3 April 2017

Everyone is a winner in the race to replace the City


Behold once again the miracle of competition upon a marketplace. The attempt to lure financial services firms away from the City and into remnant-EU states is leading to intense lobbying to scrap the more insane bits of EU regulation and taxation. That is the finding of a new report from the Sheffield University Political Economy Research Institute.

The revelation should not surprise anyone; after all, this is what competition does. It leads to, well, competition. If it is over the possible location of some activity or other, then there will be that scramble to make that place amenable to that activity. The joy of this is that it breaks the log-jam of current political inertia on such matters.

At the heart of the tussle is passporting, the system whereby approval as a financial services vendor in any one EU jurisdiction allows the selling of those services in the rest of the EU. Firms in the City would obviously like to be able to continue to do this. And, given that London is where most of the European financial markets are, firms on the continent do not want to lose access to the City.

We might note at this point the standard commentary upon trade: imports are the reason you do it, not exports. It’s not what we can sell out of the country that matters, it’s what we can buy into it. Sure, it’s nice to make money sitting in Moorgate from foreign clients but it’s as nothing to the joy of the Continentals gaining access to financial services.

Fortunately, this passporting business is easy enough to comply with. It’s not quite sticking someone behind a brass plate in Dublin. But, as Lloyd’s of London has found, a small expansion of an existing office in Brussels will suffice.

The terrors of Brexit are, therefore, overdone. Perhaps the benefits are understated. The Sheffield report looks at how Paris, Frankfurt and Dublin are trying to attract those small portions of the City which might be tempted to move. Its authors find intense pressure in all three for them to relax the restrictive rules surrounding such activities.

That is especially true of Paris, where the rules are most restrictive. As the report points out, France may or may not lower its corporate tax rate, but the exemption period from absurdly high income tax rates upon incoming workers – like bankers – has already been extended to eight years.

Now this might all seem a little trivial to British readers, possibly not to our interests. But this competition will mean the rolling back of the more restrictive or ridiculous regulations and tax laws in the UK. It forces people to see what we will miss by maintaining costly rules.

To give another example, Brexit has almost entirely killed off the idea of a Financial Transactions Tax, which would have made the European economy smaller and all Europeans poorer, as even the EU itself has conceded. It has done so not because Britain’s departure removes the policy’s most powerful opponent, but because after Brexit markets with the tax would have to compete with one just offshore without it. They couldn’t possibly hope to win such a contest.

Financial markets do indeed need regulation. But there’s a Goldilocks level to be found and it is competition between different systems in different places which will lead to that ideal temperature of regulation and taxation.

Brexit, and the competition for whatever sliver of financial services might relocate, is thus tempering the excessive levels of regulation on the continent. Sure, this is hardly the most important thing about the UK leaving the EU. But it is going to make Europe better off, and over time will help us too.

Tim Worstall is senior fellow at the Adam Smith Institute