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A series of policy ideas to ensure that the UK’s financial services industry remains open for business in the global marketplace as the Eurozone presses for more integration and the nature of EU regulation changes.
10 December 2012
The financial services industry is vital to the UK economy. In the 2009/10 tax year, the UK’s financial services sector as a whole made a total tax contribution of £53.4 billion. Financial services also accounted for a £35.2 billion trade surplus in 2010.
In the 1990s and 2000s, the benefits to the UK of EU financial regulation rested on two premises. Firstly, while EU-wide financial rules have often increased compliance costs for firms in the UK, they generally allowed the Government to influence regulation, serving to reduce barriers to trade and creating opportunities for UK-based firms.
Secondly, London was (and is) seen as an entry point to the EU’s single market in financial services – a market which experienced significant growth in the 2000s as financial services developed rapidly. For example, between 2000 and 2008, France and Italy’s financial sectors grew substantially and in the process contributed additional GDP growth in both countries of around 0.5%.
However, in the wake of the 2008 financial crisis, the UK’s level of influence on new EU financial services rules has decreased. EU regulation is now less geared to financial services growth, since the focus has shifted towards curtailing financial market activity, irrespective of whether such activity is good or bad. There are at least 49 new EU regulatory proposals potentially affecting the City of London either in the pipeline or being discussed at the EU-level. While some are justified, very few of these are aimed at promoting financial services trade.
Not entirely without reason, the perception in many Continental capitals and in the European Parliament is that ‘Anglo-Saxon’ light-touch capitalism needs to be reined in. Therefore, whereas in the 1990s and early 200s, EU politicians and policymakers generally (but not always) felt constrained by imposed financial regulation on the UK, this has now ceased to be the case.
In addition, the Eurozone crisis has contributed to creating political incentives for euro countries to act and vote as a bloc, with the concerns of the UK and other non-euro countries at risk of being seen as peripheral at best. Furthermore, under new EU voting rules due to enter into force in November 2014, the Eurozone will have an in-built qualified majority in the Council of Ministers – meaning that it could ‘caucus’ and systematically outvote non-euro countries. Under such a scenario, the Eurozone could effectively start writing the rules for the EU at 28 – which would be reduced to a political extension of the euro area.
These political pressures are reinforced by the structural bias in the EU’s voting system against the UK’s financial industry. The UK accounts for 36% of the EU’s wholesale financial market and a 61% share of the EU’s net exports of international transactions in financial services. However, under the new EU voting rules, the UK will only possess 12% of the votes in the Council of Ministers and 10% of the votes in the European Parliament.
Equally important, over the next decade, growth opportunities for financial services within the EU are likely to be more limited than elsewhere in the world. In 2005, the five largest EU economies accounted for 27% of global banking assets. In 2050, that share will have decreased to 12.5%. Meanwhile, the BRIC countries’ share of these assets will have increased from 7.9% in 2005 to 32.9% in 2050. Hence, the benefits to London of acting as the gateway to Europe are becoming less convincing, and the need to keep the door open to emerging markets elsewhere across the globe far more important.
Shifts in share of global banking assets (2005 to 2050)Source: PricewaterhouseCoopers
The UK has two broad strategies it can pursue in response to its decreasing influence and the need to keep the City open for business in the global marketplace.
In the list of priorities in the on-going EU negotiations that are inevitable in the wake of the Eurozone crisis, safeguarding financial services should be at the very top. Financial services account for at least 10% of UK GDP. It is therefore clear where the UK should concentrate its political capital.
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[1] Financial Times, Tories push for new European Union deal, 5 December 2011.
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