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The Brexit fight is on: look to the big issues

Capital market participants tend to keep their heads below the political parapet. Brexit is one issue they must not ignore. It would sabotage the City’s leadership in financial services and be an assault on the fabric of global governance.

The Brexit referendum campaign begins on Tuesday. David Cameron, UK prime minister, has wrung from European Council president Donald Tusk a deal to make some aspects of the Union more palatable to British voters. Cameron has backed the deal and said he will campaign for Britain to stay in the EU.

As Tusk warned, there are still “challenging negotiations” ahead. But if other EU states accept the deal on February 18, there will be no further changes to the EU package before Britons vote, probably later this year.

The early skirmishes are therefore over. Full battle over whether the UK stays in or leaves has commenced, and will be fought to a conclusion, one way or the other.

The British are generally only coolly interested in their own politics, let alone EU affairs. But despite the calm mood in the country so far, this is one of the most serious issues to have faced the UK — and Europe — since the war.

Everyone, especially in international markets such as finance, has a duty to take an interest and make up his or her mind.

Hail of trivia

Unfortunately, this will not be easy. First, there will be a blizzard of public argument about whether the concessions won by Cameron are enough, and how they compare with what he promised.

The reforms in themselves are not profound, and won’t make much difference to immigration, one aspect of EU membership many people are aggrieved about.

Tusk’s deal does show that Britain’s partners are willing to give ground to keep it in the EU, that they accept Britain’s reservations about an ever closer union, and that they commit to safeguarding the interests of non-euro members.

Britain gets an emergency brake to limit immigration and a new mechanism for national parliaments, acting in concert, to block EU legislation.

But UK politicians’ obsessive debate about the concessions is an irrelevant puppet show. Cameron has moved Brussels somewhat toward his position. At the margin, this should make it easier to convince wavering voters to stay in. But what matters is the overall nature and effects of the EU and UK membership, not minor recent changes.

Not just gut or wallet

The second big obstacle for voters trying to decide is that many politicians, celebrities and media see this struggle in emotional or cultural terms. They cleave to a gut feeling about whether Britain belongs in or out of the union and will neither produce, nor listen to, rational arguments.

Equally, many others will seek to influence opinion with arguments about Britain’s economic self-interest. Figures about how much the UK pays into the EU, and estimates of the trading and investment benefits the country derives, the number of jobs that could be won or lost, will be bandied about. These are important to consider, and people will come to their own conclusions. But economic arguments will be produced by both sides, and may not succeed in overturning people’s emotional preference. Detailed economic forecasts are rarely very credible, anyway.

What is in danger of getting lost amid the noise of battle are the biggest issues — and these are of most relevance to financial markets, and the City of London.

Staying relevant

When the UK joined the European Economic Community in 1973, its economy produced about 5% of world GDP. That is now 3.5%, and is only heading in one direction. Britain is still the fifth largest economy, but its influence will inevitably wane, as global development aligns economic clout much more closely with population size. Southeast Asia’s economy was a quarter the size of the UK’s in 1973 — they are now about equal.

For Britain, and other European countries, to have a voice that the world bothers to listen to, they must club together, to defend their common interests and propound their values as one.

Embrace the home market

When it comes to financial services, the UK is the undisputed leader in Europe. Especially when related professional services such as accounting, law and insurance are included, this is the one industry where Britain is a world leader, along with the US.

This is partly a legacy of UK pre-eminence in trade, going back to the 18th century. But that was a long time ago. The present might of UK financial services rests on work done in recent years and decades — while Britain was a member of the EU.

Some in the City may chafe at this or that EU regulation. But if they ask themselves whether Britain should stay in or not, they must remember that the EU is and always will be the biggest market for City services. In finance, Europe is effectively London’s domestic market.

It would be extreme folly to leave the Union, and hence give up the right to influence financial regulation in a market of 500m people. Being outside the EU has not enabled Switzerland to overtake London.

Those who argue the UK can find other markets, through closer links with the US, emerging markets or the Commonwealth, should be reminded: those connections are available already, and are not hindered by being an EU member.

Forwards or backwards?

At an even bigger level, international cooperation is the way forward. Human history is a sorry parade of wars and conflicts, as one group tried to impose its will on another. In the 20th century, for the first time, means were found to rise above that and enable countries to discuss and resolve issues and act together.

Promoting peace, reducing poverty, coping with mass migration, fighting disease and saving the climate are obvious areas where only international action can work.

At the global level are bodies such as the UN, IMF and Bank for International Settlements; co-operating much more deeply are regional groups like the EU. All around the world, groups of countries are emulating the EU by founding co-operation groups, such as Asean, Mercosur, Nafta and the Trans-Pacific Partnership.

If the UK quit the union, it would astonish and baffle our key trading partners and allies, from the US to China and Japan. It would create a high risk of Scotland leaving the UK, since Scots tend to favour EU membership. And it would gravely undermine the EU itself, at a time when it has never been weaker. Radical nationalist parties from France to Greece would be delighted at the chance to further their dark agendas.

Pulling out of the EU would be trying to swim against the tide of history, back towards narrow self-interest and division.

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