A friend tells me why he is voting Remain. “My wife works for a French bank and they would pull out of London if we left the EU.”
That’s fair enough. Assuming the French bank set up in London to access the EU, then it’s logical to assume it would leave after Brexit. But a bank headquartered in Paris is already in the EU. It already has the market access that George Osborne thinks we’re a third world country without.
Whatever reason a bank sets up in London, is it logical to suppose that the primary one is for access to the EU when it is already located in the EU? Why put up with London salaries, London rents and London weather to access the EU when you already can? Why are banks from virtually every EU country located in London when there are precious few UK banks in most EU countries?
Because the City has a lot to offer. It benefits from a time-zone conveniently between North America and Asia-Pacific, a capital markets infrastructure that brings together banks, insurance companies, consultancies, law firms and export-import businesses all in one location, an experienced workforce skilled in the more arcane and specialist areas of finance, and a commerce-friendly environment. And, oh yes, it happens to be the capital of a very large, diverse and vibrant economy.
This winning combination is unsurpassed by any other financial centre. It isn’t only banks that make the City what it is: most international capital market transactions are documented in English law, which makes London the first choice for multinational corporate borrowers requiring the services of lawyers, rating agencies and accountants.
Certainly there are negatives if we left the EU. But they aren’t the negatives the bigwigs are warning us about. When I was a gilt-edged market maker at Hoare Govett Securities, we used to love reading the IMF’s research because it was so consistently wrong. It was a great contra-indicator. When Christine Lagarde says prices will go up if we leave the EU, the all-encompassing blandness of that statement is priceless. (Yes, some prices will go up. And some prices will go down). David Cameron says that, if we leave, sterling will depreciate and mortgage rates will rise, but then didn’t Bank of England governor Mark Carney say rates could fall to bolster the economy? Which bank is going to raise mortgage rates when the Bank of England has cut?
There are obvious downsides to leaving, starting with harder cross-border access. But if one produces goods or services that other people want, other people will buy them. This is why Apple and Samsung have no problem selling to the EU and why Adele has no problem selling records outside it. It also explains why certain countries in the EU, with all the benefits the EU does bring, don’t thrive and are stuck in semi-permanent recession: they don’t produce anything anybody wants.
Fortunately, providing financial services that people want is something the City is good at. A lot of time and effort is spent by the UK government negotiating opt-outs from EU initiatives designed to water down free market principles. Examples include bans on short selling, regulatory supervision of private investors like hedge funds and, perhaps most potentially damaging, a financial transactions tax. Imagine the impact on business if it was confirmed that the City would never be subject to this type of onerous bureaucratic burden – financial services firms around the world would be keen to come here.
The City is already the leading centre for foreign exchange trading and international debt financing. The first location for Chinese and Asia-Pacific banks when they expand overseas is invariably London. Would they still want to do this if the City was outside the EU? Yes, for the same reasons that banks already in the EU do. It is a decades-old tradition: the multi-trillion dollar Eurobond market came to London in the 1960s to avoid a US withholding tax. We weren’t in the EEC then either.
The City is the centre of global finance because of what it offers market participants, not solely connected with membership of the EU. Far from stagnating, should the UK leave, it could present itself as a genuinely open free market, no longer subject to EU bureaucracy and ideologically-motivated regulation.
After Brexit there will be uncertainty and market volatility, yes. But the City of London has faced both many times before and it’s still here: the Number One global financial centre.