After a couple of turbulent years worrying about
Grexit – Greece being ejected from the euro
– the City now has something closer to home to worry
David Cameron fired the starting gun with his long-awaited
speech on Wednesday, pledging to negotiate a new settlement
with the European Union after 2015.
When we have negotiated that new settlement, we will give
the British people a referendum with a very simple choice: to
stay in the EU on these new terms or come out altogether.
City of London has always had a slightly acrimonious
relationship with Europe but an exit would pose challenges and
opportunities, leading experts have told Euromoney.
According to Daniel Godfrey, chief executive of the
Investment Management Association, whose members manage £4.2
trillion, Brexit would be lunacy.
We can all see there are some daft things that come out of
Europe but the answer is not to walk away, he says. It would
diminish still further our ability to influence the development
of the operating environment of our industry.
If we want the chance to export what we do to the rest of
Europe, we will almost certainly have to apply EU regulations
but will not be sat at the negotiating table.
According to official figures, the UK’s
financial services sector posted a trade surplus of £46.7
billion in 2011.
David Rouch, regulatory partner at law firm Freshfields,
says much will depend on what an exit looked like –
for example, whether it means becoming a member of the European
Economic Area alongside states such as Iceland and Norway.
In that case, it would not make much difference to the
ability to carry on business in the EU because UK firms would
have to continue complying with rules generated by Brussels but
would still get the benefits of the passporting regime.
If the UK completely pulled out like Switzerland, we would
effectively be on the outside of Europe and would probably find
it increasingly difficult to carry on business cross-border,
particularly in retail markets.
If London can’t continue to operate under the
EU financial services passports, that could have quite a
Shifting EU sands
However, some analysts doubt regulatory fears are a reason
to stay in. Stephen Lewis, chief economist at brokers Monument
Securities who has worked in the City for three decades, says
regulation will be an issue even if Britain were to leave.
The UK is no longer within the inner sanctum, he says,
pointing to the emergence of the European Central Bank (ECB) as
the prime regulator of large banks. We have no influence over
the ECB anyway.
Richard Reid, a research fellow at Dundee University, says the
UK is more attuned to the demands of the rest of the world than
other European centres. I am not sure how badly London would
suffer, he says.
|UK prime minister David Cameron
Countries like India, China and the US will still know they
have to deal with the UK. London offers a large amount in terms
of the market infrastructure that extends beyond banking and
insurance into shipping and many other services.
Michael Emerson, a senior research fellow at the
Centre for European Policy Studies, disagrees. He says the
issue of whether single market rules for financial markets are
kept in the EU-27 jurisdiction, where the UK has a vote, or are
completely in the hands of the eurozone, is still up for grabs.
UK exit would settle the matter for good, he says.
However, regulation is not the only issue. There is also the
question of whether London, recently named as the
world’s premier financial centre by analysts
Z/Yen, would retain its pre-eminence.
Emerson says financial centres hoping for greater market
share, such as Frankfurt and Paris, will lobby for euro-located
facilities, or euro-biased regulations.
The ill will created will be huge, he says. It will be a
pretty acrimonious mess, since withdrawal will involve a huge
amount of detailed negotiation, while in many instances [there
will be] questions of whether the EU will want to be generous
to UK interests or not – and probably not.
Another potential threat to the City is concern among
overseas investors over London’s exclusion from
Europe. Last week, US president Barack Obama told Cameron he
values a strong UK in a strong European Union.
Emerson says uncertainty created by an exit referendum would
be costly to the UK’s attractiveness as a
location for footloose investment.
Pete Hahn, a lecturer at Cass Business School in London,
spent 20 years working in London and Paris. Most of the City
is foreign-owned banks, he says. It certainly would not be a
surprise if US banks had a rethink about whether they should
move somewhere else.
Freshfields’ Rouch says the UK would lose its
influence if it distanced itself from Europe. You
can’t have your cake and eat it. If you are not in
the weave of the system and have a contrary view, it is easier
for people to say: Well, the UK is not engaged in the system
so why should we listen.’
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