Nick Hubble – Capital and Conflict (United Kingdom) –
The latest bout of Brexit coverage leaves me with nothing but questions. A lot of them are rhetorical thanks to the nonsense being spouted.
A Capital & Conflict reader feedback email is in the works, so you might be able to help me out with some of those questions soon. I miss the hate mail I used to receive writing our sister publication Down Under. So prepare your unfettered abuse too.
Back to Brexit
There’s been a flurry of articles and news lately. None of which make much sense to me. Perhaps they’re just journalists pushing a set of emotions on to readers with odd presumptions and claims, regardless of any simple realities to the contrary.
Take for example the idea that London won’t survive as a financial centre without a Brexit deal to ensure it. Nothing could be further from the truth. The less of a deal, the better London will do.
Do you remember when not adopting the euro would doom the city to global financial irrelevance? These days it’s Europe’s financial hub. Including for many euro-denominated transactions.
Funnily enough, a lot of the EU’s financial powers and regulations rely on British law being compatible with the EU. But under Brexit, it need no longer be so. That would cause an enormous disruption to the existing financial relationships and agreements the EU’s economy relies on.
The city’s dominance of Europe is not something we stand to lose, but something that puts us in a position of power now and in the future.
The use of British financial markets by EU companies means Brexit could pull the rug out from under EU rules on financial markets. For example, a lot of financial institutions and companies issue debt under UK law and in UK financial markets. Bank bonds are a big part of this.
The EU bank failure resolution mechanism requires bond holders to bear some losses in a bank failure in the EU. But the EU rules would no longer apply to a huge portion of those bonds under Brexit because they’re under British jurisdiction. And that would leave the EU taxpayers back on the hook for bailouts again.
That’s just one example. The point is that the EU cannot simply abandon British financial markets on short notice. They’re too valuable, even if only for the existing contracts already in place. Any transition to an EU-based system would have to be slow and steady, or extremely disruptive to capital flows in Europe.
Whether the slow and steady abandonment of the city happens comes down to the comparative regulatory structure of Britain and the EU. Who do you think will be more inviting? Obviously Britain will, if you take a look at the proposals inside the EU. Making bond holders liable for a bank failure isn’t good news for bond holders. So bonds will be issued in the UK, not the EU. A transaction tax will make EU market makers flee to Britain too.
Not that a post-Brexit Britain couldn’t muck things up
We might implement the same awful rules as the EU. Or elect Jeremy Corbyn, who wants a transaction tax too. But keep in mind that the booming financial centres of Europe are being sued by the EU for their non-compliant policies. The sorts of policies we could adopt to entice companies to Britain after they’ve been driven out of the EU.
Luxembourg and Ireland are likely to appeal decisions which fine their biggest taxpayers from paying too little tax. Being outside the EU means we can apply good policies like theirs without the EU’s recrimination. If the likes of Apple, Google and Amazon moved to a UK tax base after the EU made Ireland and Luxembourg expensive places to be, it’d be a brilliant result. Theresa May should be negotiating with taxpayers like these, not the EU tax collectors.
On to my next question for Brexit doubters
How many of the world’s financial centres are in the EU? New York, Hong Kong, Singapore, Tokyo.
How many of those centres have deep trade agreements with the EU?
Japan is still negotiating – they’re on the 18th round of negotiations…
The European Court of Justice deliberated until May this year about the 2014 trade deal with Singapore, and decided the EU does not have the authority to make such a deal…
Trade conflicts and court cases between the US and EU are continuous, with some embarrassing losses for the EU. They exposed the EU’s protectionist nature – the one which Donald Trump rails against and threatens to emulate so that places like the EU get a taste of their own foul medicine. But Trump is framed as the bad guy…
Hong Kong is the only financial centre with a solid trade agreement with the EU. But the trade relationship between the two seems to involve industry more than financial flows.
