Can the UK Stay Clear of the Euro Zone's Problems?
Staff Writer, CNBC.com
The UK has had an often fractious relationship with the rest of the European Union since it joined in 1973, with Euroscepticism sometimes one of the best tactics for aspiring politicians to get to the top.
Now, with almost every day marking a new milestone in the euro zone debt crisis, how can the UK avoid being dragged in?
Despite being only around 30 miles from the rest of the continent at its closest point, the UK has often tried to differentiate itself from many other European countries: by securing an opt-out from the 48-hour limit on the work week; opting out of implementing human rights legislation, and, of course, by not joining the euro.
As the debt crisis has escalated, many of those who were skeptical about the single currency are using the opportunity to sniff: "I told you so."
William Hague, now foreign secretary, who was leader of the Conservative Party when the euro was in the process of being adopted, told right-wing British magazine The Spectator last week: “It was folly to create this system, it will be written about for centuries as a kind of historical monument to collective folly. But it’s there and we have to deal with it.”
“I described the euro as a burning building with no exits and so it has proved for some of the countries in it. But there are no exits,” he added.
The current coalition government marries the traditionally Eurosceptic Conservative Party with the Liberal Democrats, often viewed as the most pro-European of the three main political parties in the UK.
Despite marked euroscepticism in their early careers, both Prime Minister David Cameron and Chancellor of the Exchequer George Osborne have reiterated their support for the euro region. Osborne went so far as to support greater fiscal union of the 17 countries that make up the euro zone, a departure from his party's previous policy.
"It's very interesting that they have not given in to calls from certain parts of their party to demand repatriation of powers from the euro zone," Phillip Souta, director of Business for New Europe, a pro-European group of British business leaders, told CNBC.com. He called Osborne's support for greater union a "seismic shift" in British policy and said that Cameron had become "more euro-pragmatic."
"If there's a crash in the euro or it fails, then it will lead to contagion," he added. "If you destroy demand for our goods, then people will lose their jobs. There's a huge threat to the banking system."
While the links between the UK and Greece, for example, are relatively small, UK banks helped swell the Irish property bubble, and had around $222 billion exposed to Irish financial institutions as of March 2010.
The euro zone is still UK manufacturing's biggest trading partner.
London and the Bank Transactions Tax
One of the focal points for Euroscepticism at the moment is the mooted Financial Transactions Tax (FTT), a tax that could be imposed on any financial transactions carried out in Europe. European Commission President Jose Manuel Barroso has said that it could raise a much-needed 55 billion euros for the region's coffers, but reaction in the UK, where financial services employ more than a million people, has been overwhelmingly negative.
"My great fear is that there would be underlying increases in costs for everybody," Chris Cummings, chief executive of financial services trade body TheCityUK, told CNBC.com. "If companies move from the UK to the Asian markets, the loser would be the European economy."
He believes that any decision on the FTT should be made at the G20 level rather than European level.
Close to 80 percent of the revenue from the FTT would be collected in London, according to TheCityUK.
"Clearly the FTT is something that could potentially damage any financial center," Tracey Pierce, director of Equity Primary Markets at the London Stock Exchange, told CNBC.com. "Maintaining London as a global financial center and keeping it attractive is very important to the UK."
"One of the key attractions and differentiators of London is the number of brokers, analysts and investment banks, and they will just move if it's more expensive," Pierce added.
Cummings argued that many other industries would be hurt if the proposed tax was introduced, and that individuals would be hurt by, for example, reductions in the value of their pensions if dividends and share prices fell, or a higher cost of car insurance if reinsurers' costs rose because of the tax.
Walking "a very fine line..."
London has historically been slightly cheaper for initial public offerings than its rivals, with average gross fees for a listing on the LSE around 3 percent, compared to an average of 7 percent on Nasdaq.
Post Sarbanes-Oxley, companies wishing to list in the US must meet more stringent criteria, and London has benefited from that. Over $1.85 trillion of equities are managed out of London, with $1.26 trillion invested in international equity assets—more than any other major financial center, according to the LSE.
"That translates into higher liquidity for our stocks," said Pierce.
The London Stock Exchange and its junior markets have more internationally listed companies than any other stock exchange, with around 14 percent of trading on the exchange involving companies based outside the UK, compared to 11 percent on the NYSE or less than 1 percent on the Hong Kong market, according to the World Federation of Exchanges statistics.
With the junior Alternative Investment Market, the criteria for listing is easier to meet than for the main market.
That has led to some controversy around the market's role. In March, a report by think-tank The New Economic Foundation claimed that the market had “driven down standards of transparency, governance and investor protection."
"The UK has always had an appropriate balance between rules and regulations and principles, and that hasn't really been impacted by the financial crisis yet," said Pierce.
The UK government has so far refrained from using the crisis in the euro zone as a bargaining chip to repatriate some of the powers it has ceded to the European Union, despite pressure from within the Conservative Party.
"If there is going to be a treaty that allows the euro zone to be more fiscally integrated, the UK can't say we are going to demand the repatriation of powers in return for agreeing to that—that would look like playing politics," said Souta. "The Prime Minister is walking a very fine line between being pragmatic and not being seen by the more eurosceptic politicians as selling out to Europe. That's an extremely difficult place to be."
A recent pamphlet by right-wing political commentator Peter Oborne and Frances Weaver, called Guilty Men, rails against those who favored closer integration with Europe.
"The schadenfreude that's being dispensed (about the euro) is increasingly irresponsible. People are almost blinded by the perception that this has proved that they are right," said Souta. "The euro has not been a failure. Its value has been rising compared to the dollar and sterling.
He pointed out that if the euro had not existed, all the different countries in the euro zone could have been trying to devalue their currencies, with potentially disastrous results.
"We are confirmed by geography to be a European country. We have got to accept that and make sure that liberal voices in the EU are heard," he said.
Some business voices believe that, rather than distancing itself, the UK should engage with the European decision-making process more closely.
"The UK has a reputation for engaging late and negatively in decisions, from the political viewpoint. We need to be more positive and to change this position of disengagement," said Cummings. "Sometimes EU regulations seem more concerned with keeping Europe competitive within its own borders rather than globally."
"The UK's position should be one of building better alliances, and that goes for industry as much as governments," he added.