As summer made way to autumn last year, I stood on the roof terrace of a smart office block, 30 floors above Brussels, as a guest of the British Bankers’ Association (BBA). A young, charming Spanish lady who worked for the BBA explained to me that there would be no banks in London if the UK were to leave the EU.
As I listened to her, I suffered a very English dilemma. Does politeness towards a foreign host require me to keep my own counsel and say nothing, or does one have a duty to offer enlightenment?
Should I have pointed out, for example, some other possible reasons for financial services preferring London to Madrid, things that may have been lacking from Spanish banking since the first of Spain’s many sovereign defaults in 1557? Should I mention that fewer than 1 per cent of household loans are completed across borders within the Eurozone, or that 90 per cent of global economic growth is expected to be generated outside of the EU? Numbers, by the way, which come from the EU Commission itself.
Would it be rude to suggest that the EU has systemic problems that lead it to inevitable conflict with market economics?
Surely my hostess knew all about the real foundations of the commercial success of the City of London? She was, after all, working for the British Bankers’ Association.
As I said my goodbyes and went home, I decided it was my duty to write these things down in a way that could be understood across Europe’s cultural divides. The result is research published in my booklet Risk and Reward – explaining why the EU separates risk from reward and what this means for the City.
I asked myself why the UK is always swimming against the EU tide, and discovered that at root it is about the different approaches each has to organising society and how those different philosophies deal with two things in particular: risk and reward. But in a wider context it is also about choice – our ability as individuals, and society, to choose how each of us wishes to balance financial risk and reward.
The great Austrian economist Ludwig von Mises emphasised that, in a market economy, it is the consumer who is sovereign. But the president of the EU Commission recently pointed out that “there can be no democratic choice against the EU treaties” – in the EU it is not the consumer but the EU treaties that are sovereign.
To protect its single currency, the EU disregards both democracy and market economics. In my research I show how this has been done, revealing the EU’s problems to be systemic – coded into its DNA at conception.
You may have noticed that the EU is obsessed with appearing to abolish risk – the very commodity from which the City earns its living – and that the euro has managed to survive longer than many expected. The two thoughts are not unconnected because the continuation of the euro requires misallocation of risk, and with it the misallocation of capital.
In this way, membership of the EU systemically undermines the foundations of the City’s ability to facilitate the allocation of risk to those willing to shoulder it.
It is hard for some to admit, but companies arguing to remain in the EU do so because EU regulations either allocate their risk to others or add costs that prevent small businesses from competing with them.
For more than 40 years the UK has been trying to reform the EU from within, but the paucity of ambition in David Cameron’s renegotiation has inadvertently shown us how impossible true reform is.
The EU actually needs us to lead by example. We owe it to our neighbours to stop subsidising bad practice in the allocation of risk and compete in a businesslike and friendly way; market economics will encourage better practice all round. Only by stepping outside of the dysfunctional EU system can we achieve this.