With a list of powerful investment banks helping to bankroll the Remain campaign, and everyone from Mark Carney, the Bank of England governor, to Jamie Dimon, chief executive of JPMorgan, warning of the dire consequences of an exit, there can be few doubts about the City of London’s strong support for Britain’s continued EU membership.
Mr Dimon this year spoke of the “massive dislocation” the UK’s financial centre would experience should the country leave the 28-member bloc. Similar concerns about the consequences of Brexit are echoed across the indigenous financial community, although many of the UK’s largest banks and insurance companies remain circumspect about expressing them openly, perhaps fearful of offending customers.
No one could accuse the Square Mile of mindlessly cheerleading for Brussels. The City has always been ambivalent about the EU: on the one hand excited by the possibilities of the single market in financial services, on the other fearful of Brussels-based regulation acting as a sort of Trojan horse for other countries intent in snatching its business.
Confronted by the possibility of Brexit, however, the financiers have come off the fence. In a poll conducted last year by the Centre for the Study of Financial Innovation, about 73 per cent said that they would either definitely or probably vote to stay in, while 12 per cent wanted to get out.
Politically, a vote to keep the City in champagne and yachts may seem an awkward sell to the electorate. When it comes to the country’s still preponderant financial sector, many taxpayers, mindful of the crisis, might welcome the shrinkage relative to the rest of the economy that Brexit could bring.
But it is too easy to overlook the City’s importance to Britain. The sector employs 2.2m across the UK and last year paid £66bn in taxes. It remains one of the few areas in which the country is an undisputed global leader. The UK runs a substantial trade surplus in financial services, including with the EU.
Roughly a quarter of its financial sector business involves the single market, equivalent to 2 per cent of gross domestic product. And balanced on top of this activity is an array of professional services. Nothing stops Britain within the EU from regulating the sector in ways that protect the taxpayer and advance the interests of the wider economy.
But dislocate that machinery by pulling the country precipitately out of the bloc, and you would potentially deduct a big slice of that activity. The prosperity of the whole could be materially reduced.
The Leave campaign argue the risk of shrinkage and decline is overstated, claiming we could continue to trade equably with the EU whether we were in or out. But without access to the single market and the “passporting privileges” that go with it, the City would be at a disadvantage. It would no longer be possible for non-EU firms to site their European operations in London and trade unhindered across the bloc.
They would be obliged to open offices in Paris or Frankfurt and would over time come under regulatory pressure to move their senior managers there. The process would not necessarily be swift as London’s advantages would remain significant.
But eventually the UK offices of non-EU firms would shrink. Those remaining would face growing restrictions on their business. Non-EU banks would lose the easy access they enjoy to the eurozone’s payments system and the European Central Bank might renew its campaign to pull all euro-denominated clearing into the eurozone. These could only diminish the volume of euro-based business done by City firms.
There is no simple way for a post-Brexit UK to retain single market access unless it accepted the obligations of EU legislation without having the power to influence it. Outside, the UK would be obliged to seek a free trade deal that could take years to negotiate, or simply to trade under World Trade Organisation rules. In either scenario, non-trade barriers would inevitably rise.
No easy path lies ahead for the City, even inside the EU. David Cameron’s “safeguards” against onerous or unfair eurozone regulation are untested. The antipathy of some member states to finance could lead to regulations being interpreted in ways that disproportionately hurt London. The way to deal with this threat is not to head for the exit. It is for Britain to stay at the European table, build alliances and defend its valuable turf.