Monday, 18 December 2017

Brexit: The City of London Makes Its Case… Again

In the first of a number of posts today, this post looks at some of the noises emanating from the financial elite within the U.K., particularly with regards to Brexit. It should come as no surprise that the decision to leave the E.U. has caused anxiety amongst business leaders within the City, and recent political developments have not made a positive impact in that regard. So, in this post, we shall look at some of the concerns that are being raised, and the impact that certain developments may have upon the City, and also the British society moreover; ultimately, the question developing is how the secession will play out in terms of finding a balance between the decision of the (very slight) majority of the electorate, and business within the U.K.

The first development that needs to be examined is the political manoeuvrings that took place last week when, in Parliament, the Government saw its attempt to ‘promise to give assurances’ on a Parliamentary consultation over the final exit deal enshrined in law, which has an impact upon the perceived authority of the Conservative government. The effect of this is that the perceived authority of the Government to deliver a fair and developed deal for Britain has been fundamentally reduced, which then has a clear knock-on effect with respect of the faith in their ability to do so; the addition of extra steps before the secession is finalised, by way of decisions required by the European and British Parliaments, are said to be indicators of the near-certainty of a ‘soft-Brexit’ being adopted. Essentially, the vote represented the rejection of the push for a ‘hard-Brexit’ by what are being called ‘Tory-rebels’, with the Daily Mail inexplicably stoking tensions (and violent ones at that) with their rhetorical ‘Proud of Yourselves?’ front-page headline; the latest on a string of revolting journalistic declarations (one is reminded of their ‘Enemies of the People’ headline). However, the vote signifies a concerted attempt to reign in the extremist elements that seek a hard and pure Brexit, and over the weekend the City sought to continue this movement.

One of the leading City lobbyist groups – UK Finance – expressed their concern at the suggestion that the British Government was seeking a ‘bespoke’ agreement with the E.U. upon its secession, with the agreement that exists between the E.U. and Canada apparently being used as the template. Whilst the Chancellor of the Exchequer, Philip Hammond, declared over the weekend that the aim was to have a bespoke arrangement but not in the same vein as the Canada-E.U. arrangement, Michel Barnier – the E.U.’s Chief Brexit negotiator – was adamant that the U.K. would not be allowed to receive the perks of E.U. membership once it leaves; the discussions have now moved to developing a transitionary arrangement that would see the U.K. remain within the single market and under the auspices of the European legal framework for a period of two years after secession – something with Chief Brexiteer Jacob Rees-Mogg has suggested would be a negative, resulting in the U.K. becoming an ‘E.U. colony’. Nevertheless, the financial elite in the U.K. have made clear that the Canada-style arrangement would certainly not be optimal for British business, with the lobby group declaring that the Government must place the City at the very heart of its negotiations if the City is to survive such an impactful era. In reference to the Canada-style arrangement, the lobby group rightfully notes that the difference between the two situations is rather obvious – the arrangement with Canada was developed from a standing start, whilst the arrangement between Britain and the E.U. is intrinsically rooted in over 40 years of collaboration; simply put, one system is not translatable to the other. Whilst the lobby group praises Theresa May for advancing the negotiations, it is clear the cross-border movement of financial service provision, amongst many other things, is vital to the continued health of the financial markets of the U.K., which seems rather obvious. Yet, underlying all of these discussions, albeit not very subtly, is the understanding that business needs certainty to thrive; whilst uncertainty can be profitable in the short-term, in the long-term it is almost cancerous to business.

This uncertainty is beginning, although in reality it started immediately after the vote to leave, to have an impact beyond financial borders. The Bank of England, discussing the results of a survey of over 6000 British households, note that over 35% of British households now believe that Brexit will cause significant economic damage to the country, up from 20% just after the referendum result was announced. Whilst the Bank of England have chosen to focus on more short-term impacts recently in terms of confidence, statistics such as these provide even more evidence that, as discussed previously here in Financial Regulation Matters, this E.U. referendum was nothing more than a botch job; a second referendum, even at this stage, would surely garner either (a) a different result or (b) a much higher and more representative turnout. It was affirmed recently that London still holds its place as one of the financial centres since the decision to leave the E.U. was taken, but the move by some of the largest financial players to make considerable moves into Europe recently is denting confidence – if confidence and certainty are two major components of the lifeblood of a successful economic system, the British financial marketplace is in short supply at the moment. The effect of all this is that one really must ask a broader and more abstract question.

Ultimately, for Britain to retain its standing on the world stage, particularly in relation to the financial marketplace, the softest-Brexit imaginable is optimal. However, that goes in the face, presumably, of the decision taken in 2016. Therefore, the decision taken by the British electorate needs to be dissected. The first aspect to question is the extent to which the electorate wanted to leave the E.U., and unfortunately that cannot be known; whilst protagonists like Nigel Farage suggested that British people wanted an absolute secession, can that really be said to be the case? Or is it more likely that voters wanted certain elements of the U.K.’s relationship with the E.U. rearranged, like immigration for example. One may be forgiven for thinking that if certain elements of the secession were put on the table before the vote took place, then certain aspects of the relationship would have been highlighted more than others, but what was proposed has not been delivered as of yet, and that is because in reality it cannot be. In reality, it is the E.U. that holds the advantage in the negotiations, and that is mostly because of the importance of the City to the prosperity of the U.K.; a cherry-picked arrangement will cause a regressive precedent for the E.U., and a very soft-Brexit will likely damage the authority of the Conservative Party, probably beyond repair. Ultimately, the trajectory of these negotiations has already been set, it is probably just the case that certain people have not yet accepted it – an extremely soft-Brexit is the only possible result, because the U.K. cannot afford nothing else. So, after such political, social, and financial upheaval, the U.K. will still be bound by European laws, still be bound by freedom of movement, and it would have paid tens of billions for the privilege – the ignorance of the study of referenda will be a costly for the British society.

Keywords – Brexit, E.U., Theresa May, City of London, Business, Politics, Finance, @finregmatters

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