The British Labour party has stumbled into the feculant political mire that is the country’s Brexit negotiations. Following suggestions that Britain might pay the EU to permit the City continued access to the EU single market and exempt bankers from EU migration curbs, shadow chancellor John McDonnell said today the Conservative government is trying to cut special deals for the financial services sector and seeking a “bankers’ brexit.”
“They’ll cut a deal for finance, but ignore our small businesses and manufacturers,” McDonnell claimed.
Nissan excepted, there might be some truth in this claim. But there are also good reasons for the government to pay special attention to striking a deal that suits the financial services sector.
1. Financial services is a key source of British exports. Small businesses and manufacturers not so much
The Financial services industry accounted for around 22% of Britain’s exports in 2015. The manufacturing industry accounted for around 1%. The financial services industry generates a huge (and much needed trade surplus for the UK). The small manufacturing sector generates almost no trade surplus at all….
2. A huge proportion of EU financial services activity currently takes place in London
As the chart below shows, a very large proportion of the wholesale banking activities in the European Union happen in London under the current passporting regime. If these passporting rights disappear and if – in the worst case scenario – no alternative arrangements are made and we revert to World Trade Organization rules (which don’t even cover banking and services), Oliver Wyman predicts that 50,000 to 70,000 London banking jobs will move overseas.
3. Proportionately, the poor stand to lose as much as the rich from a messy Brexit
Lastly, and most significantly, a study by the London School of Economics found that if a messy Brexit leads to an increase in trade barriers, the rich and poor will be hit almost equally in percentage terms as the price of basic goods rises.
Following a hard Brexit in which the UK reverts to World Trade Organization rules, the LSE predicts that prices would rise most for transport (4% to 7.5%), alcohol (4% to 7%), food (3% to 5%) and clothing (2% to 4%), as a result of tariff impacts alone. Because poorer groups spend a large proportion of their income on these items, they stand to suffer along with the rich.
Significantly, the LSE’s study doesn’t take into consideration the impact of a falling pound (sterling isn’t even mentioned in the report). As the pound falls, it can be expected to amplify the changes below – wiping an additional 5% to 10% off consumers’ incomes at all levels. And if Britain’s financial services exports are decimated, the pound will only fall further.
Suddenly protecting ‘bankers’ doesn’t look so partisan after all.