Brexit: Ending the City’s Dominance of European Finance?
The Victorian statesman Lord Palmerston famously said 200 years ago “Nations have no permanent friends or allies, they only have permanent interests”. Today, differing views on “permanent interests” fundamentally divide the United Kingdom from the European Union.The UK defines its “interests” in narrow terms of economic
In contrast, the EU defines its “interests” in broader political
terms – inspired first by the tragedies of the 30 years of war to 1945 but,
secondly and remarkably, by the solutions propounded by Winston Churchill in his
series of great speeches in the late 1940s. His vision was the
creation of “an ever closer union among
the peoples of Europe”.
The success of that vision was marked in 2012 by the award
of the Nobel Peace Prize to the EU for its advancement of peace. But economic
transactions did flow from the political vision: the Single Market and the
necessary, complementary monetary union – embodied in the creation of the euro.
Profound consequences are now flowing from how Boris Johnson’s government
defines British interests
The governance of the EU elects Members of the European
Parliament directly from among its peoples – with the nation states sending
their politicians to the Council of the European Union to act as an equal
legislature with the Parliament. In September 2019, these two bodies elected the
17th European Commission to implement the policies set out in the new
for Europe during the period 2019-2024.
In UK parlance, this was the “manifesto” the Commission was
mandated to implement: “A strong, integrated and
resilient capital market is the best starting point for the single currency to
become more widely used internationally.” Unsurprisingly, it has set
out to achieve the manifesto. The detailed goals define what the EU sees as
its “interests” and it has stated unequivocally in the TCA that it reserves its
autonomy to pursue them.
The EU requires regular reviews of financial regulations. Those
underway cover most aspects of banking, capital markets, asset management,
insurance, and payments systems – as well as digital and sustainable
finance. So it is a racing certainty
that virtually every aspect of the EU’s body of financial regulation will be
reviewed by 2024. The EU’s course is
clear and will take no account of the “interests” of a former member. Why
Now we come to the crunch: everyone in Britain has been told
over and over again that Britain is “the fifth largest economy in the world” therefore
is “sovereign”. (Actually India has probably now edged ahead). But the media
barely report that the EU has seven times our population, five times our GDP
and – key to the investment community – three times our investment assets. (Proportionately
“they” invest much more in bank deposits than “we” do.) “They” are the world’s
largest trading bloc and have set their sights on their currency being used
commensurately – part of their concept of their “sovereignty”.
We have solemnly signed
a massive Trade and Cooperation Agreement (TCA) with them that commits us to
use our “best endeavours” to continue implementing the international standards for
financial service regulation that we helped design – and signed into EU law
while we were a member.
So the EU was a bit surprised to read in the Financial Times
Sunak told MPs in the House of Commons that the conclusion of the Brexit
process would now allow Britain to “start doing things differently and better”
in terms of regulation.” Then the Governor of the Bank of England told MPs
that “I would strongly recommend
that we do not become a rule-taker. […] If the price of that is no equivalence
then I am afraid that will follow.” As the
Chancellor is telling Parliament that we will be doing things “differently and better”, then the plain
conclusion is that we do not intend to be equivalent with them – in the medium
term (say 2024?).
What is “equivalence”? The TCA states that
"equivalence" means the capability of different laws, regulations and
requirements, as well as inspection and certification systems, of meeting the
same objectives. So “equivalence” does not require word-by-word matching but an
equivalent outcome. This is determined unilaterally by the
European Commission itself and “the EU will consider equivalence when they are in the EU's interest.”
Financial institutions can read the Financial Times
as well. Regulators on both sides
of the Channel obliged them to prepare for Brexit so they are doing as they
were told. Now we read that trading in European shares has instantly move to
Amsterdam – as has the prized “green” contract for trading in carbon futures.
Derivatives trading has also started to move out of the City. Quelle surprise!
Do all these arcane technicalities matter? YES! The
City of London Corporation published its latest study on taxes contributed by
the financial sector to HMRC. The number is a stupefying £76,000,000,000. Who
knows what all these zeros mean? In hard
practical terms for every taxpayer in the United Kingdom, if say half this
revenue leaves the UK, then replacing it would be the equivalent of putting the
20p basic rate of income tax up to 28p in the £. That will be part of the price for
misunderstanding the real meaning of Lord Palmerston’s dictum 200 years ago.
(For the full, technical analysis, click here)