by Philip Whyte
After years of mutual suspicion, Britain and its EU partners seemed in early 2009 to be converging in an area of policy where they had often been at odds – financial regulation. The Turner Review, Britain’s official report into the financial crisis, accepted that ‘light touch’ regulation had failed, and recognised that the UK would have to accept greater supervisory integration at EU level if the single market in financial services was to survive. Fast-forward two years, and it is hard not to be struck by a paradox. The UK has abandoned its ‘light touch’ regulatory regime and signed up to greater supervisory integration at EU level. Yet far from narrowing, the Channel looks as wide as ever. So what went wrong?
Part of the answer is to be found in continental Europe. Since the financial crisis, politicians in Germany and France have seen it as their task to bring Britain and the City of London to heel. France’s President Sarkozy has spoken of the “death of unregulated Anglo-Saxon finance”, while Chancellor Merkel has declared that Germany will no longer be dictated to by the City of London. The eurozone debt crisis has only reinforced continental suspicions of Britain and the City, because politicians in Berlin, Paris and elsewhere view both as a threat to the euro’s existence. They think that the City is home to ‘speculators’ who are bent on destroying the euro; and they believe that it marches to the tune of a eurosceptic government and a local media that is hostile to, and ignorant of, the EU.
Suspicions of the ‘Anglo-Saxon world’ explain at least some of the measures which have emerged from the EU’s machinery. The directive on alternative investment funds was a response to longstanding Franco-German concerns about the power exercised by hedge funds in London and New York. Likewise, more recent proposals to introduce a tax on financial transactions reflect an enduring ambition by some governments to curb ‘speculative activity’ in the world’s largest financial centres. Since the UK is disproportionately affected by such measures, it has unsurprisingly showed less enthusiasm for them than other EU member-states. Inevitably, this has made the UK looking like the country of old: that is, isolated and fighting to dilute EU initiatives targeting the financial sector.
From London’s perspective, all of this can seem a bit galling. The problem is not just that some EU measures have been the product of continental politicians playing to their domestic galleries, or that they affect Britain more than other EU countries. It is that some governments have tried to occupy the moral high ground while doing less than the UK in areas of greater importance. A case in point is the recapitalisation of banks – a crucial task since 2008, but one where a number of EU countries have (until very recently at least) been guilty of a combination of denial, foot-dragging and obfuscation. Seen from the UK, the reluctance of certain EU governments to tackle the weakness of their banking systems bears more responsibility for the eurozone crisis than speculators in the City of London.
None of this is to say that the UK has reverted to its traditional role as an uncritical defender of the interests of the City. If there ever was an identity of interest between the British government and the City, this is no longer the case. These days, the City is a ‘national champion’ that attracts the hostility rather than the respect of the general public. The UK realises that it has a comparative advantage in a sector that imposes large costs on society when things go wrong. The principal thrust of policy since 2008 has therefore been to try and reduce the vast contingent liability that the financial system places on British taxpayers. This was the main rationale of the Vickers Commission, which recommended that UK banks should keep their retail operations separate from their investment banking ones.
Few detached observers can seriously doubt that Britain’s era of ‘light touch’ regulation is over. The UK does not need to be cajoled by other EU countries into regulating banks and the City. It has implemented reforms before similar measures were even proposed at EU level (sparking European grumbles about British unilateralism); and in some areas (such as the structural separation of retail and investment banking activities), it intends to go further than other EU countries can countenance. The City’s future, it follows, is being decided by decisions in London as much as those in Brussels: hedge funds have relocated abroad in response to the perceived deterioration of Britain’s tax environment, while large UK banks have periodically threatened to follow suit in response to the Vickers reforms.
But if political rhetoric is anything to go by, perceptions in other member-states have yet to adjust to this new reality. In many quarters, the UK continues to be portrayed at best as a recalcitrant country that has failed to learn the lessons of the global financial crisis, at worst as a hostile force that wishes to protect the interests of ‘speculators’ and the City the better to destroy the eurozone. Quite why the UK would benefit from the collapse of the eurozone – an event that, as the British government has repeatedly made clear, would be catastrophic for the UK economy – is not entirely clear. But lurid assumptions about the ‘Anglo-Saxon’ world are still a remarkably familiar background factor across Europe, shaping how many politicians think about financial regulation and the eurozone crisis.
The truth of the matter is this. There is no question that the UK is more ambivalent about the financial sector and the City than it has been in the past. But the UK does not believe that this justifies ill-conceived and costly initiatives that reflect political grandstanding in other EU countries; or, for that matter, that this gives carte blanche to other countries to drive financial activity away from London. Other EU countries have a justifiable interest in what happens in the City. It is less clear that they have legitimate grounds for pushing old hobby horses that win political points at home, do little to promote financial stability, yet inflict disproportionate costs on the UK (as host to Europe’s largest financial centre). The EU’s recently-proposed financial transactions tax looks like a case in point.
Philip Whyte is a senior research fellow