Despite the clamour in much of the media, structurally it doesn’t change that much for the City. The UK would never have actually taken part in the proposals that were on the table to shore up the euro – for example, the monthly meetings among Eurozone leaders – so Cameron has not lost a seat at the table as some have incorrectly reported. The UK may not have gained any additional safeguards, but it isn’t visibly any worse off on financial services. That said, there are a couple of valid background concerns.
Firstly, since there are no safeguards in place, there’s still a risk of Eurozone caucusing, with the 17+ countries deciding for all 27. Some have argued that this risk is now greater since Cameron lost a lot of good will, which could lead to retaliation from EU partners, particularly with regard to financial regulation. Let’s be honest though, the Eurozone has much bigger problems to worry about for now and doesn’t have the time to punish the UK, nor can it afford self-defeating regulation.
Second, there is a concern over a Eurozone financial transaction tax (FTT) – an EU-wide FTT is still a non-starter and the UK retains its veto. The impact of a Eurozone only FTT on the City is unclear. It could be positive, as businesses relocate from the Eurozone to London to avoid the impact of the FTT – they would still have to pay the FTT to access the Eurozone, but would not have to do so with international trade. As such, London would have a competitive advantage. At the same time, it may have a negative impact by reducing financial transactions in Europe generally – something which the City would lose from since it is often seen as a gateway to European markets. The overall impact is unclear though and the same points can be made for any Eurozone specific financial regulation.
So, if Cameron didn’t gain or lose much, what was this all about? Fundamentally, it was about announcing a new strategy in the UK’s negotiations with the EU and flagging up the City as an area of vital interest. Perhaps Cameron’s demands were too detailed, so didn’t lend themselves to EU treaty negotiations, while his timing wasn’t ideal. Perhaps he also failed to link his arguments to wider efforts to develop a more competitive and outward-looking EU. But, due to domestic political pressure and the looming threat to the City from EU regulation, Cameron may have had little choice but to take the approach he did.
There is no doubt that Cameron expended substantial political capital with this move. For this not to be in vain he must continue to push a reformist line, ensuring sound and proportionate regulation. The agreement formed at the summit does not solve the Eurozone crisis and throws up huge legal questions, not least over whether the Eurozone will be able to use EU institutions to enforce decisions. There could be instances in the near future of the Eurozone needing the approval of the UK. Cameron should stick to his guns, but needs to do a better job of communicating his overall strategy and why the City is important to the UK economy. This is not over by a long shot.
Raoul Ruparel is the head of economic research for Open Europe.