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Financial regulation
The City of London is both one of the most substantial sources of foreign earnings for the UK economy and the leading European financial centre, so that how it is regulated is a crucial dimension of the UK-EU relationship. London also stands out within the EU as being the only truly global financial centre. However, participants in the hearing differed as to whether the distinctiveness of UK financial services warrants a specific approach to financial regulation which could come under pressure outside the EU.
UK negotiators, bolstered by effective lobbying from the City, have proved to be adept over the years in ensuring that EU proposals for financial regulation take full account of the interests of the British financial sector. An example is how the EU’s Directive known as ‘MIFID’ – relating to fund management – was negotiated. Concerns have nevertheless arisen about whether the measures already taken or in the pipeline to reform the governance of the Eurozone will be detrimental to the UK, although the interests of banks may differ from those of UK taxpayers. One of the four key areas for the renegotiation of the UK’s relationship with the EU was to establish safeguards against Eurozone caucusing.
A specific complication of Brexit would arise in periods of financial instability. The cooperation of the European Central Bank would be needed in providing euro liquidity and, while there would manifestly be a common interest in forestalling financial instability, the UK would not be fully in control. In or out of the EU, therefore, the UK will need to establish mechanisms for cooperation with the Eurozone in fostering financial stability, resolving failing banks and sharing financial risks. Warnings from the Bank of England suggest Brexit itself could lead to uncertainties that could endanger financial stability and, as a result, provide an early test of cooperation mechanisms.
Regardless of EU membership and the regulatory regime to which the City would be subject following a Brexit, an important conclusion of the hearing was that London would retain its position as a leading global financial centre, but could face greater uncertainty. Some of its activity would be displaced to elsewhere in Europe, if only because of the need to have subsidiaries inside the Eurozone/ EU, and there would be barriers to selling into the EU market that could curtail future business opportunities. As many in the City have pointed out, the UK has a large surplus in trade with the EU in financial and business services giving partner countries few incentives to strike a deal to maintain market access. Slow attrition of the City’s dominant position in EU financial services, entailing a loss of jobs, could occur, although it was noted that the City is far from homogeneous.The City of London is both one of the most substantial sources of foreign earnings for the UK economy and the leading European financial centre, so that how it is regulated is a crucial dimension of the UK-EU relationship. London also stands out within the EU as being the only truly global financial centre. However, participants in the hearing differed as to whether the distinctiveness of UK financial services warrants a specific approach to financial regulation which could come under pressure outside the EU.
UK negotiators, bolstered by effective lobbying from the City, have proved to be adept over the years in ensuring that EU proposals for financial regulation take full account of the interests of the British financial sector. An example is how the EU’s Directive known as ‘MIFID’ – relating to fund management – was negotiated. Concerns have nevertheless arisen about whether the measures already taken or in the pipeline to reform the governance of the Eurozone will be detrimental to the UK, although the interests of banks may differ from those of UK taxpayers. One of the four key areas for the renegotiation of the UK’s relationship with the EU was to establish safeguards against Eurozone caucusing.
A specific complication of Brexit would arise in periods of financial instability. The cooperation of the European Central Bank would be needed in providing euro liquidity and, while there would manifestly be a common interest in forestalling financial instability, the UK would not be fully in control. In or out of the EU, therefore, the UK will need to establish mechanisms for cooperation with the Eurozone in fostering financial stability, resolving failing banks and sharing financial risks. Warnings from the Bank of England suggest Brexit itself could lead to uncertainties that could endanger financial stability and, as a result, provide an early test of cooperation mechanisms.
Regardless of EU membership and the regulatory regime to which the City would be subject following a Brexit, an important conclusion of the hearing was that London would retain its position as a leading global financial centre, but could face greater uncertainty. Some of its activity would be displaced to elsewhere in Europe, if only because of the need to have subsidiaries inside the Eurozone/ EU, and there would be barriers to selling into the EU market that could curtail future business opportunities. As many in the City have pointed out, the UK has a large surplus in trade with the EU in financial and business services giving partner countries few incentives to strike a deal to maintain market access. Slow attrition of the City’s dominant position in EU financial services, entailing a loss of jobs, could occur, although it was noted that the City is far from homogeneous. [...]
Concluding reflections
Referendum campaigns create heated debate and ‘red herrings’. There is little reason to suggest that ‘Brexit’ would disturb peace and threaten war in Europe. The logic of building the European Union has no parallel with Hitler or Napoleon. Such big claims sit uneasily with earlier protestations by protagonists on both sides that the arguments for ‘stay’ or ‘go’ were finely balanced. Similarly, statistics can animate, but also mislead: the cost of the UK being inside the EU is not £350m per week, while the effect of Brexit on house prices is not easy to predict.
On the evidence of our hearings the choice is about weighing-up contrasting risks. Brexit is largely a leap into the unknown and there are no ‘off the shelf’ solutions offering Britain tangible advantages. Instead, the potential gains depend on what is currently unknowable: what kind of deal may be available to the UK. In the long-term, there may be benefits from ‘Brexit’, but in the short to medium term there is a risk of instability and economic losses. Most economic assessments see withdrawal as leaving the UK worseoff, while any budget saving from not paying into the EU budget would be more than off-set by GDP loss. The task of extricating the UK from the EU would be complex, timeconsuming and costly in political and economic terms. None of Britain’s major trading partners believes trade would be as easy after Brexit. Plainly, the City is important to the UK economy, but Britain’s large surplus with the rest of the EU in financial and business services suggests few incentives for our partners to maintain access to their markets for these services.
That said, the impacts of Brexit are likely to be differentiated across the UK by geography, economic sector and social group. The relative winners and losers may vary over time, as business adjusts. Some sectors – including higher education – could take a permanent hit. On the sensitive issue of immigration, public perceptions of burdens on local services are at odds with the evidence that its macro-economic impact is either positive or negligible.
Alongside these economic risks, are the ‘process’ issues of how decisions are made and their effect on our democracy and sense of accountability. Clearly, many voters – not only in Britain - feel very distant from EU decision-making. This is reinforced by a sense of our identity being threatened, although the issue of sovereignty is far from straightforward. In principle, Brexit would enable Parliament to pass laws unencumbered, but this is a chimera if the right to choose is not backed up by the power to realise them. Maintaining access to the single market would oblige the UK to continue to adopt EU laws. Similarly, a desire to be free of EU charters and the European Convention on Human Rights would raise concerns about what might be lost. Domestically, attempts to curb workers’ rights would be resisted.
Brexit would change Britain’s place not only in Europe, but also the world. In foreign policy, both the EU and the UK would be weakened by Brexit. No world leader sees Brexit as strengthening Britain’s ties with them. It is not in their interests, save (perhaps) for President Putin. There is something of a tradeoff between significant costs in lost jobs and growth, the risk of lesser protection of rights, and a weaker international voice, against perceptions and sensibilities over accountability, sovereignty, and identity. For the latter, feelings matter, even though the gains may be contestable. This tantalising, perhaps irreconcilable, equation underscores the decision to be made on June 23rd.
Without doubt, the referendum decision is one of very major consequence. This once in a generation choice should not be made on the basis of fear, myth or apathy. The evidence of this Report is measured. It suggests the least risky vote is for the UK to remain in the European Union.