The perennial debate concerning Britain and the European Union is not quite reaching its denouement, but this Friday's long awaited speech from
This topic is one of those, like "independent nuclear deterrent", on which protagonists have pre-set positions, seemingly acquired at birth, on which it is not possible to have an open, objective, dispassionate debate. People utter assertions and surmise masquerading as fact that are really just personal prejudices. Logic is rare.
Which is why this week I thought we'd consider the point most relevant to this column (we discuss finance and macroeconomics here, not politics after all) – whether a United Kingdom outside of the EU would be beneficial or detrimental to the fortunes of the financial sector.
Start with this quote, from The Sunday Times business section last weekend:
"You have to be worried, generally, about Britain distancing itself from core Europe and what the ramifications are for the financial services sector".
This was attributed to the "London-based head of one international bank".
Does one have to be worried? Much of what is quoted about the dire consequences for the U.K. should it leave are simply surmise, there is no hard evidence either way of what the impact would be in the short and long term. The main thing to realize is that one does not need to be in the EU in order to trade with it. Otherwise, China, Asia-Pac and Canada, to say nothing of the USA, would not be exporting the amount they do to Europe. And one can't simply raise trade barriers to any country that does leave the EU, as that would break numerous WTO rules and ignite countless bilateral trade wars. So treat the utterances on this subject from doom-mongers like Peter Mandelson and Kenneth Clarke (if not an un-holy alliance, certainly an unusual one…) with a large grain of salt. It is all simply assertion. They don't know.
But what of the City? How to address the concerns of our banking head quoted above?
As well as our WTO point above, we should remember that a "financial center" arises as a result of a number of interacting factors, and not solely as a result of being in a country that's in a trade union. It is not at all the case that simply because the UK withdrew from the EU all the foreign-owned banks would relocate to Paris or France.
For starters, the infrastructure that exists in the City would take years to put in place elsewhere. Think of the legal and insurance firms, the FX market, the language, and a host of other factors that make the City the draw that it is. This simply doesn't exist elsewhere in the EU.
Regulation is another strong point. The U.K. FSA has already set the benchmark standard for banking regulation in the wake of the financial crash (its banking liquidity standards are more onerous than the international Basel ones) and its successor the Bank of England can maintain this standard outside of the EU.
But the main thing to remember is what attracted firms to London in the first place. Freedom from excessive bureaucracy and high taxation is what led to the Eurobond and FX trading markets siting themselves in London in an earlier era, and this same freedom will ensure that banks and other financial firms stay in the City even after a "Brexit". There will be no chance of a financial transactions tax, a short-selling ban, or any other business-unfriendly measure being implemented here if the UK is not in the EU. That is a strong reason to suspect that the City would thrive outside of the EU, a sort of super-charged Swiss financial center but covering wholesale, corporate and international banking and not just private banking.
And to top it all, forget the idea that once a country leaves the EU it will suddenly find itself unable to undertake commerce with it. If that was the case, one would never observe the hundreds branches and subsidiaries of foreign banks in the EU that one does. But then maybe that's the problem in Brussels – one never does observe them there, they're all in London…
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012)