The hidden fight for the City could drive Leave voters towards Farage
One of the many contradictions in Boris Johnson’s election prospectus is the plan to sign a free trade agreement with the EU by December 2020 and at the same time break free, by his own definition, of EU control.
It’s a contradiction that has, among other things, spurred Nigel Farage to threaten to field 600 candidates in the general election. Farage rightly says that the only way Johnson can sign a deal within a year is if he maintains the current alignment with the EU and all its rules. And if this is his plan, any chance of merrily signing free trade deals with other countries is sunk.
“It doesn’t get Brexit done,” he told his followers last week. “It is not Brexit; it’s a sellout.”
Of course Farage has in mind his old mucker and chlorinated-chicken pedlar Donald Trump when he thinks of trade deals. Trump can’t make headway with the EU on trade, and while Britain stays aligned with Brussels, Washington will find it just as hard to strike deals with London. That’s the message to Tory Leave voters, and to a large extent it is true.
The arguments around alignment are well-rehearsed and focus on EU demands that Britain observe a raft of rules, on areas from food standards (hence the ban on chlorinated chicken) and employment regulations to fishing rights.
One area that is rarely mentioned concerns the City of London, which is strange when the EU is especially concerned at the loss of London’s banking, insurance and asset management industries, clustered in the Square Mile and Canary Wharf.
As an international centre of finance, London ranks above New York and Tokyo in terms of foreign banks located in one place. These banks bring with them a deep well of funds and the kind of “flexible financial solutions” that London’s accountants and corporate lawyers are only too keen to deploy.
Even now, most large companies based in the EU come to London to woo international investors and encourage them to plough funds into their businesses. Italian banks, German manufacturers and French pharmaceutical companies unhesitatingly bypass their own financial centres when the time comes to raise some cash.
Likewise, indebted EU governments look to London’s debt markets as a source of funds.
Once London lies outside the EU, tolerance of it as a money laundering centre, ever willing to cleanse the ill-gotten gains of Russian oligarchs, is expected to wane. Its new status as a tax haven may also become a threat.
Brussels has a two-pronged strategy. The first part is to build up its own internal resources, bringing together its banking sector under one umbrella rulebook.
Europe might not sing with one voice. Yet that is likely to make for even slower progress on UK trade talks than otherwise
The Germans have proved to be one of the main barriers to any sharing across Europe’s financial sector. But last week saw the first moves by Berlin to create a full eurozone banking union. Finance minister Olaf Scholz signalled that he would drop opposition to a common scheme to protect savers’ deposits, telling the Financial Times that Europe’s global role would be undermined if it failed to complete the integration of the eurozone’s financial sector. “The need to deepen and complete European banking union is undeniable,” he said. “After years of discussion, the deadlock has to end.”
The second aim is to keep London as close as possible to the EU’s evolving rulebook. In this way it would be prevented from branching out to become the western equivalent of Singapore, which has become wildly popular with bankers and investors after adopting a simple, laissez-faire set of regulations.
For much of this year, UK banks have reported privately that their attempts to gain licences to operate in the EU have met increasingly tough responses as officials in Brussels panic about maintaining London’s compliance.
This not only means more staff moving from London to Paris and Frankfurt – it also signals to London’s largely foreign-dominated banking sector that much of their European business will need to be conducted inside the EU’s borders unless the UK agrees to full compliance with Brussels.
Of course, European integration is likely to move slowly, especially given the animosities and resentments that still exist on the continent – between the north and the south, and also between the east and the west.
So Europe might not sing with one voice. Yet that is likely to make for even slower progress on UK trade talks than otherwise, given that most EU countries agree they want to keep London close.
Conservative voters may wake up to this reality during the campaign. It would be fanciful to believe that Tory Remainers will see the contradictions as a reason to revoke article 50 or accept a second referendum. Tory Leavers, though, might fall in behind Farage.