The Magazine

City Under Siege

The European Union’s coming attack on the Anglo-Saxon financial sector

Jul 1, 2013, Vol. 18, No. 40 • By ANDREW STUTTAFORD
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That current is sweeping an increasingly burdensome, increasingly made-in-Brussels regulatory regime, expensive and rigid, into the City and beyond. Much of it is profoundly antithetical to the intuitive, principles-based, flexible, and often self-regulatory approach that has done so much to transform Britain’s financial sector into a world-beating business. That some of these rules​—​such as the new Alternative Investment Fund Managers Directive​—​will (effectively) weigh even more heavily on enterprises headquartered outside the EU is bound to damage London’s status as a global financial entrepôt, diverting business beyond the reach of Brussels.

The commission doesn’t appear to be particularly concerned where that business goes. In fact, it would probably like much of it to go away altogether. Many of Britain’s continental partners agree. And jealousy is only a part of it. The inherently unruly (markets are like that) and, to them, morally suspect financial sector is an obstacle to the ideal of a technocratic, tightly controlled Europe. Meanwhile the “island sewer” (to quote a deputy director of the supposedly serious El País, Spain’s highest-circulation newspaper) acts as a low-tax, lucrative lure for some of the continent’s best and brightest: some 300,000 to 400,000 French citizens now live in the U.K., mainly in London. Perhaps most annoyingly of all, financial services’ large contribution to the U.K.’s ramshackle economy (directly and indirectly perhaps at least 14 percent of GDP, and a badly needed export earner) helps fund Britain’s fondness for going its own way, an independent-mindedness that its European partners could do without.

But if the pie is to be smaller, that doesn’t mean that those partners don’t want a larger slice of it. National rivalries still flourish beneath that shared EU flag. The mechanism of “ever closer union” is not infrequently used by one member-state against another. It is, of course, only a coincidence that the (Frankfurt-based) European Central Bank is seeking to introduce rules that would force the relocation of clearing houses that handle euro-denominated instruments (in any significant quantity) out of London into the eurozone, to Paris, say, or, uh, Frankfurt. The U.K. is suing to prevent this, but if the currency union deepens, or banking union comes into being, there will be more of the same to come.

Taken as a whole, Europe’s financial sector will shrink further​—​even after the bloodletting of the last few years. London, as its hub, is bearing, and will continue to bear, the brunt. Jobs in the City have fallen by roughly a third and now stand at a 20-year low. In part this is natural, the product both of hard times and the necessary reconnection of the financial sector to economic reality. In part too it’s a matter of mathematics. Tougher capital requirements and more restrictive limitations on leverage (and, possibly, areas of business) are a reasonable response to some of the disasters of recent years, but they will make much of the banking sector less profitable than in the mirage years, and that’s before we begin to factor in the costs of Brussels’s wider regulatory onslaught.

The FTT adds both further insult and injury. The belated realization that the tax may be even more destructive than its supporters intended (the governor of the Bank of France has warned of the damage it could do to the French financial sector) may mean that it will be diluted prior to its planned introduction, but two key features​—​some targeting of trading volumes and extraterritoriality​—​will remain, and both will hurt London disproportionately. The extraterritoriality is particularly galling. A trade will bear the tax even if only one counterparty is in the FTT-zone, and so will a transaction where both counterparties are outside the FTT-zone (in London and New York, say) but trading a security (a Peugeot share, for example) where the issuer is based within it. The U.K. and the United States will be acting as the collectors of a tax that hurts one of their key industries​—​and they won’t get a penny for their pains.

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