PHILIP WHYTEThe global financial crisis has had a seemingly odd impact on relations between the City of London, the United Kingdom and the European Union.
Before the crisis, the dominant assumption in Britain was that what was good for the city was good for the U.K. and the rest of Europe. This assumption was not always shared by other EU countries, where suspicions of the financial sector have often run deep. Since the crisis, Britons have become far more critical of the city.
Yet growing British ambivalence about the city has coincided with a mounting political estrangement between the U.K. and the rest of the EU. What explains this paradox?
Before the financial crisis, the British case for the City of London went something like this: The financial sector is a vital component of the British economy. It accounts for 8 percent of GDP, employs more than 1 million people and generates disproportionately large tax receipts for the British government. The city is also a European asset. As the world’s largest international financial center, it plays a critical role in supporting the growth of the broader European economy. Until 2008, the British government exercised huge influence on EU policy toward financial services. It was in the vanguard of countries pushing for the removal of intra-European barriers to trade in financial services – an agenda supported by the city. The financial crisis, however, has altered this triangular dynamic.
The greatest rift has unquestionably been between continental Europe and the city. Across Europe, politicians blame the global financial crisis on regulatory failures in the Anglo-American world. The eurozone crisis has reinforced continental suspicions of unregulated Anglo-Saxon finance, with the city widely seen as a nest of speculators that poses a threat to the very survival of the eurozone. For many European leaders, therefore, the task facing policy-makers is straightforward: Ensure that the UK is made to regulate the city to continental European standards.
To the U.K., continental political rhetoric has seemed distinctly slanted. Official reports into the crisis have owned up to British failings and questioned many long-held assumptions – from the “social utility” of certain financial activities to the desirability of an outsized financial sector. But many of the factors that contributed to the global financial crisis were just as common in continental Europe as in the U.K.
The City of London, then, has faced a regulatory crackdown from two distinct directions. At home, the British regulatory authorities have made it clear that they will force U.K. banks to hold more capital than actually required under international or EU standards.
Across the channel, the city has faced a slew of regulatory and other initiatives originating from the EU. Close to 50 measures affecting financial services have been proposed since 2008 or are in the EU legislative pipeline.
Some are designed to implement commitments entered into by the U.K. in the G-20. But others are over and above such commitments, and have been proposed under pressure from countries such as France and Germany or EU bodies such as the European Parliament. As the focus of many EU measures has moved from lifting barriers to trade to imposing regulatory costs, the city has become more euro-skeptic.
The outcome: European leaders declined to provide the city with any such safeguards; Prime Minister David Cameron vetoed a proposed EU treaty to reform the governance of the eurozone; and British euro-skeptics cheered as the country’s relations with the rest of the EU sank to a historic low.
Philip Whyte is a senior research fellow at the Centre for European Reform. This abridged article originally appeared on the Khaleej Times online.