Why the EU referendum matters to financial services
We’ve heard a lot over the last few weeks and even more over the last few days about the referendum, renegotiation, who’s on what side and why it matters. There will be many different interpretations, but given one of the key tenets of the agreement is the future of the City – the UK’s vital financial services sector – it is clear that Brexit could represent a turning point as profound as the Big Bang for the future of the industry.
With the notable exception of the referendum on Scottish independence, we don’t as a nation spend very much time thinking about our place in the world, how we are governed or how we strategically organise our economy. Even those of us who spend time in political circles find that there is very little discourse about the fundamentals of how we organise society. Political change, when it happens, tends to be a slow organic process. We sort of assume that things will carry on regardless and that they’ll find their own equilibrium.
The next four months will see this complacent political evolution come to an abrupt end. The people have been asked to make a choice. Not about the renegotiation, but about the fundamental question of Britain’s EU membership and by extension its place in the world. Don’t expect it to be a polite, quiet debate either.
It is worth casting our minds back to the last time Britain was asked to make a decision about the EU. Back in 1975 it was about the Common Market. Half of Europe was still under the iron boot of the Soviet Union. Only seven years earlier Russian troops and tanks rolled into Prague to crush the spring reforms. With the fall of the Soviet Union and the reunification of Germany the EU has driven a peaceful transition to democracy, the like of which has never been seen before. You only have to look at Britain’s or indeed other EU nation’s history of decolonisation to see how things can go badly wrong. Fundamental changes in a state’s economic and political status can be very destructive processes. The problems that the EU economy has had in recent years are as nothing compared with the economic and political chaos that can result when trading relationships and political partnerships are disrupted by new political realities.
In the 1970s, London was a grim place of filthy, crumbling Victorian edifices punctuated by the occasional 1960s eyesore. As part of the EU it has flourished and grown to be a shiny multicultural metropolis. Many seem to blithely assume that this was somehow pre-ordained. It was not. Just look at what happened to other states around the world to see how circumstances can change and not always for the better. Argentina anyone? One of the wealthiest countries on earth at the start of the 20th Century.
Above all therefore, the referendum and renegotiation matters because it marks the fork in the road for the UK and the EU. It signifies a fundamental departure from the path the EU has travelled down to date – the UK will have a special status and there will be no more ever closer union. Finally, whichever way the referendum goes, it will reset the clock on Britain’s relationship with the European continent and the rest of the globe.
Presently, the UK is a member of the largest, most successful free trade area in the world. Our financial services industry has flourished in the EU. This referendum could bring all of that to a screeching halt.
Ardent Brexit supporters have come forth to pronounce on mysterious trade deals that will miraculously emerge when we leave the EU. Privately, both the Brexit supporters and numerous analysts report a period of very painful adjustment on exit whatever the eventual outcome. Worse still as both existing models of association with the EU in lieu of membership, namely Norway and Switzerland demonstrate, would be an absolute disaster for the UK financial services sector.
The stark reality is that as things presently stand on Brexit, both the UK and the EU would be poorer without the other. But undoubtedly, the City would come off worst. This is after all the logic of free trade. It is obvious that being part of the EU’s 500 million strong trading block is vital to the City’s future. It is also inconceivable that the City of London and the financial centres in Edinburgh, Bristol and Cardiff could thrive in the way they have if they were excluded from the single market.
Looking at the situation from the outside; impartial observers, including many of our traditional allies such as the United States, clearly think we’ve lost the plot. The only country that seems to want Brexit is Russia, perhaps not the best example of a country we want to be doing business with.
Unlike the alternative, Cameron’s deal secures London’s position as a global financial centre, guarantees future growth of the industry and secures vital jobs and investment in London and elsewhere in the UK.
Significantly, the negotiation has also achieved one thing that will prove to be vital in the coming years. The City has been able to guarantee its status even though it is not a member of the Eurozone. There would be no similar deal available outside the EU.
The alternatives for many of us working in and around the financial services industry just don’t bear thinking about. The City is clearly stronger in Europe. Now for the hard part, firms are going to have to speak up and speak out to convince the British public. As we have seen many FTSE firms would rather avoid the aggravation. The public, however, deserve to know the truth. It is they, after all, not economists, politicians or regulators who will decide. It is the voters that hold the future of the financial sector in their hands.
Photo credit: Didier Weemaels