The post-Brexit battle for Europe’s capital markets business has already started, even before official exit negotiations have been triggered. Bloomberg News reported Thursday that London’s biggest investment banks seem resigned to losing the $570 billion market for clearing trades of euro-denominated derivatives. Some London-based banks want Theresa May’s government to strike an interim deal to protect financial services now. It’s not clear how that would work, but one thing is clear: Every time the government repeats its desire to curb immigration, it sends a signal to Europe that everything else is up for grabs — including London’s preeminence in financial services.
Britain’s spurned partners are already warning loudly that it can’t have single-market membership without the free movement of people. The government seems ready to gamble that the City is sufficiently important to the bloc to guarantee special treatment. And while Chancellor of the Exchequer Philip Hammond has promised to protect the City, he’s also a cheerleader for the government line that curbing immigration remains the priority. The you-need-us-more-than-we-need-you stance could backfire badly.
Figures released by the U.K.’s Financial Conduct Authority this week show almost 5,500 firms in the U.K. use EU licenses to sell services into the bloc; but more than 8,000 firms are trafficking the other way — that is, based in other EU states but doing business in the U.K. under the so-called passporting regime that authorizes financial firms in one of its member states to do business across the bloc. The U.K.’s passport status after it leaves the EU is uncertain, and the numbers are likely to embolden those who believe the EU has enough skin in the game to want to keep London as the financial capital of Europe.
But it would be dangerous to underestimate the appetite of Paris, Dublin, Luxembourg, Frankfurt and other financial centers for stealing business from London. The U.K. accounts for 78 percent of the capital markets activity in the EU. Given the size of the prize on offer in financial services — the City contributes about 45 billion pounds ($59 billion) to U.K. national income and employs more than 400,000 workers — it’s hard to imagine competing countries won’t play hardball.
“This issue needs to be right at the top of the in-trays of the Chancellor, the Governor of the Bank of England, and the U.K.’s lead negotiators,” said Andrew Tyrie, a Conservative member of parliament who heads the influential Treasury Select Committee. It’s not too early to defend the City’s interests now. Despite Prime Minister Theresa May’s assertion that there won’t be a “running commentary,” pre-negotiations are already underway in very public forums even before Article 50 has been triggered.
The Czech Republic’s top Brexit negotiator, State Secretary for EU Affairs Tomas Prouza, warned this week that there’s “exactly zero chance of success if the U.K. wants to create first- and second-class citizens in Europe or if it tries to separate the four basic freedoms of movement” of goods, services, capital and labor. The Visegrad group of Poland, Hungary, the Czech Republic and Slovakia is likely to veto any deal that restricts their citizens’ ability to live and work in Britain — a reminder that any of the 27 EU members can veto whatever agreement is cobbled together.
There are some prominent voices in Europe acknowledging the value of maintaining EU access to British capital and financial expertise. Clemens Fuest, president of Germany’s influential Ifo economic institute, told Bloomberg Television that the entire region would suffer in a so-called hard Brexit that severed London’s financial access. That realization may encourage enlightened self-interest among EU leaders to reach a deal on passporting that serves both sides.
Regardless of how the wrangling pans out, Britain’s Conservative administration risks making things worse when, pandering to the right wing of its own party and the xenophobic elements of the electorate, it succumbs to grandstanding about its commitment to curbing immigration. The City is too valuable a bargaining chip to be sacrificed before talks have even started.
Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics