The City. The beating heart of the economy, the nation’s prized treasure – a treasure worth £124.2bn in Gross Value Added in 2017. London’s financial dominance dates back to the 19th century; from coordinating commerce and trade across the Empire, the City has managed to sustain its position at the epicentre of European finance since the opening of the Bank of England in 1694.
Yet the power of the City is under attack; Frankfurt, Dublin and Paris, keen to predate on the lucrative world of London banking, now have Brexit as their weapon for shifting the dominance to the continental mainland. Lloyd Blankfein’s tweet of the “great weather” in Frankfurt is evidence of the danger that a severing from the single market could pose; an outcome that could reshape the structure of the British economy.
Financial services play an essential role in the success of the UK economy. The City employs 454,700 people amongst 3030 financial and insurance firms, which account for 13% of London’s output. At 2013 prices, the sector has grown 50% since 1997 and London dominates the Clearing business, processing euro-denominated derivatives worth $900bn a day. A source of some of the highest skilled workers from the UK and abroad, it is also the largest contributor to the Treasury – tax receipts totalled £66bn in 2015/16. It is also the largest source of British exports – with a £18.5bn trade surplus with the EU in financial services, the loss of this sector to the continental mainland could result in further worsening of the UK’s current account deficit, alongside a further weakening of sterling.
All this, together with the collective lobbying of the financial powerhouses, suggests that the UK will make it a priority to retain the passport rights than enable UK financial services to operate across the Channel. Yet Michel Barnier’s emphatic statement that “there is not a single trade agreement that is open to financial services” is the foundation of uncertainty across the City; an uncertainty that could drive the banks to relocate abroad. At current, banks operate under a passport system – the home country of a financial institution ensures it follows the EU’s ‘single rulebook’, a centralised regulatory framework that replaced mutual recognition of national laws in the aftermath of the Financial Crisis. This allows banks residing in London to access the single market – an access that ends with Brexit.
Such could be mitigated by remaining in the EEA, whereby the UK would have access to the single market on the condition that it applied all EU financial regulation – an outcome that could provoke criticism for failing to deliver the sovereignty promised by Brexit. The UK would lose the ability to influence regulatory changes, particularly significant at current since a number of ‘review clauses’ in the post-crisis rulebook are currently being activated. Thus the UK would remain shackled to the Brussels bureaucrats and unable to impose its liberal views on the legislature – as epitomised by the EU’s consideration of a cap on bankers bonuses, fiercely opposed by the UK. For the once mighty British Empire to subserve itself to unelected European bureaucrats will likely prove a political crime that could spell the end of May’s government in the next general election; and as such, the banks have reason to fear their interest may not be preserved.
In the event of differences in regulation, navigation of the immensely complex channels of financial law will prove highly costly for the financial powerhouses. The EU’s rulebook runs for thousands of pages, a regulatory maze that provides an impetus to relocate to continental front-runners, who are eager to prey on London’s demise. Contingency plans are already being forced into action – with Standard Chartered setting up a Frankfurt subsidiary and Morgan Stanley boosting it’s Dublin office, EY has predicted 10,000 jobs could be lost immediately if no deal is agreed. Brussels’ swift rejection of a plan by a consortium of City executives for mutual regulatory recognition is sufficient evidence for banks to begin forming expectations of their place in the final Brexit deal – an expectation that will see their profits drop and markets blocked.
Yet rational banks will also consider the long-term issues arising from Brexit, particularly one that sits deep within the hearts of Brexiteers – migration. Despite having the largest concentration of financial knowledge in the EU, potential restrictions to the future labour movement in conjunction with a fall in incoming talent from constraints to university ERASMUS programmes could serve to diminish the pool of talent available to London employers, making the EU a more attractive alternative if freedom of movement is curtailed.
The financial system is the engine of the British economy, a national treasure around which domestic policy revolves. Yet analysis of the current evidence suggests that the City is a prime target for an exogenous shock by Brexit, creating a strong incentive to venture out of banking’s European home for the past two centuries and begin a new era on continental land. Whether the allures of the single market are sufficient to overcome London’s unique benefits of English language, skilled workforce and economies of agglomeration – which reduce operating costs across the financial spectrum – is dependent on the final deal agreed amongst the politicians. The banks are braced for the incoming storm; and it appears almost certain that whilst London may not lose its dominance, the Brussels shockwave will likely leave the City in a worse relative position than it has been since before the colonial era.