Mark Carney now agrees with me – Brussels would be mad to stop EU businesses from accessing the City

Mark Carney now agrees with me – Brussels would be mad to stop EU businesses from accessing the City

During the EU referendum campaign, one of the major debates concerned the City. Amongst Remain supporters, it was widely claimed that if we left the EU, the City of London and UK financial services more broadly would lose their right and ability to sell those services to EU clients. The EU would impose regulatory restrictions, cutting the City off. Since, it was claimed, the main attraction to finance firms of being in the City was because of the access it provided to the Single Market, if the UK left the EU, such firms would relocate to somewhere else within the EU, such as Paris or Frankfurt. This would cost the UK significant jobs, GDP and tax revenue.

During the campaign, I was the Chairman of Economists for Britain, affiliated to Vote Leave. In multiple media appearances throughout the campaign, I repeated an argument I wrote down in February, as you can see here. It was this: I said that although there would doubtless be some “brass plate plus” relocation, with firms moving a small number of staff and perhaps a block of capital into some notional office within the EU, they would not move significant volumes of business there.

Financial sector business is located in London for a number of profound and long-standing reasons, not simply because of EU regulation. There are well-known implications of the UK’s time zone, the use of English, London’s personal safety, UK business custom and practice, and clustering effects from London’s history. But two reasons in particular stand out.

If you are going to take a large number of very smart, high-energy people such as City workers, and pay them a large amount of money, they are going to want to know two things: a) Are they really going to get the money? b) Is it going to be fun to spend it?

Really getting the money means no risk of 80 per cent tax rates, €200,000 remuneration caps or random bonus clawbacks. Paris cannot offer such guarantees.

As to issue b), Frankfurt cannot provide that. Frankfurt or Geneva are charming places in their own way, but the kinds of individuals who work and spend their money in the City have lifestyle expectations that Frankfurt and Geneva cannot match. The relevant workers, of the right quality and skill, won’t go.

That does not mean that, under sufficient regulatory pressure, activity might not migrate out of London. But if it did, I said in February, it would move to the global finance centres that are London’s real rivals, such as New York or Shanghai.

Making London’s activity move to New York or Shanghai would be of no gain to the EU. Actually, it would involve a serious and potentially damaging loss. The UK provides 24 per cent of value added in financial services across the EU.

Many parts of the EU corporate and finance sectors are highly dependent upon their access to the City and would be materially commercially damaged if such access were lost. And that would happen at a time when the EU’s corporate sector is still weak and the EU’s finance sector is still unstable, following the Eurozone crisis. Any attempt to cut the City off would backfire, damaging the EU economy.

That was what I said then. Now, I have acquired an important ally in this case: the Bank of England. In October, deputy governor Sir John Cunliffe stated:

“I can’t see [what the City offers] being replicated in the foreseeable future in one place in the European Union… It takes an awful lot of time, human capital, it’s based around the interaction of financial services. The idea this ecosystem is transplanted somewhere else into Europe in the foreseeable future… I think to me is highly unlikely… Could it be transported to New York? Well of course it already exists in New York.”

This mirrors, precisely, my first argument above.

Today, Bank of England governor Mark Carney mirrored my second, stating:

“Banks located in the UK supply over half of debt and equity issuance by continental firms, and account for over three-quarters of foreign exchange and derivatives activity in the EU… If these UK-based firms have to adjust their activities in a short time frame, there could be a greater risk of disruption to services provided to the European real economy… The UK is effectively the investment banker for Europe…These activities are crucial for firms in the European real economy, and it is absolutely in the interests of the EU that there is an orderly transition and there is continual access to those services.”

This mirrors, precisely, my second.

Perhaps the EU has become so dysfunctionally incapable of seeing its own self-interest that it will, despite the logic of the case I offered and the Bank of England now offers, harm itself by cutting its businesses off from access to the City. If so, it could be doomed.

More likely is that common sense prevails and that we come to an accommodation with our EU friends and partners that allows them to continue to have access to the key financial services that the City provides and upon which the EU economy so depends.