The government fails to stem the Brexit bleeding
It’s decision o’clock in the City.
Most banks have resolved to move at least part of their operations away from London amid continued uncertainty about Britain’s future arrangements with the EU.
The announcements of banks moving operations to other EU member states have been following each other in rapid succession in recent weeks.
Barclays has chosen Dublin, Citigroup moves to Frankfurt, HSBC goes for Paris, and now MUFG – Japan’s biggest bank – has reportedly decided on Amsterdam.
Of course to some extent it was inevitable that jobs would move from Britain to other EU member states after Brexit.
From the start Brussels appeared eager to move euro clearing houses to the continent, which would take thousands of jobs with them.
But even so, the British government has done little to stem the bleeding.
Between the government’s internal quarrels and Jeremy Corbyn’s government-in-waiting, banks could decide to relocate an even bigger part of their operations outside Britain.
In the end, it may not be Brexit that harms the City the most, but the government’s handling of it.
Why are banks announcing these relocations all at the same time?
Well, that’s because the Bank of England asked financial firms to submit their contingency plans for Brexit by 14 July.
Incredibly, government ministers were still quarrelling about the kind of Brexit Britain should pursue when this deadline passed.
Given that the government is in disarray, it’s reasonable to assume banks have started implementing their plan for the worst-case scenario.
If it isn’t a political own goal, at the very least it’s a missed opportunity to reassure banks and convince them to postpone putting their contingency plans in motion.
After weeks of being at each other’s throats, government ministers seem to have calmed down a bit. But they are still openly contradicting each other.
One day Chancellor Philip Hammond claims his colleagues have come to see the need for a transitional period after Brexit. The next, Trade Minister Liam Fox declares that the freedom of movement of people will end in March 2019.
It’s unlikely that both of these claims can coexist for the simple reason that Brussels is unlikely to agree to this.
If Britain doesn’t accept the free movement of people, then the free movement of goods, services and capital is off the table as well. Since it’s a package deal, you’ll either get the status quo or you get barriers.
Either way, we’re no step closer to knowing what will happen after March 2019, especially now that Prime Minister Theresa May is biting her tongue.
How different it could have been if the government had immediately realised the need for a transitional phase in which freedom of movement would be guaranteed.
Banks could have delayed these decisions to a point where it was much clearer what direction the negotiations were going.
For example, if the City were to keep its passporting rights (the ability to offer services in the European market), it could keep a lot of jobs in London.
Now, completely in the dark about future arrangements with the rest of Europe, banks may see themselves forced to relocate more jobs than they were initially planning to.
Corbyn is waiting
From the day after the EU referendum, some jobs were already destined to leave the City. But that doesn’t mean Britain shouldn’t fight to keep the rest of the City intact.
It’s true that the British economy has an unhealthy reliance on its financial service sector and, to be sure, that is something that urgently needs to be resolved.
But, as Therese Raphael aptly writes in Bloomberg, “that should happen by attracting capital to other centres and encouraging innovation and investment – not by handicapping one of the country’s most globally successful industries.”
That’s actually what stands to happen now that the financial services sector has little to go on when it comes to Britain’s future relationship with the EU.
Not only that, the government’s popularity has dropped even more since the election, meaning that Jeremy Corbyn is ready to step in if Theresa May slips up.
Labour advocates a financial transaction tax with which it looks to raise £4.7bn a year. The party would expand stamp duty on shares and put a tax on derivatives, bonds and market makers to help fund public services.
Making the sector deemed responsible for the financial crisis pay a little more for the common good is exactly the kind of narrative that will strike a chord with voters. But it could also make banks move even more jobs out of the City.
We can still only speculate about the kind of deal Britain will strike with the EU, what the transitional period will look like, and how the UK’s financial sector will be affected by all this.
Banks may not want to wait to find out.