What will Boris Johnson do for the City of London? - Editor's Blog -

Markets rallied on the news that UK prime minister Boris Johnson had won a large majority in the recent election and there were hopes for a softer Brexit. Such optimism may be premature, writes Brian Caplen.

The UK’s parliamentary arithmetic may have changed but apart from that the basic Brexit facts remain the same. With an 80-seat majority, there has been speculation that the UK’s Conservative prime minister Boris Johnson will now be free from the clutches of the Eurosceptic hardliners in his party and able to pursue a more pragmatic and softer Brexit. But the tough choices that need to be made have not altered and financial services are unlikely to be favoured over the wishes of the government’s new supporters in the Midlands and the north of England.

For the City of London, a more favourable outcome would mean having a regime more robust than the third-party equivalence which is offered to non-EU countries such as the US and Switzerland. The problem is that it can be unilaterally withdrawn, as the Swiss discovered last July when EU investment firms were prevented from trading on the country’s stock exchanges in a row about updating the EU-Switzerland trade agreement.  

Since the UK voted to leave the EU, the commission has become more rather than less intransigent towards Switzerland and has also shown in its negotiations with the UK that as a legal body it works in one direction only, regardless of the consequences. This means that a practical solution such as exchanging free movement of goods (very much in Germany’s interests as a net exporter) for continued passporting of financial services (the UK’s economy is 80% services) seems unlikely.

For his part, Mr Johnson was one of the leading proponents of the false idea that the UK could leave the EU while retaining all the benefits of membership and without any cost. In particular, the leave voters in the formerly Labour constituencies that made a historic switch to the Conservatives in the recent election, feel strongly about migration. The EU has always been steadfast in saying that access to the single market depended on free movement of people, an issue that has also caused political problems in Switzerland.

If the choice is between controlling migration and having passporting for UK financial services, Mr Johnson will realise that his political future depends on getting the former and letting the City struggle on with equivalence.  Bankers in the City would do well not to bin their hard Brexit plans yet as they could still come in useful. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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