Open Europe’s report today makes a compelling case for the government to spend what political capital it has in the EU defending the City from the barrage of EU regulations. Financial services makes up 10% of UK GDP, whereas fishing makes up 0.05%. However disastrous the Common Fisheries Policy – and it is difficult to think of any policy that has been more of a complete and catastrophic failure (please feel free to suggest any!) – it just a matter of numbers that it is more in the UK’s interest to try and protect financial services rather than resuscitate fishing, or reform farming. At the All Party Parliamentary Group on European Reform meeting today, at which the report was presented, there seemed to be genera l consensus on this among MPs and Peers (indeed, the report seemed very well received).
There are three other reasons why the government should focus on financial services. Firstly, it is being subjected to a far greater legislative tidal wave than any other sector – with 49 EU regulatory proposals in the pipeline that would affect the City (including the disastrous financial transactions tax, and the ban on short selling). This regulatory deluge is almost exclusive aimed at trying to clip the wings of financial services, rather than help them grow. Indeed the meeting today heard several first hand accounts of European politicians apparently being determined to do down financial services.
Secondly, the UK has an overwhelming dominance in financial services – we have over 35% of the EU financial services market, and two thirds of financial services exports (they are by far the UK’s biggest export earner). In some sectors like derivatives and hedge funds, our market share soars closer to 80%. Like them or loathe them, they are our key strategic industry and we are the financial capital of Europe – if we don’t protect them, no one will. However, the rule-making system makes no recognition of the UK’s position. Almost all the EU legislation is being done by qualified majority voting, which means that Italy gets as big a say as the UK in an industry Italy has little interest in. For the three new European super-regulators, it is even more absurd – they make decisions by simple majority with each country having an equal vote, so Lithuania, Malta and Bulgaria each get the same say as the UK.
Thirdly – a point the report doesn’t mention – is that the need to protect UK financial services from EU legislation is at least an area where the two halves of the coalition agree. That is likely to mean we can negotiate far more effectively. If we chose an area such as repatriating powers over social and employment legislation, then our negotiating hand would be permanently weakened by government splits.
Of course, getting any protection for financial services – or repatriating any powers – depends on their being treaty negotiations at the level of the EU 27. That in part depends on the Germany and France not being spooked that the UK would derail any negotiations, for example by demanding a referendum. So in fact, it is in our interest to quietly support the cause of treaty renegotiations – and then when the EU has gone down that path beyond the point of no return, we present our demands. Far cleverer to do that than lay all our national cards on the table now.