03 March 2013

Wolfgang Münchau: Bonus issue marks start of a long battle

It is in the eurozone's collective interest to stop London from acting as its main financial centre, comments Münchau in his FT column. The bonus issue is only the first warning shot in what will become a long drawn-out fight.

The most interesting aspect of the bonuses question is not the impact it will have on the financial services industry, although this is probably significant in the long run. Even more interesting is what it says about the quality of life of an EU member permanently outside the eurozone and its banking union...

Britain managed to fend off quite a few initiatives that could have hampered the position of the City of London. But in the past few years, the balance of power has shifted. The single biggest change here is the position of Germany.

This shift has two causes. One is domestic politics. The opposition Social Democrats are basing their campaign for September’s general election on a promise to get tough on banks. This alone limits the room for manoeuvre of Chancellor Angela Merkel’s centre-right government. Germany is one of the 11 countries pushing forward with a financial transaction tax, despite the present coalition’s initial reluctance...

The general attitude in Germany, and many other parts of the eurozone, is that the banks should essentially be kept on a very short leash since they received large bailouts during the crisis. There is now an overwhelming political will to tax the industry, and to clamp down on the rent-seeking behaviour of individuals. I personally believe this is a defensible proposition.

Attitudes on the continent towards the banks have become much more extreme, even hostile. And if individual institutions retaliate, and warn that their best people will leave, it might turn out that people come to regard this not as a threat but as a promise.

The second cause is, of course, the fledgling banking union, of which Germany – unlike the UK – has become a reluctant but ultimately supportive member. One of the reasons the eurozone was in the past never able to defend its collective interest, as distinct from that of its Member States, was the fact that it lacked independent institutions. With a banking union and a single supervisory mechanism, this is going to change, at least in this important area. And if the eurozone has a collective interest in anything, it is to stop the City from acting as its main financial centre. The bonus issue is only the first warning shot in what will become a long drawn-out fight.

In the permanent outer sphere of the EU, the UK will find that very strange things are beginning to happen. First, the financial transaction tax; now the bonus cap; maybe one day eurozone residency requirements for specific types of financial transaction, or some more subtle forms of discrimination... In the long run, the permanent non-eurozone members will become isolated.

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