We may not like bankers. But the City of London is our most important industry. Financial services account for nearly 10% of our economy and 11% of tax revenue. So it matters whether the City thrives if we quit the European Union.
Alex Brummer, the Daily Mail’s City Editor, has made an eloquent case for how the City would survive if we left the EU. But he understated how much our financial services industry would be damaged and overstated the amount of regulation we’d jettison.
Brummer also failed to mention that, if we stay, we could lead a new golden age for European finance now that Brussels is embracing market-based finance. Lord Hill, Britain’s EU commissioner, is creating a capital markets union which will be hugely beneficial for the City. We might not be able to tap it if we quit. Indeed, without our impetus, it might not even come into existence.
Brummer is correct that we would survive if we quit the EU. But we would not thrive as much as if we remain.
Look, first, at the overall economy. Nearly half our trade is with the EU. Even though the bloc is struggling economically, it would be foolish to diminish our access to this market. There’s no reason why, if we stay, we can’t trade with European countries and those further afield (many of which, including Russia and China, are also struggling).
Now look at finance. The City isn’t just important for the jobs and taxes it generates. Lawyers, accountants and consultants all service finance. Bankers spend their bonuses on art, restaurants, schools, doctors, taxis and so forth. The City sits at the apex of a lot of other jobs.
The Leave camp hasn’t spelled out what it wants if we quit. But there are two main options. In one, we keep full access to the EU’s single market, like Norway. But we’d still have to follow all its rules and we wouldn’t even get a vote. For those who pretend to care about sovereignty, that’s clearly a step backwards. It could also damage the City, as Brussels would determine our financial regulations which we’d meekly have to adopt.
Despite all the noise about how we get outvoted in the EU, the only significant financial issue where we’ve lost out is on a rule that caps bankers’ bonuses to twice their salary. Although this is a foolish regulation, many British people like it.
Could it really be in our interest to hand over the keys to our most valuable industry to the EU? There is, of course, no continental financial centre to rival London. But you can bet that Frankfurt, Paris and Dublin would salivate at the possibility of attracting slices of our industry to their cities. They may already be developing contingency plans to do just that.
The other option is that we quit the single market as well as the EU. But this would amount to jumping from the frying pan into the fire. UK-based financial firms would no longer have a “passport”, allowing them to provide services anywhere in the other 27 countries. Firms wanting to do business in the EU would then have to relocate there by setting up subsidiaries.
Financial services wouldn’t even be free of regulation. As we saw when Northern Rock and RBS blew up, the City is far too dangerous to operate without strong rules.
Although Brummer acknowledges that the City would lose its passport, he doesn’t think it’s too serious. He says we’d only lose a fraction of our investment banking jobs, mentioning that Goldman Sachs says it would relocate a third of its 6,000 jobs across the Channel.
A third is, indeed, a fraction. But it is quite a large one. Remember that investment banking jobs are high paid ones. If Goldman’s prediction was repeated across the City, the whole of the UK would notice the impact.
A version of this piece was previously published in the Daily Mail
Hugo Dixon is the author of The In/Out Question: Why Britain should stay in the EU and fight to make it better. Available here for £5 (paperback), £2.50 (e-book)
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