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Brexit is a big economic and
political mess for British imperialism. It also undermines some of the previous
plans to boost the City of London’s operations, especially in deals with China.
The City will not collapse. But it will lose business as other European Union
countries are already aiming to divide up the soon to-be-deceased member’s estate while the body is still stumbling
around.
A large proportion of City financial dealing is with the rest of
Europe, although London has been pre-eminent because of its worldwide links –
including with offshore financial centres, many of which sing God Save the
Queen as their national anthem. These European ties formerly helped underpin
the City’s growth, but have since been a factor in decline, even before
the Brexit vote in June 2016. So problems for British-based finance due to
Brexit now add to those resulting from a drop in European economic strength.
Shift in economic power from Europe to Asia
IMF data show that the European Union’s share of world GDP fell from 25
per cent to 22 per cent from 2011 to 2016, a sharp fall in just five years.
This was offset by a higher share for the US, and especially so for China,
based on their faster growth. Weak economies, massive debts and bad loans also
undermined Europe’s banks and led to a cut in their dealing operations – most
of which are in London.
A good example of the impact is seen from the global foreign exchange
market, which reflects the cross-border deals in the currencies used for
investment in bonds, equities and real estate, and the buying and selling of
goods and services. From 2013 to 2016, the size of the foreign exchange market
had declined for the first time in more than a decade, based on low world
growth and problems in banks. The UK’s share of the foreign exchange market
fell from 41 per cent in 2013 to 37 per cent in 2016. Although the City still
remained by far the world’s biggest FX dealing centre, and the US in second
place had a much lower 19 per cent, the US share rose a bit, helped by the
better position of its banks.
By contrast, Asian financial
trading centres were the clear winners. Singapore’s share of trading rose from
5.7 per cent to 7.9 per cent from 2013 to 2016. Taken together, China’s and
Hong Kong’s rose from 4.8 per cent to 7.8 per cent. Though still a small share,
this is an astonishing result for China, one backed by the near-doubling in the
use of the renminbi in global FX dealing to 4 per cent. This made the renminbi
the eighth largest trading currency in 2016, just behind the far more
established Canadian dollar and the Swiss franc. Meanwhile, the euro, now the
currency of nineteen countries, saw its share slip to the lowest since its
inception.
UK politicians: dumber than you might think
The City had a falling share of a falling market even before Brexit,[1]
but now faces the prospect of Brexit. A key problem it faces is how far will
UK-based financial companies be able to conduct business with the European
Union once the UK leaves. Implausible as it may seem, despite UK governments
having promoted the financial sector for more than three decades, there is no
sign that the current UK government has given this much attention.
Under the Labour governments from 1997-2010, there was also a clear
pro-finance policy. This was seen as one of the few competitive UK
‘industries’, one that also provided lots of tax revenues to fund public
spending, from income taxes on the high paying jobs and the various duties
imposed. Finance supported millions of jobs related to trading in foreign
exchange and all kinds of financial securities and insurance services. It also
provided international revenues that covered nearly half of the UK’s
record-breaking trade deficit in goods that in 2016 amounted to 7% of GDP. Even
non-financial UK business services, from accountancy to information technology,
are very closely tied into the financial sector, and offset another chunk of
the trade deficit. Basically, without the City’s financial business, UK living
standards would be lower.
In more recent years, the UK political class has had trouble
maintaining support from a disgruntled electorate. Voters worried about
pressure on living standards focused on immigration from the EU, so this has
led the two main parties, Conservative and Labour, to accept the referendum
vote and reject EU membership. They obviously want free access for all UK
business to the EU market, but this is not possible under EU treaties for a
non-member, unless, at a minimum, that country also accepts the free movement
of labour, ie no restrictions on migration from the EU. UK politicians can
grandstand as much as they like, declaring what they want from a deal, but the
end result will come from a negotiation
With the UK a member of the EU, City-based financial firms can freely
do business across the rest of the EU single market, due to so-called
‘passporting’. This means that banks or other financial institutions in the UK
can sell their services in all other EU countries, as these are considered part
of the same market. Without the ‘passport’, or something very similar when the
UK leaves the EU, that ability will either cease or become much more
restricted.
More than 5,000 UK-based firms rely on these passport agreements, and
some 8,000 European companies also need them to offer services in the UK. So
there may be some compromise. But it is in the interests of the remaining EU-27
countries not to make this a favourable one for the UK, or else the
longstanding European Union project would risk being unravelled as others
considered the exit too.
