Follow the money.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
One of the glaring but oft-overlooked ironies of the Brexit debate is the fact that the UK has been one of the biggest beneficiaries of the creation of the euro, despite not being a member of the Eurozone and holding the single currency in rampant disregard. The UK economy has certainly benefited more than most Eurozone economies.
Since 2001 Britain’s share of key financial markets has exploded. London is now home to almost one-half of the entire global interest-rate OTC derivatives market, compared to 35% in 2001. Its share of global forex turnover increased from 33% to 41% between 2001 and 2014. And its share of global hedge fund assets doubled, from 9% to 18%.
Almost 2.2 million people work in financial and related services such as accounting and law, two-thirds of them outside London, reports a study by the financial services lobby group CityUK. They produce nearly 12% of the UK’s GDP, 11% of its tax take, and a net trade surplus of £72 billion ($104 billion).
Financial services have taken a third of foreign direct investment in Britain since 2007, most of it coming from the EU. These are some of the reasons why The Economist magazine recently identified the City of London as the place with arguably most at stake in the Brexit debate, especially with its two biggest rivals, Paris and Frankfurt, vying to take a piece of the action.
The fact that Frankfurt is already home to the European Central Bank’s lavish headquarters makes it the most likely contender.
“In the unlikely event that the UK were to leave, Frankfurt would clearly be a main beneficiary,” says Hubertus Vaeth, who runs Frankfurt Main Finance, the industry association for the city’s banks. “Quite a few actors have prepared. Don’t ask me for names, because nobody wants to be quoted on that – but we do know from quite a few players that they have plans for such an unlikely event.”
That’s not to say that Germany is banking on Brexit. As the BBC points out, German business is strongly anti-Brexit. A recent survey by the Bertelsmann Stiftung think-tank found that 83% of German businesses opposed it.
As for most City-based banks, they would much prefer to continue operating from London than have to move their European base to Frankfurt or Paris, where they can probably expect a lot more government interference in their operations. When it comes to financial secrecy, no European jurisdiction – not even Switzerland or Luxembourg – can hold a candle to the wholly autonomous City of London, one square mile inside the nation’s capital that for centuries has existed as an ancient, semi-alien entity lodged inside the British nation state; a “prehistoric monster which had mysteriously survived into the modern world”, as a 19th-century would-be City reformer put it.
Despite attempts down the centuries to reform the City, it remains the only jurisdiction in the UK not fully subject to the authority of parliament. In fact, the relationship seems to work the other way around. Behind the Speaker’s chair in the House of Commons sits the Remembrancer, whose job is to ensure that the interests of the City of London are respected by the elected members.
The square mile has another major attraction: its almost non-existent approach to financial regulation. By having a large base in the City, global financial institutions get the best of both worlds: they get both EU “passporting rights” — that is, the ability to trade across Europe — as well as the ability to engage in activities that would be unimaginable in most other financial jurisdictions, including New York.
It’s no coincidence that London has been home to just about every major global financial scandal of the last decade, including Libor, Forex, MF Global, the London Whale and rampant gold and oil-price rigging.
Given that both the City of London and the global banks that operate there have so much to lose from a British exit from the EU, it’s hardly any surprise that they are among the largest backers of Project Fear, the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of Brexit.
Two days ago the Project scaled new heights of absurdity when UK Prime Minister David Cameron warned that Brexit could lead to the outbreak of a new war in Europe.
The UK Treasury has predicted that Brexit could cost each British taxpayer over £4,000 each, while destroying the jobs of thousands of city bankers. The latter may well be true but it is unlikely to enlicit much in the way of sympathy beyond the nation’s capital.
The Bank of England’s Mark Carney has cautioned that Brexit is the “biggest domestic risk to financial stability,” with potentially dire consequences for Britain’s balance of payments, its housing market, foreign investment, and its banks.
The banks themselves, they have begun threatening to hike the cost of loans if Britain quits the EU. As the FT reports, Goldman Sachs and Deutsche Bank are among a number of City giants to have included so-called “flexit” clauses into loan documents, escalating fears that borrowing costs will soar if Britain votes to leave the EU.
But will fear be enough to dissuade British voters from taking a giant leap into the great unknown? Based on recent polls, the answer appears to be a resounding NO. Even among businesses, support for Brexit is on the rise. Not only that, but the European establishment and global banks’ biggest fear — that a vote for Brexit would unleash popular demands across Europe for similar referendums on EU membership — appears to be in the process of manifesting.
A new MORI survey of countries making up 80% of the EU population shows that 60% of Italians and 58% of the French also want their own referendums on EU membership. And 48% of the Italians and 41% of the French surveyed said they would vote to leave. Perhaps most importantly, half of those surveyed believe that Brexit would set off a domino effect, and that it would do more damage to the European Union than to Britain itself.
It is this potential of Brexit to unleash a mass stampede towards the EU’s doors — doors that as yet do not open from the inside — that has the political and economic establishment on both sides of the Atlantic in a state of barely concealed panic. As the last three EU-themed referendums (in Greece, Denmark, and the Netherlands) have shown, no matter how much fear of change they try to instill in the European populace, it doesn’t appear to be working. For now, it seems, the fear is very much on the other foot. By Don Quijones, Raging Bull-Shit
You know that things are bad when even the firmest believers begin questioning their faith. That’s what’s starting to happen in Europe, where the EU faces a dizzying constellation of threats and challenges and even the staunchest of eurocrats are beginning to express doubts. Read… It’s Gotten So Bad in Europe, Even Eurocrats Begin to Worry