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GERMAN EDITOR’S TAKE: Cameron’s bulldog policy is a disaster for the City

FHamannEditor

When David Cameron said “No” to reforming the EU, he said it was in the interest of the City. He was wrong.

In England, Europeans are the favourite scapegoats for any negative developments. Therefore, when the British economy goes downhill, European crisis management will be to blame: not bad economic policy at home.

The reality is that some of Britain’s economic data is worse than that of most so-called PIIGS. In 2010, Eurostat figures indicate that British government debt was 10.3% of GDP, versus 9.8% in Portugal, 9.3% in Spain, and a mere 4.6% in Italy. Despite attending Eton and Oxford, the UK’s finest schools, Cameron seems oblivious to this.

Equally, the UK’s inflation rate of 5% is among the highest in the EU. Mervyn King is printing money to support the country’s government debt. Regardless of this flood of money, the country is fighting recession.

The British economy is not world class in many areas. It has a strong pharmaceutical industry (GlaxoSmithKline, AstraZeneca) and it has the engine manufacturer Rolls Royce. Financial services contributes a massive 10% of GDP, making it clear why Cameron wishes to champion it.

Nevertheless, Cameron was wrong to favour for the City on three counts:

1. Banking margins are falling

As Basel III obliges banks to hold more capital, many business areas that were profitable in the past won’t be profitable in the future. The high risk high margin businesses in which theUKspecializes are disappearing. Compensation will fall permanently. Big job cuts have already started.

2. Emerging market countries are doing their banking themselves

The City has good contacts with the emerging economies of Asia, South America and Africa. For decades, these were a strategic advantage for theUK’s financial services industry. The City also benefited from an inflow of talent from these countries.

Today, however, emerging economies are developing financial centres of their own.Singapore, Hong Kong,Shanghai and Sao Paolo are emerging as rivals. Today, Hong Kong was crowned the world’s most developed financial market.

3. London benefits from its position as the finance hub of Europe

Despite the shift in business to emerging markets,London has drawn considerable benefits from its position as Europe’s finance hub in recent years. US banks typically have sales teams on the ground in Germany, France and Italy, but trading and structuring takes place in the City. Even Deutsche Bank controls its investment banking arm from London, not Frankfurt.

This development has only been possible because England is part of the European Union.

If the British are out of the EU – either officially or unofficially, then this vitally important position of the City is existentially threatened. As soon as the British turn away from the EU, there is no reason for continental European countries to sacrifice their financial interests to London. They will try to bring them back home.

The City has been in gradual decline for a while. This will become more pronounced following Cameron’s bulldog behaviour last week.

Comments (18)

Comments
  1. I know you’re upset, Flo, but it’s really none of your business.

  2. @MichaelFowke: And why are there so many comments in English media about the Eurozone????? (And how many of these commentators know only a single Continental European language or have ever lived there???)

  3. You seem to be having a nervous breakdown, Flo. When we want German advice on running OUR country, I’m sure someone in the government will get in touch.

  4. Excessive punctuation: inverse proportion to strength of argument, Florian. Just so you know.

  5. Let’s not beat around the bush – the agreement is a complete joke.

    First, to the extent that there’s multiple components to the current debt situation, there’s only one – long term sentiment – that it goes any way to address, and that quite poorly. Sure, the target deficit is 0.5%, but penalties only kick in at 3%. This in a situation where the size of the debt itself is at the tipping point where sentiment any day of the week can tip over into making interest payments unsustainable. The only way to get out of that situation, save a real or nominal debt erasure, is to pay it down. Which actually takes a budget surplus. Maybe if the target limit was a 3% surplus and penalties kicked in at 0% someone would have cared.

    Not to mention, look at the jobs situation in Greece and Spain, getting ever worse. Why is Germany doing well these days? Because companies are switching to German suppliers! Locked into a currency union and prevented from deficit spending there’s no reason either country should somehow create jobs.

    The EU’s sulky and petulant reaction is reminiscent of the ratings agency tantrums, where someone who has just been rated a credit risk reacts with anger and tells the world that he will start his own ratings agency which will always rate him “billiontuple A”.

    Sure, the UK has its problems, but it’s not locked into a currency union which prevents it from printing its way out of the problem.

    How about putting a transaction tax on EU exchanges only? I guess volumes would move to the UK – oh wait. Given that the very basis for the EU was a common market policy and the alternative of expelling the UK seems highly unlikely it’s difficult to envision any EU financial policy that could somehow hurt the UK more than if the UK was forced to adopt it as well. Irrelevant budget deals aside, either the situation gets better and everything is forgotten, or it gets worse and continental Europe will have more urgent things to worry about.

  6. Maybe I shouldn’t mention the war?

  7. Florian – you are confusing England with France, the English do not blame Europe at all for our own self inflicted problems, we take responsibility and act. Have you actually ever spent time in England? If so have you not remarked how the British love Europe, why do they buy so many houses in Spain and France? Why are there so many well made German cars in London? What about Scandinavian design in the homes of our land? No Florian, I am afraid we are entirely able to admit that we cocked it up ourselves – we don’t blame Europe at all. I now politely pass you the mirror.

  8. Apey123, I think I love you. In a very platonic – and British – way. Florian, get over yourself, sweetie. Hissy fits never work well in print.

