Boris Johnson, Mayor of London, has just backed Brexit. Much of the debate will now switch to arguments that the City will lose out if Britain leaves the European Union, that businesses would relocate to Paris or Frankfurt.
I don’t see any risk of any significant move from the UK in the event of Brexit. And surely, in any event, there is a risk associated with staying in: there are serious moves afoot towards harmonisation – the Financial Transaction Tax (FTT) is a real issue. This would cause the UK to lose its competitive advantage over other countries, and would cause an outflow of capital and jobs from the UK, probably to non-EU countries. This doesn’t matter so much to the EU nations with smaller financial sectors, because their increased tax revenue from an FTT would outweigh the costs. Nations with smaller financial sectors are likely to be more focused on domestic transactions than on international ones, so an FTT would genuinely create income for them. The UK might be able to stay outside an FTT, but we don’t have to just trust our current Conservative government on that. We have to be able to trust any future Labour government too.
One of the pro-EU arguments is that ‘it’s okay, we have to agree to changes’. Yes, and no. On some issues we do, on others we can be outvoted. The problem is what we mean by ‘we’. If an unpopular government votes in a bad law in Westminster, our next government can repeal it. But if it hands a power to Brussels, the next government can’t bring it back.
So what could cause the City problems in the event of a Brexit? There’s no realistic threat of tariffs being imposed between the UK and the EU. Why? Because in the absence of any deal at all, we’d be subject to the Common External Tariff – which provides for tariffs for goods but not for services. The Common External Tariff would be a nonsensical position (for the EU), and for many reasons we would have a better deal than that: there’s a legal argument to suggest that we have a right to EEA membership and conditions. There’s a self-interest argument from other countries, and there’s WTO rules preventing punitive tariffs. There’s pressure from EU businesses. Then there is the Lisbon Treaty: Articles 8 and 50 spell out the conditions on which negotiation would be based: a ‘special relationship’ aiming to establish an area of ‘prosperity’. Does that sound like a tariff war to you? Yet that’s what’s written in the Treaty in the event of Brexit. So I think we can safely rule out the possibility of tariffs.
Next, would any bank really want to move financial services away from the UK? Of course, businesses which want to stay in will make empty threats to leave. We know that; Nissan used this tactic in the 1990s to try to force us into the euro. When we didn’t join the euro, they did an about-turn and expanded their business in the UK rather than leaving. We’re now seeing HSBC doing the same. But the financial services sector is split in any event: note that the hedge funds are generally pretty anti-EU (and have backed this up through campaign donations – which hints that they care somewhat more about the issue than other companies, which have not). A successful financial services sector requires expertise and experience. Neither Frankfurt nor Paris will be offering anything substantially cheaper than what the UK has to offer, Switzerland even less, and even if the talent pool exists they would have to find it. There is a gamble in staff recruitment, especially in that sector. The human cost of relocation is greater than in other industries for this reason.
Outside the EU, the UK would have to seek to be a low-tax economy for financial services. Generate business, generate employment, generate taxation revenue. We would be far less hampered in this respect as EU members. Consider the possibility: the UK tries to attract investment through low taxation and a regulatory system designed to prevent the worst excesses of the sector’s problems of the last decade – but otherwise to interfere as little as possible. At the same time, the EU is adding to the regulatory burden through the FTT. The Common Corporate Consolidated Tax Base is currently in the pipeline in the EU; would the UK not be again seeking a competitive edge? The advantage of English as a global language being factored in, isn’t it possible that actually the movement would be in the other direction? That firms would be moving from EU countries to the UK, to avoid the FTT and to take advantage of our reputation in the field.
Finally, ask yourself where the future of the UK’s financial services industry lies. Is it with the European Union, whose share of world GDP continues to decline? Or is it with the emerging markets? I believe that we need to expand in order to survive, to look wider than we are doing at the moment. But whilst in the EU, such bilateral deals are not permitted. We can’t, for example, look towards what will become a highly lucrative Asian market. On trade deals whilst we’re in the EU, we have to negotiate our negotiating position. The French will want our negotiating position to be different to the one that we want; the Germans’ requests are different still. The upshot of all this is that we might well sign trade deals whilst in the EU which do nothing to help our financial services industry. Outside the EU, we can guarantee that is precisely what the deals will do.
As for the question of foreign exchange markets, I don’t suspect that this is a problem either. Look at trade in dollars, for example. Twice as much trade in dollars is done in London as in the USA, for example. We don’t have to be governed by the USA for that to happen. London is the largest foreign exchange trading market in the world. The strength of our position here isn’t relevant to the EU debate: we trade more euros in the UK than the whole eurozone combined. If you said in the 1990s that London’s financial dominance was at risk if we didn’t join the euro, you’d have been wrong but the argument would have made some sense. Today’s debate isn’t about the euro, it’s about political structures and changes which could only make it easier to do business in the UK.
I understand that the ‘in’ campaign feels the need to scaremonger on these issues; after all, it is their primary tactic on the economy. Is there any substance to their claims? I don’t see it.