For decades, Conservative and Labour governments lauded the financial sector as the UK’s pre-eminent economic asset. The City of London was hailed as the source of lavish tax revenues and as an emblem of national pride. In his June 2007 Mansion House speech, Gordon Brown spoke of “an era that history will record as the beginning of a new golden age for the City of London”.
But after the financial crisis began only a few months later, the City lost its political lustre. The Conservatives’ embrace of a “hard Brexit” partly reflects this changed reality. Boris Johnson may have declared during a 2019 Conservative leadership hustings that no politician “stuck up for the bankers as much as I did” but his intended EU trade deal threatens London’s status as one of the world’s leading financial centres.
At present, the sector accounts for 6.5 per cent of the UK’s economic output, 11 per cent of its tax revenue and 2.2 million of its workforce. Financial firms benefit immensely from the UK’s membership of the European single market (which Margaret Thatcher championed), most obviously through “passporting” rights. Under this rule, firms are permitted to trade in any other member state under the supervision of British regulators and without further authorisation from each country. Around 5,476 firms based in the UK currently benefit from passporting (with financial exports worth £26bn), while 8,000 companies in the European Economic Area use this mechanism to offer services in Britain.
For now, owing to the Brexit transition period, the UK retains full access to the single market (and will do so until at least 31 December 2020). But the government’s intention to leave the single market, in order to diverge from EU rules on immigration and other areas, will mean the end of passporting rights.
The spectre of Brexit has already reshaped the UK’s financial sector. More than 300 firms in Britain have opened EU hubs in order to ensure single market access, while £1trn of City assets and 7,000 banking jobs have been transferred to the eurozone. London has been supplanted by New York as the world’s leading financial centre in the Global Financial Centres Index and is close to being overtaken by Hong Kong.
The UK needs to maintain single market access – but on whose terms? EU officials have insisted that Britain, as a “third country”, must abide by “equivalence” – a guarantee that its financial regulations meet European standards. Though the EU has conceded that Britain’s rules need not be “identical”, it has emphasised that they must have the same “outcome” as the bloc’s own.
Conservative ministers and City figures, including former Bank of England governor Mark Carney, scent danger. The EU, they fear, would unilaterally skew such rules in order to benefit rival financial centres, such as Paris, Frankfurt and Luxembourg. Sceptics of equivalence cite the recent withdrawal of this status from Switzerland’s stock exchange on political rather than legal grounds. “They [the EU] know precisely how to send Exocets into London,” Jonathan Hill, the UK’s former EU commissioner for financial services, has warned.
The technical issue of financial regulation has already been politicised by Irish Prime Minister Leo Varadkar who demanded that the UK open its fishing waters to EU boats in return for access to European financial markets.
“The UK has a lot of waters and a lot of fish is taken out of your waters by boats from other countries. But bear in mind that 70 per cent of the fish you sell, you sell into Europe,” Varadkar told the BBC. He added: “That’s an area where you are in a strong position. An area where you’re in a very weak position is one of the most valuable parts of the British economy – financial services. You may have to make concessions in areas like fishing in order to get concessions from us in areas like financial services. That’s why things tend to be all in the one package.”
Though the UK fishing industry is valued at around 169 times less than financial services and employs just 8,000 people compared to 2.2 million in finance, it has become a crucial symbol of “taking back control”. No.10 has insisted that “it will be for the UK to determine who fishes in our waters”.
Free marketeers argue that the UK should treat Brexit as an opportunity, rather than a crisis, by radically diverging from EU regulations. But as Johnson and his team know, there is little appetite for ultra-Thatcherism in the UK, not least in the Northern and Midlands seats the Conservatives won from Labour.
For others, Brexit is a serendipitous moment to break the stranglehold of finance on the British economy and rebalance growth away from London. But withdrawal from the single market risks harming every sector of the economy. Based on the governent’s own figures published last year, Johnson’s deal would reduce growth by around 6.7 per cent of GDP (£130bn) between now and 2034, while new trade deals with the US and other Anglosphere countries would add just 0.6 per cent.
“I would rather see finance less proud and industry more content,” Winston Churchill, Johnson’s political hero, declared as chancellor in 1925. The risk for the UK is that Brexit leaves both discontent.
This piece is part of the New Statesman’s Brexit isn’t done series.