22nd Oct 2016

Column / Brexit Briefing

UK prepares to protect its golden goose in EU talks

  • The Brexit talks will now pit Barnier against his former boss in the Berlaymont, Jose Manuel Barroso, the new non-executive chairman of Goldman Sachs

London’s financial services sector is the UK’s golden goose, driving its economy as Britain’s traditional manufacturing sector has been allowed to steadily decline.

Protecting the City, and its status as Europe’s financial centre, will lie at the heart of British PM Theresa May’s negotiating strategy. Even so, London financiers are among the most nervous Britons in the uncertain post-Brexit world.

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The potential loss of "passporting" rights is the elephant in the room for businesses based in the UK. Without it, the other European financial centres looking to pick up business from London - Dublin, Luxembourg, Amsterdam, Frankfurt and Paris - will have an easier job persuading multinationals to flee the Square Mile.

Of these, Paris has been the most proactive in touting for business, although French leader Francois Hollande’s government is yet to offer the tax and labour law incentives that are probably needed to tempt some firms across the Channel.

The first piece of business to leave London has already been lined up by a senior Bundesbank official.

Last month, Andreas Dombret, a member of the German Bundesbank’s executive board, insisted that Brexit Britain would leave Frankfurt as the "more appropriate alternative" venue for euro-denominated clearing in future.

"I am convinced that, in the medium term, euro clearing cannot take place to the existing extent in London," he said.

In March 2015 the European Court of Justice overturned a European Central Bank edict that would have required central counterparty clearing houses (CCPs) - which handle trades of stocks and shares - to be located inside the eurozone if they were processing transactions worth more than €5 billion.

This was a major victory for the City of London, which hosts roughly €1.3 trillion of euro clearing transactions every year.

However, the Court made it clear that London’s financial houses would not be able to offer the service were they outside the EU.

All this makes the recent career moves for former internal market commissioner, Michel Barnier, and his former boss in the European Commission, Jose Manuel Barroso, more interesting.

The Brexit talks will now pit Barnier against his former boss in the Berlaymont, Jose Manuel Barroso, the new non-executive chairman of Goldman Sachs.

Having donated heavily to the Remain campaign, along with the likes of JP Morgan and Morgan Stanley, Goldman Sachs, which employs 6,000 people in London, is one of the US mega-banks anxious to avoid losing money from the Brexit fallout.

Goldman’s logic is sound: billions of dollars are at stake and who better to fight for them than the ex-commission president? Barroso, meanwhile, has decided that money is there to be made from Brexit, and he’s going to get himself a cut of it.

Appointing Barnier as his chief Brexit negotiator is one of EU commission boss Jean Claude-Juncker’s shrewdest moves.

A patrician French federalist, Barnier had a reputation for being a basher of the City prompting several of London’s more bellicose pundits to describe his appointment as a "declaration of war".

It is true that the laws that saw bank bonuses capped were Barnier’s babies and were opposed by David Cameron’s government. But Barnier’s bark was invariably worse than his bite.

The UK MEPs who dealt with him on the European Parliament’s economic and monetary affairs committee respected him because he was a deal-maker, not to mention charming. The bonus cap bill, which was initially designed to increase the capital held by banks (a measure strongly supported by the UK) was one of very few to be opposed by former finance minister George Osborne.

When it came to blueprints aimed at splitting the riskier functions of banks from their day-to-day business, meanwhile, Barnier's plans had, in the words of the UK Treasury "much in common with the banking reforms the UK has pioneered".

He was also receptive to UK concerns that the eurozone’s banking union structure could allow the eurozone-17 to overpower countries outside the euro when drawing up financial services rules. Barnier now has masters in Paris and Berlin, as well as Brussels, to satisfy, but City financiers shouldn’t be losing sleep about him.

Instead, they should be more concerned about the political contortions resulting from Theresa May’s ministers seeking full single market access without freedom of movement.

The City’s strength relies on retaining free movement of both capital and people. Around 40 percent of workers in London’s burgeoning financial technology industry are non-Brits, while one in five tech businesses in the UK is started by an immigrant.

Yet anything short of a moratorium on EU migration will be considered a betrayal of the referendum result. Something has to give.

Benjamin Fox, a former reporter for EUobserver, is a consultant with Sovereign Strategy and a freelance writer

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