Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.

There is lots to say about the impact of Brexit on UK politics, on the EU itself and on its survival, and on the EU economies – as well as the reasons for the Leave win.  But I am writing today about Brexit and the City.

The first obvious point is that nothing changes until the expected Article 50 terms of exit are completed, which could take four years.  At a macro level, the importance of our financial service exports to the EU should not be exaggerated.  Some 50 per cent of our total financial services are exported, of which only 30 per cent go to the EU – i.e. 15 per cent of the total.  This represents 1.2 per cent of GDP.

The largest exporter is investment management, of which 80 per cent is non-EU and, for EU Retail Fund exports, most firms already use Luxemburg or Dublin UCITs (i.e: mutual funds based in the EU).  88 per cent of insurance exports go elsewhere than the EU: to North America and Asia.

The most affected sector is investment banking, in which 80 per cent of EU capital markets business is done in London.  While the big players already have operations on the ground in continental Europe, these are the institutions which may move significant numbers of staff out of London to their continental European operations.

The financial services industry is of major importance to the UK economy.  In aggregate, it employs 2.1 million  people and raises £66.5 billion a year in tax, and, together with other related services exports – in particular, legal – earns around £75 billion a year of overseas income.  There are also obvious “multiplier” economic effects from the expenditure of those working in the sector.  It is, therefore, a valid point that we do not want our biggest industry damaged as a result of Brexit.

Going forward, the issues are what sort of deal we should aim for; how should we organise and negotiate it; with whom should we negotiate, and how strong is our negotiating position.

First of all, we will need a tough negotiating team coming under the Cabinet Office and not the Foreign Office.  I believe this should be led by Michael Gove and include a number of senior politicians: for example, Oliver Letwin, Nigel Lawson, Norman Lamont and Peter Lilley; and include talented business representatives such as Luke Johnson.  I also consider it would be wise, from a domestic perspective, to include Nigel Farage.

Before we activate Article 50 (assuming we take this route rather than the Vienna Convention route) I believe it would be sensible to negotiate and reach “Heads of Agreement”, in which, post Article 50 being moved, the task will be to thrash out the substantial legal documentation required.

While ultimate agreement will need to be with the EU, I believe we would also be wise to work closely with Germany in formulating the “Heads of Agreement”.  Our negotiating position is, in principle, strong – reflecting both the EU’s current account surplus with the UK of in excess of £100 billion, and that the EU could not impose a harsh settlement on the UK to prevent a “domino effect” while at the same time seeking to nurse the Eurozone economy back to health.

Failure to mend fences with London would risk a financial and economic crisis which would expose the disastrous economic and financial effects of monetary union.  As Pier Carlo, Italy’s Finance Minister, has commented: “There is a cocktail of factors that could lead to disintegration” and “we face a double reaction from Brexit – financial and political”.  The EU already faces the need to “shore up” the Italian banking system, which is faced with the risk  of a “banking run” – which may require massive ECB support.

There are also domestic political considerations to consider. While there was a Brexit majority, close to 50 per cent voted to remain and, in particular, there will be a need to get the required measures through Parliament, where there is a substantial anti-Brexit majority.  My judgment is, therefore, is that the new UK Government would be wise to opt for a sensible, compromise package for the next few years: to retain Single Market passporting, and agree to contribute a reduced amount to the EU Budget.  The loss of EU income of £12 billion net per annum next year and beyond is a major financial issue for the EU.

The ideal package would be a Free Trade deal between the UK and the EU; the UK withdrawal from free movement of EU citizens, and the passporting of financial services – based on equivalent regulation applying to the UK financial services exported to the EU, and as provided for under MiFID 2 (rules for markets in financial instruments), effective in 2018.

In practise, this may be most easily achieved via the EEA membership option, but with an adequate reduction in migrant flows, either by going back to the pre-Maastricht rules guaranteeing only the right to work, or following the Lichtenstein model – i.e: becoming a member of both the EEA and EFTA – with an opt-out on the migration issue.

The City has broadly indicated that it could live comfortably with the EEA option, or with a hybrid variant, safeguarding EU passporting rights for financial services.  I believe this would also be acceptable to a Parliamentary majority and provide for a safe withdrawal from the EU in managed stages.  The likely price of such an arrangement would, however, be some continuing UK contribution to the EU Budget.

Looking through the inevitable, political rhetoric, particularly by the Commission, I believe a hybrid EEA arrangement would be acceptable to Germany and to the EU as a whole.  Francois Villeroy de Galhau, France’s Member of the European Central Bank, has already commented that Britain could “keep access to the Single Market” and its passporting rights if it opts for this sort of arrangement.  German industry is very clear they do not want a tariff war which they have estimated could cost the German economy three per cent of GDP.

Whatever Jean-Claude Juncker may say, most EU Governments have woken up to the reality that the more ‘Europe’ they push for, the more Eurosceptism they get back.  EU policy will be forged by an emerging directorate of Angela Merkel, Francois Hollande and Italy’s Matteo Renzi.

Without automatic passporting, the risk is that the main investment banks seek to move a few thousand staff to Frankfurt or Paris, which would be damaging to London’s international reputation and the wider economy – but the truth is that Europe needs the services of London just as much, if not more than London needs its financial exports to Continental Europe.

There is no European financial capital anywhere approaching London in terms of its expertise, depth of markets, money-raising abilities and international cover.  London is a crucial raiser of funds for EU businesses.  The last time that Germany tried to develop Frankfurt as a competitor to London, it failed.  The whole EU structure is, moreover, in a highly delicate state with the departure of the UK.  I also believe it is wise to be “magnanimous in victory”.

There are, however, two other separate – though related – territories in which the new UK Government should establish talented task forces, including tough representatives of business.  The first is to negotiate separate free trade agreements with the US, India, China, Australia and New Zealand.  There is a group of US Governors and Senators interested in a Free Trade Agreement with the UK which they believe would be acceptable to the USA, and who view keeping the UK united as a national security priority.  The Governments of Australia and New Zealand have already indicated their support for such free trade arrangements.

The second is the need for a blitz on unnecessary and economically damaging regulation across the full sweep of economic activity.  In the financial services sector, regrettably, equivalent regulation would need to be retained for financial exports passported to the EU. But, for the domestic economy and other overseas markets there is a raft of EU driven regulation which could be got rid of – i.e: the Alternative Investment Fund Managers Directive, MiFID II, the Bonus Cap, short-selling bans, and the Prospectus Directive.  It should be remembered that one of the main ingredients of Ludwig Erhard’s huge success in reviving the German economy in the 1950s and 1960s was a blitz on unnecessary and damaging regulation.  The UK habit of being overzealous and often gold-plating EU regulation requirements needs to end.

I do not believe there is the need for either a rurther Referendum on the package to be negotiated by the new Government – or for a general election, unless the Government is voted down in the Commons on a major aspect of the proposed Brexit package.

Finally, there is the need for detailed research into the extent of the UK’s potential financial exposure, as a member state, to the European Investment Bank, European Central Bank and European Financial Stabilisation Mechanism in the wake of a Eurozone banking crisis, since we ourselves will remain a member state until Article 50 exit arrangements are completed.  We also need to ensure that our post-Brexit deal with the EU puts an end to such potential financial liabilities.