So, given the historical and comparative evidence, why is there so much furore about the city and Brexit? If Britain wants to maintain its global financial centre status, it looks to me like leaving the EU is a good idea, not a bad one.
Moving vast amounts of jobs to the EU, which I seriously doubt will happen, could be hiding the vast amounts of finance jobs created by an independent Britain no longer threatened by EU policy.
Adrift in the Atlantic?
My next question is about the drama surrounding Trump’s commerce secretary, Wilbur Ross. He recently visited the UK and was drawn into the Brexit mess. The media had a field day.
First Ross was warned by major banks that the Brexit impasse was creating enormous problems for some of the world’s biggest banks – mostly American.
Ross’ response at the Confederation of British Industry was clear: don’t give in to the EU’s demands. He framed the EU as a royal pain in the neck on trade. Only on the financial side did he advocate for giving in to ensure London’s relevance to Europe.
My question is, why on earth is the US commerce secretary so involved in Brexit? Surely Trump’s representative on trade is the last person who should be briefed by banks on the British and EU trade relationship. And the last person to ask for help or analysis.
He does not have British interests at heart. In his world view, trade is a competitive endeavour of power, not a mutually beneficial human right. He might want Britain to struggle, or to do damage to the EU. Helping American banks by advocating a deal on that particular issue is disingenuous.
At least he pointed out the truth about the EU, as the Telegraph summarised:
Mr Ross accused Brussels of imposing higher tariffs than the US across the “vast majority” of traded goods – including a 10 per cent charge on cars, compared to America’s 2.5 per cent – and trying to enforce its regulatory codes on third countries rather than allowing an open global system.
“While the EU talks a lot of free-trade rhetoric, it is really quite protectionist,” he said.
“The EU rules are not science-based. This could potentially create problems with us. What happens will be very much conditioned by the terms of the departure agreement between the UK and the EU.”
“The EU also needs access to the UK,” he said. “Your banking system is one of the largest in the world. There is a mutual need for some sort of interaction going back and forth.”
Supposedly, measly Britain is now stuck in a terrible place. It has to choose between the EU’s trade regime or the US’s. The media calls it “squeezed”. Once again, let’s look at the historical and comparative evidence.
Small countries outside the EU are the biggest success stories of trade. It’s no coincidence they’re the same as many of the financial centres. Singapore, Switzerland and Hong Kong are the obvious examples. Being inside a trading bloc obviously empowers your trading potential within that bloc. The question is whether it also comes at the expense of other trading relationships. And which outweighs which.
But it’s a false choice. Countries like Hong Kong, Switzerland and Singapore trade with EU and non-EU countries. Even though the EU tries to force “most favoured nation” type restrictions on their supposed trading “partners”. That’s one of the hampers for a good Brexit deal – it compromises deals with other nations who were promised good deals under “most favoured nation” status.
Once again, the EU’s true colours as a protectionist bloc are laid bare.
Brexit is not rudderless, it’s a negotiation
The worst part of the Brexit coverage is framing it as lost and aimless. The media claim Brexit isn’t providing a clear direction. There are no policy certainties. No clear plan is offered. No knows what a deal will look like.
“We don’t seem to know where we’re going,” former chancellor Alistair Darling lamented recently. “It’s like walking through a snowstorm: you could go over a cliff, or down a crevasse… I just ask myself time and time again: why are we doing this to ourselves?”
This is an incredibly stupid point to make. The Brexit process is a negotiation. It is impossible for Britain to declare what Brexit will look like, because it’s only half of the negotiating table. The EU is by definition as much to blame for the confusion because it is the other half of the negotiation. But neither side is really to blame given negotiation outcomes are inherently unclear. Otherwise there would be no negotiation…
A unilateral Brexit would provide the certainty people are looking for, because policy would be up to Britain and then the government could lay out its plans. But the same people complaining about the lack of certainty are the ones who warn against doing this.
What would honest commentary on Brexit look like? I’m not sure it matters in such a dishonest world.
Until next time,
Capital & Conflict