  9. “The reality is that some of Britain’s economic data is worse than that of most so-called PIIGS. In 2010, Eurostat figures indicate that British government debt was 10.3% of GDP, versus 9.8% in Portugal, 9.3% in Spain, and a mere 4.6% in Italy”

    Florian, the fact is those countries with a better debt to GDP that you mention are in the EZ which is their problem. We have two policy leavers which these countries don’t. Our own currency and our own Monetary policy. The City has existed for a lot longer than the EU has. It will most likely exist for a lot longer than the EU stays together as well.

    Fact is every policy coming from Brussels seeks to either transfer by decree institutions and business to the EZ or implements policy which will be to the detriment of the City. To say anything else is a complete lie.

  10. Maybe I shouldn’t mention the war?
    cityhag | 13 hours ago

    Idiotic & puerile response, apologies from another Brit.

    In response to your argument, you are mistaking economics for politics. Cameron is doing what the Europeans are doing, protecting and promoting self-interest. The statistics that you use are not definitive as well you know. They merely serve rhetoric.

    Moreover, none of your arguments are convincing, either in isolation or together. First, there are no winners in the developed world. All countries are fighting a recession. This is a global simultaneous recession. Read up on your Roubini. British economic policy has been subject to the ill winds of the credit crisis as much as the next country. There is no escaping a massive credit unwind and the deleveraging that accompanies it. Second, the argument about business moving away from the City is not new. And what is also not new, is that it has never happened. So lets not kid ourselves. London is a world city with a first class business centre and it is going to stay that way. Shrinking margins are not going to see companies suddenly relocate. The City predates the Eurozone by many decades. The eurodollar market grew up there in the 70s. The City is extremely versatile and dovetails with New York in a way that no other city in the world does. Where else do the Chinese, Arabs, Russians and whatever next wealthy group go for business? They go to London. People like doing business in London.

    I don’t see why Cameron would seek to jeopardise these advantages for a high risk strategy with an ill defined set of rules and an even less ruly set of members. The markets haven’t exactly reacted with a double thumbs up, have they? And that is people putting their money where their mouth is.

    And I say all this having lived and worked in Europe for the last 15 years!

  11. let’s get to the crux of the matter. the eurozone model doesn’t work, and it was always fundamentally floored. in order to stand a chance of working in the long-run it has to largely mimic the united states model, with a few tweaks. this means easy mobility of labour, and the ability to have vast fiscal transfers and a centralised federal government.

    if you look at unit wage costs for individualised countries with the european union the truth is laid bare for all to see. the german economy remains very efficient, with a clear improvement in productivity in both the medium and long-term, and hence unit wage costs that have remained broadly constant over the long-run. for many of the mediterranean economies however, unit wage costs have ballooned by as much as 30% or more during the past 10 to 15-years. in other words these economies have become highly uncompetitive. and are no longer able to devalue as a means to try and stay competitive, as they are part of the euro-block.

    this means that economic growth in these uncompetitive economies falters, tax revenues decline, deficits rise and it all gets ugly. and the system becomes very vulnerable to outside shocks. trade competitiveness for many of the same mediterranean economies in europe verses germany is also extremely poor, emphasizing the point.

    it’s a shame that the lessons of the breakdown of the exchange rate mechanism back in 1992 were not learnt and understood. the best economic model for europe would have been a free trade zone, including easy movement of labour combined with individual countries continuing to print their own currencies and having control over their own monetary policy. in the very long-run steps in the direction of closer union could have been taken if desired, and democratically approved.

    the current eurozone model is obviously leading to severe economic strains and hardships, and this unfortunately one way or another looks set to continue for a while to come. you cannot get a stark improvement in government finances without economic growth, and it is only wage and price deflation that is now allowing mediterranean economies to stop their unit wage costs from rising further. the unfortunate consequences of this is high and rising levels of unemployment.

    and the latest proposed changes to the european union won’t make much difference to this outlook.

  12. “In 2010, Eurostat figures indicate that British government debt was 10.3% of GDP, versus 9.8% in Portugal, 9.3% in Spain, and a mere 4.6% in Italy. Despite attending Eton and Oxford, the UK’s finest schools, Cameron seems oblivious to this.”

    I imagine Cameron knows the difference between public debt and the deficit. You clearly do not.

  13. Long LSE,Short Deutche Borse.
    All the big banks will close their offices in the Eurozone, except for some corporate finance representation, and service all their clients from London thus avoiding any transaction tax.
    Thank you, Sarkozy.

  14. 2and20 | 11 hours ago: Massive sense of humour failure alert. Perhaps concomitant on working in Europe for the last 15 years? The German editor can take a bit of ribbing. He’s going to have to get used to it, after all.

  15. cityhag | 11 hours ago: I think you are more suited to KFC than EFC. How’s my humour rating doing now?

  16. Humour rating: Poor, Gallantry rating: non-existent. Try to channel John Cleese, dear. The arguments were becoming rather…pompous.

  17. I think someone’s been on the Christmas sherry already… best you apply a ‘light’ email policy today and try to avoid the boss. Good chap, what what.

  18. Bob Diamond is right. I’m operating a ‘no jerk policy’ from now on. Over and out.

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