The financial-services industry would be one of the biggest losers from Brexit
THE place with most at stake in the Brexit debate may be the City of London, Britain’s financial hub. Although the European Union’s single market in services is incomplete, it clearly works in wholesale financial services. Today London is more obviously the financial centre of both the EU and the euro zone than it was 20 years ago, inspiring much jealousy among potential rivals like Paris and Frankfurt. José Manuel Barroso, a former European Commission president, bluntly told a recent conference organised by UK in a Changing Europe, an academic network, that, post-Brexit, “London could no longer be the financial capital of Europe.”
According to TheCityUK, a lobby group, almost 2.2m people work in financial and related services such as accounting and the law, two-thirds of them outside London. They produce nearly 12% of GDP, 11% of the country’s tax take and a net trade surplus of £72 billion ($104 billion). Financial services have taken a third of foreign direct investment in Britain since 2007, most of it coming from the EU. Some 250 foreign banks operate in London, and over 200 foreign law firms have offices across Britain.
A Brexit study by PwC, an accounting firm, for TheCityUK concludes that gross value-added in financial services would fall by 5.7-9.5% by 2020 and employment by 70,000-100,000. The sector would grow more slowly and some firms would relocate to other EU financial hubs. The main cause would be the loss of “passporting rights”. These allow any British-based bank or investment firm to trade across Europe: without them, firms would have to set up separately capitalised subsidiaries inside the EU. A study by Frontier Economics for London First, another lobby group, also finds that total British trade would fall by £67 billion-92 billion a year.
Brexiteers dismiss all this as scaremongering. London was a financial centre, they say, long before Britain joined the EU. Indeed, membership has been damaging by imposing stupid rules. Gerard Lyons, economic adviser to the mayor of London, argues that Europe cannot replicate the City: the real competitors are New York, Singapore and Hong Kong, not Paris or Frankfurt. Brexiteers say their opponents also claimed 15 years ago that the City would suffer if Britain did not join the euro. No wonder, they conclude, that City opinion is divided, with many bankers and hedge-fund managers backing Brexit.
This last claim is wrong. Repeated surveys find that most current practitioners want to remain in the EU. It is hard to find a single bank in favour of Brexit. It is true that hedge-fund bosses like Crispin Odey and Paul Marshall are big contributors to Vote Leave, the main pro-Brexit campaign. But David Harding, founder of Winton Capital Management, is one of the biggest backers of Britain Stronger in Europe, the chief pro-Remain group, and he is not alone.
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The case against EU red tape is also unconvincing, not least because the City has thrived inside the club (see chart) and the 2008 financial crash led to demands for more not less regulation. Brussels can be annoying, especially when it sets limits on bankers’ bonuses. But most of today’s regulations stem from international accords like the Basel rules on bank capital or domestic proposals in the Vickers report into bank structure. As an EU member, Britain has often improved clumsy draft regulations coming from Brussels. Were it to leave, it would lose any influence over the EU’s planned capital markets union.
As for Europe’s ability to compete, Chris Cummings, chief executive of TheCityUK agrees that nowhere can challenge the City as a whole. But the risk is that chunks of the industry would migrate. Dublin and Luxembourg are strong in fund management, for instance. The most immediate threat is to clearing and settlement of euro trades, which the European Central Bank has already tried to relocate into the euro zone, only to be rebuffed by the European courts. Were Britain to leave the EU, it would lose this judicial protection. The profits from clearing and settlement are crucially important to financial exchanges.
It is true that concerns about the City were rife when Britain refused to join the euro. But the loss of passporting rights matters far more than being out of the single currency. Fears over the City’s future are one reason why sterling has been so wobbly this year. Some in the City reckon it could fall by another 20-30% post-Brexit—the betting on which may explain why a few hedge funds back the idea.
This article was amended on May 10th to clarify that the amount by which trade would fall in the event of Brexit (quoted from the study by Frontier Economics) relates to total trade and not just trade in services.
This article appeared in the Britain section of the print edition under the headline "City blues"
