While the financial industry is rightly concerned about the negative business impact if the UK leaves the EU, the reality of such an outcome is likely to be more nuanced. For sure, some banking operations would be shifted out of London to Frankfurt and Dublin, and there are reports that key US banks are already drawing up plans.
But, given the growing distinction between eurozone and non-eurozone countries, some of this business might be lost anyway. On the positive side, London would develop as an offshore centre to the EU and might attract new business that finds operating in an ever less accommodating eurozone no longer tenable.
The situation arises because the UK's prime minister, David Cameron, has promised a referendum on EU membership if his Conservative Party wins the next election in 2015. But, even if this does not happen, the EU is going to undergo substantial change over the next few years that will alter the role of London anyway.
We have already witnessed the UK government’s attempts to mount legal challenges to EU rules on short-selling, financial transactions taxes (FTT), bonus caps and, most recently, a European Central Bank ruling that clearing houses dealing in euro-denominated transactions must be located in the eurozone. The UK has already lost appeals on short-selling and FTT; if it got the same result on euro clearing – the most significant – London would already be entering new territory – with or without continued EU membership.
If the UK did leave the EU (the so-called Brexit) the two key points would be what kind of post-membership deal it forged and what sorts of restrictive practises Brussels dreams up for its remaining members in future.
As far as a UK-EU deal is concerned, the UK is in a fairly strong position in the negotiations – the EU accounts for 45% of UK exports and 50% of UK imports. In other words, any hard ball on access to the single market would hurt the EU as much if not more than the UK.
On the second issue, Brussels is becoming quite dependable. There is a general negative mood towards the financial sector and the latest idea being considered is to set up a standalone financial directorate headed by a single EU commissioner. London outside the EU would just have to wait for this new commissioner to get to work on a set of new rules and then wait for banks to move more of their operations to the UK capital in response.