How to get a piece of the financial action?
Whatever the wider economic and political issues for the UK and the
rest of Europe, the UK’s financial business is an area coveted by some of the
major EU players. Already, many UK and international banks and other financial
institutions have said that they plan to relocate some business into the EU-27.
So far it is only on a small scale, and as a precaution so as not to be left
high and dry if there are barriers to their UK-based operations doing business in
the EU. If it becomes clear that full access to EU financial markets will be
difficult, more will follow.
The likely outcome is a piecemeal lopping off of some parts of City
business into several other EU locations rather than into one new rival centre.
Frankfurt, home of the European Central Bank, is one of the favoured
alternatives, but there is also Dublin, Paris, Amsterdam, Luxembourg and
others, depending upon where a financial company might already have some
existing business.
Ironically, Frankfurt, the main financial centre for Europe’s largest
economy, Germany, is a rather provincial town, not particularly attractive to
financiers, and is based in country whose politicians have shown little
orientation to finance. They have instead been able to benefit from the prowess
of German engineering business and have had other ways of promoting German
capitalists on their minds.
I do not think that the Brexit effect by itself is likely to add up to
a dramatic reduction in the City’s operations. London has built up a series of
reinforcing advantages that are difficult to replicate elsewhere, as shown by
the several directions in which alternatives are sought. For now, at least,
London has very many more international connections than rival financial
centres, plus a broad range of financial services and personnel skills that
other centres lack. English is the main business language and English
commercial law is the foundation for many financial contracts, for example
interest rate swaps, the largest traded financial derivatives contract.
The commercial law issue is more important than one might think.
Lawyers based in other countries, or sent from the UK, might be trained in the
relevant aspects of English commercial law, but legal judgements are based on
court decisions. Being part of the relevant legal network is important. It
would also take a long time before contracts are changed into another legal
system, and that system may not have the specific aspects necessary that have
been developed over decades within the UK legal set up.
Furthermore, most other possible centres have also had governments that
have been advocates of a financial transactions tax. This will not help them
make a convincing case for expanding their role as a financial business centre.
Nevertheless, the incompetence of the present British government could make
them question favouring London.
What next for the City?
Despite the impact of Brexit and the recent decline in the growth of
financial dealing, it will not be easy to dislodge the City of London from its
pre-eminent position. London will almost certainly lose business to other
financial centres, but it is costly for banks to move even some operations from
London to the rest of Europe, estimated at anything from $30-$50bn.[2]
As these decisions play themselves out, British financial elites are
planning to secure for the London Stock Exchange the flotation of Saudi
Aramco’s shares. This state-owned Saudi Arabian oil company is the world’s
largest and the deal would produce big revenues for the exchange and banks
handling it. Around five percent of the company might be on sale, but even this
is expected to raise some $100bn.
Only a major stock exchange could handle such a large deal. But
although New York is the biggest, and Trump’s pro-Saudi politics are
supportive, US financial regulations could be a barrier since the Saudis do not
like giving much information. London is more lax on that score and has also
changed its rules to help its bid for the deal. Furthermore, there could be US
legal claims against the Saudis regarding the 9/11 attacks that would impact
Saudi Aramco, and this kind of trouble looks more likely to occur in a US court
than any such thing in British courts.
One deal, no matter how big, would not point to sunlit uplands ahead for
British finance. But the outcome for Saudi Aramco’s deal will be an interesting
signal of how far a Brexit-hobbled City can have a future outside the European
club. It would also indicate how far Britain’s status as a key player in world
politics has been damaged, since the Saudi decision will certainly have that in
mind.
Tony Norfield, 1 August 2017
Notes:
A fuller discussion of City finances in relation to British imperialism, plus Brexit and Trump is available in
the paperback edition of my book, The City, available from these sources.
For a brief article on this blog covering the background to the City’s business relating
to British imperialism, see here.
[1] The Bank for International Settlements surveys from which this
information is taken are conducted in April of the relevant years, so in 2016
it was before the June Brexit vote. Similarly, the UK’s share of the trade in
financial derivatives fell back between 2013 and 2016, based largely upon a
drop in the volume of dealing in euros.
[2] See this Bloomberg story:
https://www.bloomberg.com/news/articles/2017-07-31/banks-may-be-hit-with-50-billion-capital-needs-after-brexit
