After a couple of turbulent years worrying about Grexit – Greece being ejected from the euro – the City now has something closer to home to worry about: Brexit. David Cameron fired the starting gun with his long-awaited speech on Wednesday, pledging to negotiate a new settlement with the European Union after 2015.
“When we have negotiated that new settlement, we will give the British people a referendum with a very simple choice: to stay in the EU on these new terms or come out altogether.”
The City of London has always had a slightly acrimonious relationship with Europe but an exit would pose challenges and opportunities, leading experts have told Euromoney.
According to Daniel Godfrey, chief executive of the Investment Management Association, whose members manage £4.2 trillion, Brexit would be “lunacy”.
“We can all see there are some daft things that come out of Europe but the answer is not to walk away,” he says. “It would diminish still further our ability to influence the development of the operating environment of our industry.
“If we want the chance to export what we do to the rest of Europe, we will almost certainly have to apply EU regulations but will not be sat at the negotiating table.”
According to official figures, the UK’s financial services sector posted a trade surplus of £46.7 billion in 2011.
David Rouch, regulatory partner at law firm Freshfields, says much will depend on what an exit looked like – for example, whether it means becoming a member of the European Economic Area alongside states such as Iceland and Norway.
“In that case, it would not make much difference to the ability to carry on business in the EU because UK firms would have to continue complying with rules generated by Brussels but would still get the benefits of the passporting regime.
“If the UK completely pulled out like Switzerland, we would effectively be on the outside of Europe and would probably find it increasingly difficult to carry on business cross-border, particularly in retail markets.
“If London can’t continue to operate under the EU financial services passports, that could have quite a material impact.”
Shifting EU sands
However, some analysts doubt regulatory fears are a reason to stay in. Stephen Lewis, chief economist at brokers Monument Securities who has worked in the City for three decades, says regulation will be an issue even if Britain were to leave.
“The UK is no longer within the inner sanctum,” he says, pointing to the emergence of the European Central Bank (ECB) as the prime regulator of large banks. “We have no influence over the ECB anyway.”
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| UK prime minister David Cameron |
Richard Reid, a research fellow at Dundee University, says the UK is more attuned to the demands of the rest of the world than other European centres. “I am not sure how badly London would suffer,” he says. “Countries like India, China and the US will still know they have to deal with the UK. London offers a large amount in terms of the market infrastructure that extends beyond banking and insurance into shipping and many other services.”
Michael Emerson, a senior research fellow at the Centre for European Policy Studies, disagrees. He says the issue of whether single market rules for financial markets are kept in the EU-27 jurisdiction, where the UK has a vote, or are completely in the hands of the eurozone, is still up for grabs. “UK exit would settle the matter for good,” he says.
However, regulation is not the only issue. There is also the question of whether London, recently named as the world’s premier financial centre by analysts Z/Yen, would retain its pre-eminence.
Emerson says financial centres hoping for greater market share, such as Frankfurt and Paris, will lobby for euro-located facilities, or euro-biased regulations.
“The ill will created will be huge,” he says. “It will be a pretty acrimonious mess, since withdrawal will involve a huge amount of detailed negotiation, while in many instances [there will be] questions of whether the EU will want to be generous to UK interests or not – and probably not.”
Another potential threat to the City is concern among overseas investors over London’s exclusion from Europe. Last week, US president Barack Obama told Cameron he “values a strong UK in a strong European Union”.
Emerson says uncertainty created by an exit referendum would be “costly to the UK’s attractiveness as a location for footloose investment”.
Pete Hahn, a lecturer at Cass Business School in London, spent 20 years working in London and Paris. “Most of the City is foreign-owned banks,” he says. “It certainly would not be a surprise if US banks had a rethink about whether they should move somewhere else.”
Freshfields’ Rouch says the UK would lose its influence if it distanced itself from Europe. “You can’t have your cake and eat it. If you are not in the weave of the system and have a contrary view, it is easier for people to say: ‘Well, the UK is not engaged in the system so why should we listen.’”