In, Out or Shake it all About? Cameron’s EU Dance Creates Uncertainty for the City of London

EU without UK

The UK’s attitude to Europe is best summed up by an apocryphal 1930s newspaper headline “Fog in Channel – Continent Isolated”. But unfortunately in today’s global economy the UK cannot hide behind sea mists. Despite the travails of the last 5 years London remains, with New York, the leading financial centre in the world. Financial services contribute 9.6% of the UK’s GDP in 2011. This compares to 8.4% in the USA, and less than 5% in Japan, Germany and France.

The UK built its economic dominance in the 17th to 19th century upon free-wheeling capitalism, strong banks, an assertive, politically strong middle-class, an independent, relatively incorrupt legal system and free trade aided and abetted by the odd gun-boat, a little light exploitation and an imperial war or two.

Well now the empire has gone, the banks are much diminished, and the gun-boats are now few and far between, but free trade in financial services remains key to the City of London’s continued fortunes, particularly in the (re)insurance sector.

The Quandary of European Union

But the UK is caught in a quandary. The European Union promises (and has to a large extent delivered) free trade in financial services across Europe and is a heavyweight in global trade negotiation. But the EU is not what most of the UK’s population thought they signed up for.

In the 1970s when the UK joined the European Economic Community, as it then was, it was billed as a free-trade area, but it has since then become a political and economic union. Valéry Giscard d’Estaing’s rejected draft European Constitution talked of Europe’s peoples demanding ever closer union—not in the UK they weren’t and still aren’t. Politically the EU remains unpopular in the UK, latest opinion polls show a majority in favour of quitting the EU, which is seen by many as anti-democratic, corrupt and self-serving.

Calls for a Divorce

Demands for a referendum on an exit, or at least a renegotiation of the UK’s terms, are growing. The Conservative Party under Prime Minister David Cameron is caught between the Eurosceptic UK Independence Party on its right and its coalition partners, the Europhile Liberal Democrats, on the left.

On 23rd January, David Cameron finally delivered his much delayed speech on the ruling Conservative party’s position on the EU and a referendum.  Originally promised for the Conservative party conference in October, the speech was promised again for December and then again for mid January – delayed this time by the Algerian hostage crisis rather than problems finding a form of words that wasn’t offensive to all wings of the party and the UK electorate, UK business and our European partners. The delay led to (per David Cameron) “tantric” levels of excitement and anticipation amongst Conservative back-benchers.  Putting aside for as moment the unpleasant image that this conjures, it begs the question did he pull it off successfully?

In an early abbreviated version of this blog published last week I predicted (along with many much more serious political commentators) that he would be unable to resist demands for a referendum.  I also rightly  thought that he would delay the referendum until after the next general election.  Why?  Two reasons: to put political pressure on the Labour Party and to allow him to renegotiate (assuming the ploy worked and the general election was won outright) without the constraints of keeping his Europhile collation partners on-board.  Cameron is highly influenced by business – he doesn’t want to quit but does want his negotiating hand to as strong as possible to repatriate powers back to national parliaments, protecting national interests (particularly the City of London’s global and European dominance) and maintaining and enhancing free trade within Europe and globally.

Domestically this ploy seems to be working, the conservatives are expected to surge in the opinion polls after the speech. But in European terms, it is a cunning plan with just one small flaw  – our European partners seem disinclined to negotiate.

Playing the Euro Game

But matters could easily come to a head far earlier.  The Eurozone problems may have been temporarily forgotten, but they have not gone away, still less been solved.  Cameron is hemmed in with little room for manoeuvre, dependent upon German support if not to be humiliated in votes in the Council of Ministers and the EU parliament,  losses that would fuel UK popular resentment against the EU.  Despite its controversial budget rebate the UK remains the EU’s third largest net contributor after Germany, roughly equal to France. But in the rest of Europe the UK  is seen as a poor European, always taking, never giving.  Some, like the French, have been much more successful playing the game, protecting their core industries, such as agriculture, with large European subsidies and so do not need to have a rebate to get contributions down to manageable (and politically acceptable) levels.  Of course financial services, banking especially, are seen as largely to blame for the current financial crisis, rather than the structural issues in the European economy.

So the position looks bleak, the UK is disliked in Europe and the financial services industry is seen as a problem and so ripe for more aggressive pan-European regulation and  taxation.  This could weaken the global competitive position of the UK’s dominant financial services sector and fuel further Europhobia with the UK electorate.  The politicians will need to show a hell of a lot more imagination and resolve than they have shown so far to solve this conundrum.  The UK’s European merry dance looks like it has many more twists and turns to come.

 

About David Simmons

David is a Managing Director in the Willis Re Analytics team in London. He focuses on Enterprise Risk Management, i…
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