12.07.2016

Brexit Bashing from Brussels to Backfire?

With political smoke signals from all sides pointing towards hard Brexit, Rob Boardman, European CEO of equities broker ITG, argues why it is not in Europe’s interest to cut economic ties with the City. 

Benjamin Franklin once said that “you may delay, but time will not.” With Article 50 to be triggered before the end of March pending the Supreme Court ruling, how much more time can Westminster and Brussels policy makers really afford to spend on political rhetoric? Can we really ignore warnings from European officials that UK plans to limit free-movement of people post-Brexit will lead to loss of EU access for the City? 

Rob Boardman, ITG

Rob Boardman, ITG

Closer to home, favourable macroeconomic and confidence data combined with the weakening of sterling have caused the government to ignore the recessionary worries of Bank of England governor Mark Carney. Confidence in UK economy is strengthening ministerial resolve towards a hard Brexit. This was backed up by recent rhetoric from Theresa May, which seems to give the people what they voted for, while leaving the City to fend for itself.


The truth is that both sides should put the political point scoring to one side and look at the reality of the situation. To start with, the City of London provides a deep pool of financial and human capital that helps finance investment and job creation on a pan-European basis. The post-recession European continent needs a new generation of entrepreneurs creating companies which will go on to be world leaders, generating employment and wealth for Europeans. This requires interconnected and efficient capital markets, not artificial barriers to trade and investment. The EU should resist the temptation to erect a President-elect Trump style wall around its Euro-denominated trading and clearing infrastructure. 

Many studies post-financial crisis have shown Eurozone fledgling companies were over reliant on bank debt funding compared with, for example, their American counterparts. A decade after the crisis, Eurozone banks are still not strong enough to fund a new Marshall Plan for European business from their own balance sheets. They need global investors with risk appetite to invest, and London’s expertise at financing both listed and private equity is essential.

Another factor in the UK political calculus is trade imbalances. Certainly the UK is fond of German cars and washing machines. But the UK’s status as a net importer of EU consumer goods has given government Brexit negotiators confidence that the EU will not erect trade barriers in the form of tariffs if the UK leaves the European Economic Area (EEA). In services, however, the reverse is true, the EU is a net importer of services from the UK, including many City financial services such as capital markets, trading, administration and legal services. 

This is not to say that EU Brexit negotiators’ warnings of legal barriers and other tariffs on the City’s service exports should be taken lightly. WTO trade rules would not give City sufficient access to EU capital markets. After all, basic economics argues that the highest state of efficiency is reached when people are allowed to do what they do best. The City should finance Europe, and Germany should make consumer goods. A reduction in mutual trade in goods and services between UK and EU is not in either side’s interests. 

We are now in a two-year period of no doubt more rhetoric leading up to the political divorce. However, now is not the time for myopic politicians to gamble with the future growth of EU citizens. Instead wise thinkers in both London and Brussels should plan specific measures to strengthen trade ties and promote financing for economic growth and prosperity in a post-Brexit world. After all, as Franklin once put it: “without continual growth and progress, such words as improvement and success have no meaning.”

 

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