Just when you thought things couldn’t get worse for the City of London, there is a new unquantifiable risk to worry about: the UK drifting away from the EU.
Any formal change in the UK’s relationship with the EU remains beyond the horizon — even, a remote possibility. But so is the euro breaking up, and however unlikely that is, fear of it has already done untold damage.
Broad strokes are what count in forming perceptions. If there were any doubt about that, it is proved by the direly simplistic level at which much of the media, politicians and even businesspeople have reacted to David Cameron’s veto of the EU treaty change proposed in Brussels last week.
The UK may convince its European partners at the diplomatic level that it remains committed to the EU. But will CEOs in China or India understand such subtleties, when even many British leader-writers and MPs see the prime minister’s action as the first step in reclaiming the UK’s independence from Brussels?
The City, of course, was a global financial centre long before Britain joined the EEC in 1972. Some patriots clearly believe it could remain one even if the UK left the union.
But in the late 1960s, when the Euromarket began, Britain was the world’s second largest economy. Germany was still recovering from the second world war.
Things are very different now. The UK is expected to have only the world’s seventh highest GDP by 2015. The cultural openness, robust legal systems and market-friendly policies that made London an ideal seedbed for international finance are no longer unique.
As City lobbyists themselves endlessly repeat, Frankfurt, Geneva, Singapore, Dubai, Hong Kong and New York are all slavering to eat London’s lunch. And just wait till Shanghai gets started.
The City still has many competitive advantages, but its location at the heart of the EU single market — the world’s biggest economy, when taken as a whole — is among the most important. London handles a substantial share of business for many emerging markets, and for US companies.
But its share of financial activity within the EU — and the eurozone — is dominant. Think of the gains the City has derived from the euro’s amalgamation of European capital markets.
Cameron’s veto has not ruined the City’s fortunes overnight. But it has seriously undermined confidence in the UK’s centrality to the EU, emboldened a lunatic fringe who want Britain to leave the union, encouraged those in Frankfurt and Paris who want to win business back from London, and weakened Britain’s clout at EU negotiating tables.
Nothing to show for it
Perhaps it was worth it. After all, wasn't Cameron doing it to protect the City?
Alas not. The only gain from the event has been to Cameron’s approval rating with a faction of his own party.
Nothing being discussed in Brussels last Thursday night had anything to do with the City or financial regulation. By vetoing the document, Cameron achieved no change in the EU’s regulatory stance.
He may well, however, have changed (unfavourably) the attitudes of the parties with which Britain is negotiating on a range of EU regulations.
On the central issues of fiscal discipline, which concern only the euro zone, Cameron was willing to sign up to the treaty. But he gambled that the euro zone states would be so desperate for Britain’s involvement that they would agree, with little prior warning, to change the EU’s decision-making processes on several complex and irrelevant policy issues, giving him trophies to take home and show off to his party. The Americans have a word for that kind of politics: pork.
The UK demands concerned whether the European Banking Authority will stay in London; whether the UK should be free to impose higher capital requirements on its banks than the EU norm; how deposit guarantees are funded; crisis resolution legislation; and whether non-EU firms operating only in one EU country should be subject to EU rules.
Also on the list was the financial transaction tax — something that Britain already has the right to veto.
The gamble failed. Cameron got none of his trophies. He did not even get, indeed, a concession that the other states were willing to offer — a clause in the treaty that stated explicitly that it would not alter the single market in financial services or discriminate against non-euro members.
What is most worrying is that the UK’s eurosceptics regard this as a triumph. That shows how much they care about the City. Their only real desire is to show two fingers to Brussels. When they realise they have gained nothing from the veto, they will want more concessions.
Time to speak up
London’s lobbying machine, which has gone into overdrive in recent years, fighting regulations from the FSA, Basel, Brussels and beyond, now has two new enemies: eurosceptics in the UK and UK-sceptics in Europe.
There is still a chance of moderating the political fallout from Thursday’s veto. Cameron seems to understand this, saying he will keep an open mind on letting the willing 23 states use EU institutions to implement their agreement. He could be persuaded to go further.
Limiting the damage is now an urgent priority for the UK financial services industry and the rest of British business. Loudly and in the clearest possible terms, the City must say: "we need to be at the heart of the EU".