We thought it was all over. After years of wrangling, stand-offs, walk-outs and arguments, the UK and the EU finally reached a trade deal just before Christmas, and with only days remaining before the transitional arrangement expired at the end of the old year. And yet, just when you thought we could safely forget about wrangling with Michel Barnier, it turns out the arguments are set to continue.
Talks will start this week between the UK and the EU over a deal for financial services. There will inevitably be lots of pressure to make concessions and secure access to the European market for the UK’s banks, insurers and asset managers. That should be resisted. In truth, the same hardball “no deal is better than a bad deal” stance will work as well for the City as it did for the rest of the country.
Playing hardball makes sense
Over the next couple of months, British officials will have to try and negotiate “equivalence” rules that will allow City firms to sell their services across the EU. That matters a lot. Financial services are one of the UK’s largest exports industries, and one of the most lucrative. The EU market has been hugely important, allowing the City to become the dominant financial centre for the whole of the continent. There can be no argument that losing access to that market would come as a huge blow.
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It is not going to be easy to strike a deal. Plenty of European countries are suspicious of the UK’s role in finance. The French, Germans and, increasingly, the Italians as well, would like a share of that trade. Many of them will be uneasy about the main trading and debt centre for the euro being outside their regulatory control. Plenty of them will calculate they should make life as hard for the UK as possible, not least because it will increase the chances of banks relocating to mainland Europe.
At the same time, many City banks, lobbyists and asset managers will be desperate to secure access to the single market, and they will be urging the government to make whatever concessions are necessary to secure it. We can expect to see lots of scare stories about the huge losses the UK economy will face if it doesn’t reach a deal. The trouble is, we could easily find our finance industry essentially regulated from Brussels forever. The City should instead back the UK’s negotiators to be robust and ready to walk away without a deal if they have to. Here’s why.
First, the strategy works well. The EU is not as powerful as it pretends to be, or as its more enthusiastic supporters claim. Sure, it is an important market for British financial firms. But it also depends on the City to raise the vast amounts of debt that eurozone governments and companies need. In the main negotiations, the EU became a lot more willing to compromise as soon as the British government made it clear it would walk away without a deal if it had to. The same will be true for financial services.
Europe is not the only game in town
Second, there are plenty of markets outside the EU where the City can grow instead. The eurozone accounts for 16% of the global economy, and with slower growth, and accelerating development in Asia and Africa, that is getting smaller all the time. The City has always done best as a global finance hub rather than as merely a domestic or regional one. It might well lose some business over the next few years to Paris, Frankfurt and Amsterdam. But it can more than make up for that by expanding across the rest of the world. As an offshore, lightly regulated hub straddling time zones, and connecting Europe to the rest of the world, it might well find it can do a lot better than it ever did inside the EU.
It is important that the City gets these negotiations right. The City is one of the most important sectors of the British economy. The last thing we need is to commit ourselves to an EU rule book that will be hostile to artificial intelligence, robot trading, app-based insurance and banking, and all the other new technologies that should turbocharge the finance industry over the next decade.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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