Lord Hill: Brexit risks ruling us out of our best market

Debate: Britain will decide on its future with the European Union in a referendum on June 23

Toby Melville/Reuters

15 March 2016

It’s good sometimes to hold a mirror up to ourselves. So maybe we should consider what countries on the other side of the world think about London’s place as a global financial centre.

On a recent trip to Hong Kong, I was introduced to a young entrepreneur from China who had just opened a new office in the City. I asked him why he had chosen London for his European headquarters. He explained that it has the best talent pool in the world, his Chinese staff feel welcome, and English is a global language.

But he had also come for another reason — because it was a launch-pad into Europe, a single market of 500 million people, a trading bloc of some of the most prosperous countries on Earth.

This Chinese investor, not caught up in the rhetoric of our referendum debate, perhaps saw the City’s position rather more clearly than we sometimes do at home. He could see that London owes its success not just to its intrinsic merits but also to its access to a wider European market. He could also see that, far from being contradictory, the two go hand-in-hand.

And my Chinese businessman is not alone: almost three-quarters of investors in the UK say one of the factors that led them to invest was access to the single market.

This combination of British flexibility with European scale is obviously a powerful one. Although I sometimes read that the City is “drowning” or “suffocating” in regulation, London seems to be in fairly rude health. Over the past decade, the surplus from Britain’s trade in financial services more than doubled, from £23 billion in 2004 to £58 billion in 2014. And last year, once again, London was rated by the Global Financial Centres Index as the world’s most competitive financial centre. So under the present set-up, something seems to be going okay.

For a country such as Britain with great strengths in financial services, being part of the single market is a huge advantage. Passporting, whereby any financial service business established in one EU country can do business in all 28, is one of the reasons that the British fund management industry can look after a big chunk of the €8 trillion (£6.24 trillion) market in Europe’s globally successful investment product, Ucits [Undertakings for collective investments in transferable securities].

Being part of the single market has helped UK banks lend some £1 trillion and take nearly £1 trillion in deposits from across the EU.

"There is no convincing answer as to how any future arrangements outside the EU would be better; instead, we’re offered a future shrouded in uncertainty."

It means British insurance groups running businesses across Europe are not faced with the difficult equivalence assessments process which third countries have to pass.

What if Britain left the EU? Would the City do any better than it already is doing? First, everything would be up for negotiation, meaning cost and uncertainty — the enemy of investment.

But second, countries outside the EU have to meet the standards of the EU to do business here. So either Britain would, like Norway, have to accept free movement and pay to get proper access to the single market, and still have to follow EU rules over which it would then have no say.

Or the UK would have to ask the EU countries to have our rules recognised as being equivalent to theirs, and even then businesses such as banks and insurance would have to set up a separate base in the EU to do business there.

Some claim it would be in the interests of the EU to come up with rules that suited the UK. Well, countries such as Germany and France have very different financial sectors from the UK. Their preoccupations are therefore different. Today, financial rules in the EU reflect this variety. But if Britain left the EU why would this continue to be the case?

Why should other countries, pursuing their own interests, use political capital defending Britain’s — assuming they didn’t want to seize the opportunity of our absence to gain a competitive advantage? It would be ironic if, in the name of gaining more control, Britain ended up having to sign up to rules over which it had no control at all.

As a European Commissioner I meet lots of British business leaders. The great majority do not seem to think that Britain faces a choice between trading with Europe or trading with the rest of the world. They know that Germany, at the heart of the EU, is the world’s third-largest exporter. They can see that far from being held back by the EU, the City of London has risen to become the world’s strongest financial centre.

I have never been starry-eyed about the EU. I campaigned with Business for Sterling to keep the UK out of the euro. Given Britain’s history, it’s no surprise we like to go our own way. But there is no convincing answer as to how any future arrangements outside the EU would be better; instead, we’re offered a future shrouded in uncertainty.

One thing is certain, however. Outside, Britain would not be able to maintain access to the single market on the terms it has at present. And to be certain of access, businesses would start to think about moving elsewhere in Europe to set up.

So let’s look into the mirror held up by my Chinese entrepreneur. On the one hand we might quite like what we see — a thriving financial sector linked both to a market of 500 million and to the rest of the world. But we might also see how others see us. And it might remind us how wise it is to look before we leap.

Lord Hill is European Commissioner for Financial Stability, Financial Services and Capital Markets Union

MORE ABOUT

Brexit

EU referendum

The City

Financial Markets

Lord Hill: Brexit risks ruling us out of our best market

Read More