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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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As if all that were not enough, the intervention of Europe’s reliably authoritarian parliament means that new caps on bonuses have recently been approved. The bonuses of bankers classified as “material risk-takers” (including anyone who earns over $660,000 a year) will be capped at one times salary, or two times with the approval of a supermajority of shareholders​—​an arbitrary diktat at odds with more subtly designed measures preferred by the U.K. The possibility that similar limits may be imposed on asset management firms (a group that received no bailouts from the European taxpayer) gave the lie to the never convincing argument that these changes are about risk control. Rather, like the Swiss referendum in March that also imposed restrictions on executive pay, they are both an exercise in collective punishment and a manifestation of the neo-egalitarianism growing on either side of the Atlantic. There is something else at play. Members of the European parliament see themselves as the continent’s elite (check out the deeply discounted tax rates that most of them pay), the vanguard of a new Europe. Earning so much less than those arrogant, unnecessary bankers maddens them: The chance to put a brake on financial sector pay is difficult to resist. 

 

That’s more bad news for the City. The cap will​—​surprise​—​hit London hardest (that’s where most of the EU’s “material risk-takers” are to be found) and will make it a less hospitable place for the type of international business that could just as easily be located in New York, Hong Kong, or Zurich. Not only that, mandating less flexible wage structures will discourage hiring, the last thing that London needs now. And if these changes do end up crimping total compensation, that will be a blow to Britain’s cash-strapped treasury, long accustomed to raking in a good bit of that income, among other large “contributions” (to use that fashionable word) from the financial sector.

And so British prime minister David Cameron finds himself in another European swamp. All he can do about the FTT’s extraterritorial reach is protest (the United States is also objecting) and maintain a fingers-crossed legal challenge. He could (very) arguably have vetoed the bonus cap under the Luxembourg compromise, a severely eroded understanding dating to 1966, which might still permit a veto in defense of a vital national interest even where no veto power formally exists. That would have been a long shot, but Cameron didn’t even attempt it. Going to the mat “against Brussels” in defense of bankers’ bonuses would have played no better in euroskeptic Britain than anywhere else.

But one important, and generally Conservative, section of the electorate might have supported him. Traditionally nervous about political uncertainty and understandably wary about being cut off from European markets, the City’s grandees have long endorsed​—​if on occasion through gritted teeth​—​British membership in the EU. That’s not going to change quite yet, but some of them must be beginning to see that staying in an EU fixed on its current course could well be riskier than taking their chances outside. Whatever he is now claiming, Cameron is not going to be able to nudge the EU in a different direction, and he does not have the imagination to see that Britain would be better off out. Sooner or later, the City will have to confront the fact that if the EU is the problem, Cameron is not the answer.

A sign that it may be starting to was a high-profile event hosted last month by London hedge funder Crispin Odey and designed to introduce Nigel Farage, the leader of the uncompromisingly Euroskeptic U.K. Independence party, and a former City trader himself, to financial types. A long-term and generous, if sometimes critical, member of the Conservative party, Odey has not switched his support to UKIP, but this looked a lot like a warning shot.

Cameron would do well to pay attention. The 3 percent scored by UKIP (which up until now has principally drawn its support from the right) in the 2010 general election cost his Tories their chance of an absolute majority. UKIP is now polling in the mid-teens or higher, a feat it has managed on a shoestring. If UKIP can begin to attract City money, and the credibility that can come with it .  .  .

It’s not easy being David Cameron.

Andrew Stuttaford works in the international financial markets and writes frequently about cultural and political issues.

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