It is the folly of too many to mistake the economic success of London for the success of a kingdom.
Yes, I’ve twisted Jonathan Swift’s words somewhat.
Britain has been happy to lean on the City for its economic performance. But the British vote to leave the EU means the country has some important decisions to make.
Banks are said to be making ‘contingency plans’. They’re mostly worried about what is known as ‘passporting’ – the ability to offer their services across the EU.
Single market access won’t be off the table at the Brexit negotiations, but you can be sure it will come at a high price.
It’s a catch-22.
Either Britain accepts freedom of movement and lets the City function as it did before. Or it imposes a migration cap and severely disrupts the City’s current mechanism.
If there’s no single market access from London, finance companies might take their business elsewhere. They’re not going to stay for the weather.
Which means something’s got to give.
While everyone will be looking at the Brexit negotiations, banks might try to extract favourable deals from the UK government for their continued loyalty to the City.
Given the current set-up of the UK economy, I fear the government may be tempted to give them what they want.
There’s blood in the water and the sharks are circling.
Paris and Frankfurt were already eyeing London after the Brexit vote and now Luxembourg will be vying for City jobs with them.
Losing a chunk of the City’s current business would be a blow to the UK economy. I just hope this won’t lead to any rash and irresponsible actions from the new government.
Theresa May should not make the same mistake the Cameron administration made. Britain can’t afford to see a repeat of what happened when HSBC threatened to move its headquarters out of London last February.
Policy makers responded to the blackmail by offering to relax measures protecting taxpayers and consumers. Britain gained nothing from that deal and ended up even more at the mercy of banks.
Surely I wasn’t the only one who experienced a sense of déjà vu.
Letting banks become bigger with regulations becoming looser is exactly what gave Britain an Achilles heel in the run-up to the global financial crisis.
And now, less than a decade later, that heel is exposed again.
Leaning on the City
“As of late, the United Kingdom has punched far above its weight by (re)creating London as a service centre and financial capital of most of Europe,” Tyler Cowen writes in Marginal Revolution.
“The success of London really does help pay the bills elsewhere.”
As the financial service sector is considering its options, Britain should rethink if its economy is best served leaning on just one sector.
This is something that’s easier said than done.
Britain’s reliance on the City has long masked the country’s weak economic growth outside the capital.
It is why politicians have been more concerned about bankers’ bonuses than creating jobs for young people.
Now that Britain’s economic future is uncertain, banks and companies could threaten to leave again. The government, in turn, might be tempted to persuade them to stay by promising to loosen its grip even further.
That would be the wrong move.
The UK economy is already excessively exposed to financial shocks. Legislating the financial sector less only puts the country more at risk.
Besides, it wouldn’t take care of the actual problem. Britain needs other sectors to perform better so that it can weather storms in finance.
A diversified portfolio
Britain understandably wants to retain the City’s clientele. But giving in to the wishes of finance companies would destabilise the UK economy more than if these corporations take their business elsewhere.
Instead of panicking over the possible departure of banks, Britain should finally realise its economy needs restructuring.
Britain’s unhealthy reliance on the City is one problem. Another is the country’s productivity gap.
UK productivity levels are 20 per cent below the average of its G7 partners. The problem is direst in low-wage sectors and poses a serious risk to British living standards in the long run.
Right now London is more than twice as rich as Britain’s next richest region. If Britain does see business moving out of its capital, how will it offset this loss?
Britain’s City-focused economy doesn’t make sense anyway. There’s a reason most investors recommend a diversified portfolio.
You could put all your money in one sector and it may well pay off as long as that sector goes up. But if it crashes you have to sell the house.
Rather than pouring more money into its finance stock, Britain needs to decrease its exposure to that sector and invest in other industries.
Let’s hope the May administration understands that point better than its predecessor.