HOW absurd. A successful British industry, one which even banker-bashers admit wasn’t responsible for the financial crisis, will this week be hammered by the European Union, marking the new government’s first foreign policy defeat and the latest blow to London’s prosperity. I’m of course referring to the EU’s attack on alternative investment managers, including hedge funds and private equity firms. It’s a sorry saga; City A.M. was the first newspaper to take up arms against the directive, a cause which has since gained widespread acceptance in the British media and in Westminster – fortunately, the proposed rules are not as bad as they originally were but they will still impose damaging and protectionist restrictions on the industry. They will make it harder for Europeans to invest outside the EU, curtailing choice and returns and infuriating other countries, who may seek to retaliate with equally damaging new rules.
There are two key votes on the directive – in the European parliament’s economic and monetary affairs committee today and the economic and finance council (Ecofin) of European finance ministers tomorrow. Barring a last-ditch miracle, George Osborne, the new chancellor, will be defeated following a qualified majority vote. Osborne has already all but conceded defeat and won’t be going in “all guns blazing” to seek a reprieve.
Four fifths of Europe’s alternative managers are based in London; they provide a vast amount of work to investment bank prime brokerages, law firms, accountants and other advisers, as well as property, arts and retail businesses. Pension funds and insurance companies are heavily invested in hedge funds; their customers, including tens of millions of ordinary folk, will suffer reduced returns and higher premiums.
The directive will also affect small firms seeking capital; it will hit development banks investing in emerging markets; it will impact real estate and infrastructure investment as funds in this sector are also covered by the directive. Over time, hedge fund management will migrate not just out of the City but out of Europe to other, less stupid parts of the world.
As a seminal FSA survey on the matter explained, hedge funds during the crisis “did not pose a potentially destabilising credit counterparty risk” and the levels of leverage employed were “relatively low” which “suggests a contained level of risk”. The report concludes that its analysis “revealed no clear evidence to suggest that any individual fund posed a significant systemic risk to the financial system”. In fact, it has long been known that banks were much more leveraged during the bubbles than hedge funds.
Only London can hope to compete with Singapore, Shanghai and New York in global finance; rather than reinforcing our competitiveness by reducing the risk of another crisis, the move to the new EU regime will merely hand business to others. It is a tragedy the EU cannot see that a well-functioning and reformed City would be one of Europe’s greatest assets. Instead, they are rejoicing at bringing it to heel – especially Nicolas Sarkozy, who openly states his hatred of financial capitalism, Angela Merkel, who doesn’t understand finance, and the Greeks, who want to blame everybody else for their self-inflicted profligacy.
This will be a grim week for London but especially for British democracy, as our new government watches powerlessly as yet another key industry is subjected to the dead hand of the Eurocrats.