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.