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Briefings

Damaging the City

in | by Hugo Dixon

If we quit the EU, we would damage one of our most important industries –  financial services. The extent of the wound would depend on how we exited. Although bankers are not popular, much is at stake. Financial services are responsible for nearly 10% of our economy and 11% of tax revenue. Various associated professions such as law and accountancy are also important.

The City—used as a shorthand for financial services across Britain—is not just the UK’s financial capital. It is also Europe’s top financial centre, accounting for 78% of the EU’s foreign-exchange trading, 85% of Europe’s hedge-fund assets and half of its fund management.

The way to quit the EU and inflict the least harm on the City would be to stay in the single market – in other words, the Norwegian approach. The snag is that the rules for how the City was regulated would be determined in Brussels and we wouldn’t get a vote on them. Other countries might even try to rig the rules to shift business from London to Frankfurt or Paris. This is worse than the status quo. Although the UK cannot currently veto EU financial services legislation, in practice it has only twice lost out: the main one was when Brussels decided in 2013 to cap bankers’ bonuses. More often, we are able to negotiate a good deal for the City. For example, when the euro zone decided to create a banking union which we didn’t want to be part of, the government secured a double majority voting system on EU banking rules. For a rule to pass, it needs to secure a majority both among those countries that are part of the banking union and among those that are not.

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The damage to the City would be particularly severe if the UK quit the single market as well as the EU – in other words, any of the Swiss, Turkish or WTO models. UK-based financial firms would no longer have a “passport”, allowing them to provide services anywhere in the EU. Firms wanting to do business in the EU would then have to relocate there by setting up subsidiaries.

No wonder the British Bankers Association as well as two giant US banks, Citigroup and JPMorgan, all warned in early 2014 about the dangers of leaving the EU. Meanwhile, Goldman Sachs, the world’s pre-eminent investment bank, had previously said it would move a “substantial” part of its European business across the Channel, possibly to Paris or Frankfurt, if we quit the EU.

British citizens wouldn’t necessarily even be able to follow these jobs abroad because they would no longer have the right to work in the EU. Meanwhile, the City’s competitiveness would be undermined if Britain stopped EU citizens working in the UK. While we could still let them enter, we probably wouldn’t adopt such a policy since one of the main reasons eurosceptics give for quitting the EU is to stop immigration in the first place.

We wouldn’t be able to jettison much financial services regulation either. We need rules to stop the system blowing up. And it makes sense to coordinate these internationally to make sure things don’t fall through the cracks as they did when Lehman Brothers went bust.

If we were on our own, we would also lose influence in determining the rules of the global financial game. There would be a risk of being told what to do by America, which has its own huge financial system, and China, which wants to become a global player.

The City’s ability to act as the world’s financial capital, vying with New York, could be damaged. It enjoys economies of scale from being Europe’s financial capital. With less scale, it would be less competitive and its ability to serve fast-growing markets in the rest of the world would be compromised. And, of course, the City would lose the chance to ride what could be a big opportunity – turning the EU from a financial system centred on banks into one based on capital markets.

Not surprisingly, when the CityUK, which represents Britain’s financial services industry, commissioned Ipsos MORI to survey its members in 2013, 84% said they wanted to stay in the EU. Quitting the EU would be bad for this money-spinner.

This is an excerpt from “The In/Out Question: Why Britain should stay in the EU and fight to make it better” by Hugo Dixon. 

Factchecking by Sam Ashworth-Hayes