Is the City worse off after David Cameron's EU veto?
- 2 March 2012
- From the section Business
Chancellor George Osborne says the prime minister blocked EU treaty changes to protect Britain's financial services, but Labour says the move achieved nothing that would help the City.
So what is the impact of the veto on the UK's financial sector?
The European single market is the largest such market in the world with almost 500 million residents. It guarantees four fundamental freedoms for all countries and companies within the EU: the free movement of goods, labour, services and capital.
Few other countries or industries have benefited as much as Britain's financial services sector from these four freedoms.
Any European who wants to work in the City can do so, any UK banks can sell their financial services without restriction elsewhere within the Union and capital or money can move unfettered across EU borders.
Nothing that happened last Friday in Brussels will change the above. Britain and especially the City of London will still be a full member of the single market and continue to derive benefits (or profits) from that.
Many in the British government and Parliament had feared that the City would have been unfairly disadvantaged, had they signed up to some of the ideas proposed by eurozone countries such as France and Germany, such as an EU-wide Financial Transaction Tax (FTT).
That's mainly the reason given for the Cameron veto in Brussels.
The FTT is a tax on every purchase or sale of stocks or bonds or whatever financial product by a bank. Because there are millions every day, it could force banks to be more careful in their purchases or sales.
But since 75% of all financial transactions occur in the UK, British-based banks would have paid the vast majority of this proposed tax.
It's very unclear at this early stage, and before any new EU Treaty has been even written, whether the City will lose out in the long run.
But if it were to, it could only result from banks being affected by any future deals - as yet not negotiated nor agreed.
The problem for Britain is that it may in future arrive to the negotiating table in Brussels and be handed a done deal from the remaining 26 EU member states which cannot be blocked as unanimity is no longer required except in the case of taxation.
Let's take another example. Germany's Deutsche Bank is the largest single banking employer in the City of London. French, Spanish and Italian banks also have a significant presence here.
Will they stay in the same numbers if their governments make it politically and/or fiscally disadvantageous to do so?
Former Labour City Minister and investment banker Lord Myners told the BBC that by "isolating" itself, Britain had forced London-based banks to face a dilemma.
"Do they continue to put all their resources behind supporting their activities in the City of London or do they begin to build up other centres of excellence elsewhere in Europe?" he asked.
"I think the balance has tilted quite strongly as a consequence of the petulance of the prime minister."
Then there's the issue of rebalancing the UK economy - stated UK coalition policy, which hopes to wean Britain off its dependency on taxes from the financial services sector and slant the economy more towards manufacturing and exporters.
Here the response of the CBI to the Cameron veto is instructive.
The business lobby group has said almost nothing so far.
The majority of its members are manufacturers or exporters whose main customers are in the eurozone and the rest of the EU.
Many business groups will now have to wait until more detail emerges as to how exactly events last week will shape Britain Inc in the coming years and decades.
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