An EU exit would harm London as a major financial center which currently rivals New York. Two reports commissioned by TheCityUK, a lobby group for money managers and banks, demonstrate that exiting the EU poses “very significant risks to the UK’s future, undermining economic well-being and the ability of business to grow and compete in world markets.”
The three largest financial centers in the world are London, New York and Tokyo.
According to the studies – “A Legal Assessment of the UK’s relationship with the EU – a financial services perspective” and “Analysing the case for EU membership – How does the economic evidence stack up” – being a member state of the European Union (EU) has a positive impact on UK trade, increases productivity and boosts GDP (gross domestic product) growth.
EU exit would harm London and rest of UK
Both reports determine that all alternatives to EU membership would come with a heavy price for UK businesses and financial institutions.
There would be considerable challenges in the negotiation process, leading to uncertainty about the UK economy, loss of influence, and reduced market access.
The authors concluded that it is in the United Kingdom’s best long-term interests to remain in the EU, especially one that embraces reform and modernization.
The UK would still be subject to Single Market regulation if it left the EU, but would have no say on regulatory developments. This loss of influence would make the UK much less attractive to investors “at a time when new regulatory architecture in financial services such as Banking Union, is coming into effect.”
Most British people are keen on the free trade aspects of a single market, but dislike losing independence on decisions regarding internal affairs, tax, and immigration policies.
How would 8 scenarios affect the UK?
Clifford Chance, a law firm, commissioned research into the legal implications of eight different scenarios for the UK, three where the country stays within the EU and five after leaving, and what their impact would be on financial services.
The research also gathered and analyzed data on the development of the Internal Market in financial services alongside legal and practical barriers, and how the supervisory and regulatory relationship functions between the EU and UK.
The authors of the reports highlighted the following points which clearly show how much better of the UK would be inside than outside the EU:
- If the UK left the EU, the country’s financial services would face uncertainty, loss of influence and reduced market access. The UK’s attempts to arrange for exemptions could encourage other member states to do the same, which would eventually fragment the Internal Market.
- If the UK left the EU and joined the European Economic Area (EAA) or the European Free Trade Association (EFTA), there is no guarantee that it would have access to the EU’s Internal Market. The UK would only have a chance at obtaining Internal Market access if it implemented all of the relevant EU legislation – legislation that would be formulated with no UK influence.
- Some major features of EU financial services are already modeled on the UK system, such as the Market Abuse Directive and MiFID. This is good for The City (London’s financial center), which is the EU’s global marketplace. The UK has a good history of generally getting what it wants as far as EU financial services regulations are concerned.
- The UK can only influence the development of Internal Market legislation as an EU Member State, “allowing it to preserve market access, promote liberal economic policies and have maximum influence in setting market rules.”
- The UK should push hard for reform, promoting both recognition and harmonization – thus making the Internal Market effective for both non-Euro area and Euro area members.
- With the arrival of Banking Union, the UK needs to be working actively and from within the EU to ensure the coherence and integrity of the EU-wide Internal Market.
- In its own right and also through EU membership, the UK benefits from double representation on international forums, such as the Basel Committee on Banking Supervision and the World Trade Organization.
“Overall, the European and global interests of UK financial services are best served by the UK remaining a member of the EU. Current membership gives access to the most powerful tools to promote our interests, including voting, veto rights, opt-outs, free movement, justice and home affairs,” the authors wrote.
Does it matter whether the UK is in or out of the EU?
The new report also explains how economies foster growth and create employment – considering immigration, FDI, multinationals, supply chains, trade and productivity – looking beyond the typical attempts at cost-benefit analysis to answer the questions “Does EU membership matter?” and “What really drives growth?” Below are some of the research’s key findings:
- Being an EU member is crucial for UK growth. In particular for companies that export.
- The EU Single Market plays a fundamental role in driving UK productivity and innovation due to its sheer size and close proximity. Levels of competition and size of market matter.
- The EU is the exporter’s ideal partner. Exporters place a high priority on large, nearby markets with strong institutions and sophisticated financial markets.
- Exporters benefit from being close to the EU, the largest market globally, making up 25% of world GDP. Forty-five percent of UK exports and 50% of its imports are to/from the EU. More than 80% of UK companies that trade do business with Europe.
Moreover, EU trade deals with non-EU countries mean that approximately 60% of UK trade is with countries that come under the umbrella of trade agreements. This could increase to 85% if EU trade negotiations that are currently underway are successful.
- All EU exit options analyzed in the reports would raise trade costs for high productivity companies – leading to reduced output, higher costs, as well as lower investment. The knock-on effect would eventually be the loss of jobs and higher prices, lower wages, and poorer GDP growth.
Most business leaders favor continued EU membership for the UK
According to TheCityUK, the majority of business leaders are in favor of the UK remaining in the EU. The general public is swayed strongly by the economic implications of staying inside or exiting.
Chris Cummings, CEO of TheCityUK commented:
“Current EU membership not only gives the UK access to the most powerful tools to promote its interests including voting and veto rights, but it is also significantly tailored to meet UK- specific objectives”
“By contrast this research clearly shows that leaving the EU would pose a number of risks. Uncertainty about what a “no” vote in any referendum would entail is one of the most significant.”
Malcolm Sweeting, Senior Partner of Clifford Chance added:
“The success of the UK financial services industry is to a large extent built on EU Internal Market legislation. To abandon this for some untried, unknown and unpredictable alternative would carry very significant risks.”
“The UK is a powerful player in the EU and should retain the capacity to push for reform as a member.”
Gerry Grimstone, Chairman of TheCityUK said:
“Our research clearly shows that leaving the EU would seriously damage economic growth and jobs in the UK. But the EU can and must be improved. It mustn’t interfere in things which it does not need to do and it must make a better job of doing the things it has to do.”
“We need to continue saying this loudly and clearly. London is Europe’s financial center so there is a strong national interest in getting this right.”