But the finished rulebook is 7,000 pages long. The estimated bill for compliance is £2.2bn across the EU.
This fiddly farce defies the main lesson of the history of financial regulation, which is to within reason keep it as simple as possible, and to align it with incentives that encourage good or acceptable behaviour. Professor Charles Calomaris of Columbia University, in Fragile by Design, his most recent book, explains what goes wrong when excessive regulation produces unintended consequences.
The early reports on implementation of MiFID II are mixed. So much work has been done by lawyers and consultants that many large firms in London claim to be handling it fine, but they have the resources. The main complaint I hear is that the longer-term threat is to competitiveness, in tying up firms in a spaghetti junction of regulation, inhibiting the growth of smaller and new, insurgent enterprises that might choose to go outside the EU and the UK, and making it harder to compete with the Rest of the World that operates outside the EU’s rulebook.
Super-regulation, in a giant bloc, is the direction that the European authorities, understandably responding to the financial crisis and the eurozone crisis, have chosen to head in. But do the UK post-Brexit and the City – with a strong financial centre with global appeal – really want to follow in that direction in the age of tech disruption?
As a moderate leaver, prepared to accept the Brexit exit bill (a bargain) and a time-limited transition period, I’ve all along been one of those open to compromise. Signing up to the status quo is simplest. But on the City, EU bureaucracy, and Macron’s determination to spin this out, while pushing for more integration, for yet more EU rule making, make it look like a waste of time to wait for a compromise that won’t turn up.
There is an alternative that could be disruptive in the short term but more conducive to clarity and competitiveness. That is to say the following to our neighbours:
“Thank you, but no, we’ll regulate the City as the US regulates New York. We are friendly, open for business, tax efficient, expert, keenly observant of global rules, welcoming to institutions and people who obey the law, but, really, now we are leaving the EU your model of financial regulation is just not for us.”
I’m hearing more of this attitude surfacing and it is not hard to see why when Macron makes it clear that we in the UK either accept all the EU’s rules on financial services or else. Time for the government and the City to try the “or else.”
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Iain Martin and the team make sense of the news, providing commentary and analysis on the stories that matter in politics, geopolitics, economics and culture.