An abridged version of the following article featured in this morning’s City AM. Click here
Below is the full text.
Short term tactical expedience continues to outweigh longer term strategy in the coalition’s approach to both the UK’s relationship with the EU and the future of our single most important global industry, financial services.
As a consequence, our ability to dictate the terms of trade in either area is fast eroding.
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 develop a light-touch regulatory approach 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 Eurozone 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 questioned how long it might feasibly avoid being infected by the numerous directives churned out by the EU to create common financial standards without its global competitiveness being fundamentally damaged.
The invoking of a British ‘veto’ at last December’s 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 ideally until well beyond 2015. The backdrop to that last 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.
Over the past year, of course, matters have moved on apace. The EU, under the leadership of European internal markets Commissioner, Michel Barnier, is finalising work to set up a single bank supervisor. Next month the EU’s executive and the European Parliament will be agreeing a legal framework. Meanwhile the coalition government has failed to see off a further rebellion on the UK’s relationship with the Union, this time over its budget. Another summit showdown is surely inevitable.
The uncomfortable truth fast 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 placate Eurosceptic passions with aggressive talk about repatriating powers from and renegotiating our relationship with Brussels, 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 EU bureaucrats. This approach is, however, no substitute for a clear view about how Britain’s economic interests are best served, particularly when it comes to 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 are fast losing 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 now required. This path will involve facing down Eurosceptic sentiment in the UK. He will need to 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.
If, however, he truly believes that the raft of EU directives coming this way are anathema to the long term interests of the City of London, with its future best served by adopting an offshore model, a path towards British withdrawal from the EU will need to be sketched out before long.
Talk of fundamental renegotiation is illusory. We 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. As it stands, the UK government has no clear answer on either of these issues. This is a perilous position for the national interest.