FRANCE and Germany have sent a detailed letter to Herman Van Rompuy, the president of the EU Council, setting out their wish list ahead of the EU summit. Their desires include tighter rules on deficits, which they hope will calm the markets, but also – and predictably – proposals for a Eurozone financial transaction tax (FTT), financial regulation and tax harmonisation. If these become reality – a big “if” given potential opposition and referendums in places like Ireland – they could pose a threat to the City of London. Although the UK will not be bound by Eurozone only measures, if they press ahead with their own regulation and taxes this will mark a significant acceleration of a de facto shift in decision making power towards the Eurozone.
It remains unclear what route France and Germany wish to go down to enforce their new Eurozone regime. The Germans in particular are keen to enshrine the changes in the EU treaties, which are owned by all 27 member states. This is because they wish to use the European Commission and European Court of Justice to enforce their new rules. Importantly, the UK has a veto if the EU treaties route is chosen, so we would therefore have some influence. However, the option of using a separate treaty of only the 17 euro states remains open.
If the government does have influence to exert, where should it be brought to bear? The answer is clear. It should be to protect the City. Although there are a number of EU areas the UK should wish to reform – for instance the common agricultural policy and fishing policies – when compared to the UK’s financial services industry they are all relatively small beer. Our financial services accounted for a £35.2bn trade surplus in 2010 – the only industry sector in Britain that generated a substantial surplus in a country that does not do surpluses. UK financial services makes up 10 per cent of our GDP, by contrast agriculture and fishing account for only 0.7 per cent. It is clear where the UK’s priorities should lie. Financial services are to the UK what agriculture is to France and fishing is to Spain – two countries that never shy away from defending their national interests.
In seeking to protect the City it is important to understand the nature of the threat. Until now the City has generally been a beneficiary of the single market. EU-wide financial rules may have increased compliance costs for firms in Britain, but generally – due to UK influence – they also reduced barriers to trade and created opportunities for UK-based firms. However, as a result of changes in the EU, the financial crash and the continuing Eurozone crisis, the economic and political weather has changed. The UK’s level of influence on new European financial rules has decreased with regulation now less geared to financial services growth and more towards curtailing financial market activity, irrespective of whether such activity is good or bad. Add in the fact that future growth and opportunities in financial services will increasingly take place in the growth economies of India and China and not the EU and it begins to look as if the benefits of EU level regulation are now less and less clear.
The Eurozone crisis is now accelerating this process by creating political incentives for the euro countries to act in the interests of the Eurozone 17, rather than the EU-27. Before the crisis, the EU would not have been so able to override the objections of the market’s biggest player. We now see new proposals – including the FTT, possible short-selling bans and the European Central Bank’s insistence that transactions in euro-denominated financial products are only cleared by counterparties from within the Eurozone. This represents not only a clear challenge to UK concepts of financial regulation, but also UK access to the single market.
At today’s summit the UK should set out to guarantee the City’s future by ensuring that the single market remains intact and the UK’s positive influence over regulation is retained. In this the UK will have allies in countries like Sweden, Ireland, the Netherlands and the Czech Republic, who understand the need for efficient financial markets and that the City’s continued success is beneficial to Europe as a whole.
In the list of priorities in the on-going EU negotiations, safeguarding financial services should be at the very top. Our recent report, Continental Shift, sets out a number of ways this could be achieved. A UK-specific “emergency brake” on financial regulation could be introduced, or wider protection for the single market. Another option is a full UK opt-out from EU financial services legislation, with an opportunity for Britain to opt in to individual measures on a case-by-case basis. The UK already has a similar opt-in arrangement in EU justice and home affairs. One thing is certain, though: concerted action is needed now.
Christopher Howarth is a researcher at the think tank Open Europe.
Before the crisis, the EU would not have been so able to override the objections of the market’s biggest player