The language of the euro crisis gets more colourful by the week. We've become used to the Grexit' (the Greek exit from the euro); now the terms Spexit' (Spain leaving) and the Quitaly' (Italy saying arrivederci to the whole catastrophe) are slowly becoming familiar. But Brixit' was a new one at least until the Japanese bank Nomura coined the term last week.
Nomura was referring to the possibility of Britain leaving the European Union. It is still a fairly far-fetched outcome, of course: our relationship with the rest of Europe hasn't broken down to that extent yet. But if it happened it would pose a huge challenge for the City.
Nobody thinks Britain is about to turn its back on four decades of European integration anytime soon. But the Nomura analysts were drawing attention to the widening gulf between Britain and the rest of the EU and suggesting that this should at least be on people's radar screens.
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It's not hard to understand why. The euro crisis is rapidly transforming the EU. Over the next few months, the eurozone countries may take a bold leap towards full economic integration. They may pool their debts and create a single European treasury, raising taxes and distributing budgets for the entire continent as the only way of keeping the eurozone together. Inevitably, Britain wouldn't be a part of that. It will drift towards a semi-detached relationship with Europe that will eventually lead to Britain leaving.
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Alternatively, the euro may fall apart catastrophically. If so, not only will the economy plunge into a deep recession but the cause of closer European integration will be fatally damaged. Like a bicycle, the EU either moves forward or falls over it needs momentum to keep it going.
Between those two extremes, Britain may still gradually edge closer to the exit. The failure of the euro has tarnished the entire European project. What was once about opening borders and promoting trade is now mostly about salvaging a currencythat has plunged half the continent into a 1930s-style depression. The argument of the euro-enthusiasts that we risk being left on the sidelines doesn't carry much force now that the heart of Europe seems such a terrible place to be.
The Labour Party is toying with a referendum on continued membership of the EU. So are the Conservatives. If one is eventually held in 2016 or 2017, it is hard to see it being won, particularly if the recession in the eurozone drags on and on. It isn't a project anyone wants to be associated with right now and it is very hard to see that changing over the next few years.
To most of the British economy, that is probably of little consequence. In a globalised world, regional trade blocs such as the EU don't mean very much anymore. China manages to export plenty to Europe without belonging to the EU. So does America. There is no reason why Britain shouldn't as well. Indeed, if Britain was suddenly released from the mountains of red tape that the EU generates, and costly absurdities such as the Common Agricultural Policy, it would probably be a boost for the economy. Our exporters would do just fine from the outside.
But it would pose a huge challenge for the City. Why? Because the City has sold itself as the EU's financial centre. The reason so many American, Japanese and German banks are in London is because from this base they can do business right across Europe. The EU was essentially the City's domestic market', just as America is the domestic market for Wall Street. Outside the EU, that would not be true anymore. Worse, the rest of the EU might well put up barriers to London-based firms the French and the Germans would hardly want to offer the British equal access to the market unless they had to. And all the global banks would rapidly have to move their bases to Paris or Frankfurt. The City would have to re-invent itself completely.
That shouldn't be impossible. It could become the offshore centre for Europe, rather as the Isle of Man is for Britain or Luxembourg is for Germany. It would be the place where individuals and firms come when they want to avoid EU regulations and taxes. Given how burdensome both could quickly become, that could create a very lucrative position in the market.
The City could also become a financial centre for the emerging markets, particularly Russia and eastern Europe. A lot of companies in those nations are going to need to raise capital over the next decade and many of them will want to float their shares. The City already has a big chunk of that market but it has the potential to grow a lot more.
Moreover, the City could get back to its roots: providing finance for British entrepreneurs. It's largely ignored that aspect of its business in the last two decades as big global banks have come to dominate the market and provided much more lucrative opportunities. But there is still a huge opportunity for finance houses that can find innovative ways of getting money to small start-up enterprises.
A financial centre does not need a big domestic' market to flourish. Look at Singapore, for example it's done very well by staying outside of any major economic bloc. But it requires a strategy and the time to start formulating one is now. By the time a referendum on British membership is held, it will probably already be too late.
