It's now almost nine months since the referendum, and Article 50 is about to be invoked.
Readers of this column will be familiar with my arguments as to why a unilateral free trade Brexit is the optimal exit strategy, because of the gain to consumers in the short term and to consumers and producers in the long term. Readers will also be familiar with my arguments as to why certain sectors, such as the car industry, can easily be placated and aren’t going to up-sticks and move to the continent.
But the one sector I’ve neglected to discuss has been financial services and the City. This is not because I’m unsure of the case. Quite the opposite in fact. It’s because I genuinely believe that the idea that the City will be undermined by Brexit is completely potty. The idea is so potty, I neglected to think the argument should be engaged. Well I was wrong. My conclusion is sound but my complacency about the need to engage the debate was wrong.
So let’s examine the idea that London will be usurped and some form of financial colossus will emerge on the continent. The simple response to this claim is to say: get on a plane, fly to Frankfurt, walk around the financial centre, and then decide whether you think the city has the breadth and depth of financial services to compete with London. The “agglomeration economies” in London make it the world’s financial centre.
What about Paris? Same problem. And how are you going to move vast numbers of highly paid individuals to countries with significantly higher marginal tax rates? It’s not going to happen. Period.
London is Europe’s financial centre, and at a time when Europe’s banks are in a parlous condition, with shattered balance sheets, access to deep capital markets is a must for European companies.
Despite this harsh reality, much of the EU remains committed to introducing some form of financial transactions tax. It’s quite possible that, when the UK leaves the EU in 2019, our absence could trigger a whole spate of nefarious ideas to curtail and control wholesale financial institutions across the EU. The end result could be a win for the City.
The nature of financial centres is that they tend to be outside or offshore to something, as opposed to being part of that something. Think Switzerland or Hong Kong.
It’s not long ago that we had the debate over euro participation. We were told then that being outside the euro would hit the City badly. Well, that didn’t happen either, but it’s not stopped a similar array of institutions from engaging in special pleading now.
Sure, there are negative assertions about the consequences of losing passporting, and counter claims regarding the significance of equivalence. We will have to wait and see. But the underlying competitive edge of the City remains, and may even be enhanced by Brexit.
Oh, and I forgot to mention, the English language, English law and a favourable time zone.
The City preceded the EU, and there’s a good chance it will be around a long time after the EU as well.