Mark’s below article was published yesterday on the European Movement website – http://www.euromove.org.uk/
The City is one of Britain’s most valuable assets and central to its success is its ability to be part of the EU’s common market. The coalition government’s EU policy must be based on those two fundamental principles.
Historically there have tended to be two potential models for a successful financial centre. The first, an onshore version, is based around the notion of a hub city servicing a sizeable domestic market – think New York and the US market. The alternative approach, offshore, depends upon attracting business primarily via competitive tax rates, regulatory arbitrage and other distinct selling points such as a respected system of law, privacy and a skilled workforce – the most obvious example here being the Swiss niche in secret bank accounts.
Until 2008’s financial crisis, the City of London had pragmatically been enjoying elements of both models and benefited handsomely. Prominent first as the epicentre of the British Empire, servicing the UK’s great global trading market, since the 1980s the City had taken on the role of offshore-onshore financial centre to the European continent – more recently still as a member of the European Union outside the Eurozone. As a pan-European capital market, the City flourished and alongside that role was able to take advantage of a light-touch regulatory approach advocated by Britain and applied across the EU that attracted huge volumes of foreign money. But the arrival of the financial crisis fundamentally changed the rules of this game.
Almost overnight since 2008 the EU has demanded greater oversight of its financial infrastructure. Awkward questions have been raised about the ability of London and UK financial services regulators to prevent the system silting up; whether it is sustainable (or desirable) for Euro-denominated risk to be cleared offshore in the British capital. In turn, the City has expressed firm concerns about the way the new and numerous EU laws can fundamentally damage its global competitiveness.
The invoking of a British ‘veto’ at the December 2011 EU summit was billed as an aggressive demonstration of the UK’s intention to retain its offshore/onshore model, protecting the City as its vital interest. To much of the EU it was perceived as an unrealistic and petulant attempt to maintain an unsustainable status quo. The UK’s demands for safeguards would have given the UK an effective veto over European financial regulation, a request that was never going to be acceded to.
In reality, that veto was less about the future of the City and more a political gesture to a domestic audience aimed at keeping Eurosceptic wolves from the door. The backdrop to that summit, it is important to recall, was the unexpectedly large ‘rebellion’ in support of an EU referendum. It was perhaps naïve ever to suppose that this would close off debate on the issue. Instead the Prime Minister’s superficially popular move delighted the media and hardened Eurosceptics’ resolve to extract further concessions.
Since then, of course, matters have moved on apace. The EU, under the leadership of European Internal Market Commissioner, Michel Barnier, has set up a single bank supervisor and is moving ahead with putting in place the foundations of a banking union. Meanwhile the coalition government saw further rebellion on the UK’s relationship with the Union, that time over its budget, and the Prime Minister has crafted a clear path towards renegotiating the UK’s relationship with the EU, returning powers and holding a referendum.
The uncomfortable truth facing the Prime Minister is that there is no third way in the UK’s relationship with Europe. His understandable instinct is to play for time, trying to address Eurosceptic passions with aggressive talk about repatriating powers from and renegotiating our relationship with the EU, while smoothing relations with European partners behind closed doors. To some extent, this is a challenge faced by all European leaders, whose electorates are increasingly restless at the influence of the EU institutions. This approach is, however, no substitute for a clear view about how Britain’s economic interests are best served, particularly when it comes to the direction in which the City – the nation’s only substantial, globally competitive industry – should evolve. Our European partners are entangled in a crisis of continental scale and have lost interest in being lectured to accede to the UK’s demands.
If the Prime Minister sees our future in the EU, with the City remaining closely integrated into the vast domestic European market, a more collaborative approach with our European partners is required. This path will involve facing down Eurosceptic sentiment in the UK. He must put forward a powerful case for why now is not the time for British belligerence. Time will need to be spent extracting the best deal for the City through careful diplomacy and the building of alliances.
Talk of fundamental renegotiation is illusory. Many of my Conservative colleagues, whose idea of renegotiation would take the UK’s relationship with the EU back to a pre-Maastricht arrangement may not like it, but for the EU and the City the choice ahead is increasingly binary. This arises out of a dearth of strategic thinking in how we see the City operating in future and the relationship Britain should enjoy with the European Union in the years ahead. The long term success of the City is better served from within the EU, forming the laws that affect it and helping shape the EU’s future. Because a successful City and an engaged UK are good for the EU as a whole.