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Preface, Ruth Lea CBE, Economic Commentator
On the 23 June this year there will be a political event of monumental political importance. And that is the UK’s referendum on whether we will remain in the European Union or leave. This is not the place to advocate whether we should stay or go. But it is the place to discuss a key aspect of Britain’s current relationship with the EU and ask whether it is optimal for Britain.
I am, of course, referring to the impact of the EU’s financial regulations and the City of London. London is, of course, one of the two great global financial centres – New York being the other. Significantly, the centres hot of their heels are Hong Kong and Singapore, whilst Frankfurt and Paris languish well behind.1 London is Europe’s premier financial centre with many natural advantages which include, as Benjamin Wrench points out, an independent judiciary, the English language and a critical mass of professional services.
The City is, above all, a global centre and, in order to maintain its supremacy, needs to compete globally. If it is to continue to prosper it will need a regulatory system that compares with the best internationally. We need a regulatory system that allows the market to function properly. But, as Mr Wrench convincingly argues in this excellent, thought-provoking paper, “EU regulation actively undermines the City because the rules are based on the EU’s need to replace the market as arbiter of risk and reward.” And the EU’s rules are singularly bad at allocating risk and reward.
It is vital to understand that there is a fundamental cultural clash between the EU’s harmonised and regulated markets and the UK’s market approach. Nothing illustrates this better than Commissioner Juncker’s spokesman’s comment, quoted in the foreword, that the “Anglo-Saxon world” could be “understood in the sense of the markets and speculators.” The “Anglo-Saxon world” was, therefore, seen as something of the “Wild West”, in need of discipline. And markets themselves, extraordinarily, were seen as alien. Let us also remember former French President Nicolas Sarkozy comment when he welcomed the appointment of his countryman Michel Barnier as EU Commissioner for the Internal Market and Financial Services in 2010. It was a “French victory and a defeat for Anglo-Saxon capitalism.”
Granted many of the regulations imposed on the City since the financial crisis of 2008 would have been implemented even if we had not been in the EU. Our regulators have been assiduous. So it would be unlikely that there would immediately be a deregulatory nirvana if Brexit. But, at the very minimum, the British Government would surely amend those EU regulations, such as the bankers’ bonus caps, which it challenged unsuccessfully. And flawed legislation, most notoriously AIFMD, would surely be fundamentally reformed. Whilst in the EU this is quite simply impossible.
Mr Wrench concludes that the City needs flexibility to maintain its competitiveness but the EU’s Treaties are unsuited to the task. He is surely right.