It was one of the best speeches that Philip Hammond has given. That isn’t a grim joke. As Chancellor he has been nicknamed Spreadsheet Phil but contrary to reputation, he has given some resonant speeches in his time. As Foreign Secretary, standing in refugee camps, he found the right, searing words to condemn Russian bombing in Syria. Yesterday’s speech in the glossy headquarters of HSBC (“It’s great to be here in Canary Wharf,” he said, unconvincingly, at the start) wasn’t memorable in that way. All the same, the Chancellor set out a powerful case for why the European Union should extend any deal with the UK to the City and financial services.
It was the right pitch to make, given the importance of the industry to the UK (and more than two-thirds of its jobs are outside London, he reminded people). He is right to say it is in both sides’ interests. Without a deal, extra costs will weave their way through every pulse of daily life in the UK and Europe, and citizens and businesses will be the ones to pay.
As things stand, his chances of winning the argument seem low. The EU’s draft guidelines for negotiations, also published yesterday, mainly read like a rebuff of the UK’s request for a special deal. UK officials claim to detect signs of compromise in sub-clauses and say bravely that it’s only the start of talks. Maybe. But with other countries’ predatory eyes on the City’s revenues, financial services is an area where compromise seems elusive.
Would that have dire consequences for the City, as many have warned? That is probably overstated. But as Hammond said yesterday, it would be a pity. It could be so much better.
His argument was a City-flavoured version of the one that Theresa May made on Friday. Britain, as an EU member, currently complies with all EU regulations and so deserves special treatment, the Government says. It wants a handcrafted deal that gives the UK the freedom to diverge from some EU rules, knowing that it would then have to accept some restrictions on trade. In financial services rules could evolve separately but deliver the same results, Hammond said, adding that there would need to be a framework for supervising this and for resolving disputes.
Whether that would actually work is hard to say without much more detail. The strength of his argument, though, was not in the mechanics but the case for collaboration.
The International Monetary Fund has called the City a “global public good”, he noted. Its size and the competitiveness of its firms reduce the cost of transactions — to everyone’s benefit. Fragmentation could force banks to find another $30-50billion of extra capital for their balance sheets, he added. Relocation of clearing houses, as the EU has mooted, could cost firms €27 bilion a year.
What’s more, he said, UK taxpayers (who bailed out banks to the tune of £136 billion after the 2008 crash are, in effect, carrying the risk for much of Europe. That’s a strong point to notch up on the tally of “what we do for the EU”, although one he might find a harder sell at home (even though he quickly added that banks were obliged to be much safer now).
So far, though, the UK’s pitch has met an unyielding “No” from EU negotiators. The two sides are talking straight past each other, lobbing metaphors of eating cake and picking cherries as they go. The UK calls for pragmatism in pursuit of mutual economic gain. It assumes that the “logic” of this “win-win” solution will triumph. The EU hears in this an existential threat to the single market and to the European project itself.
Maybe there will be more room for compromise than is audible now. It is, after all, only the start of serious talks. But financial services are hardly going to be top of the list for special favours. The Chancellor pointed out that the EU was prepared to include financial services in the ambitious Transatlantic Trade and Investment Partnership talks with the US. But France, Germany, and the Netherlands (otherwise a close UK ally) all have hopes of luring away financial firms and have little incentive to bend.
If there isn’t a deal that covers financial services, what happens? The City will no doubt survive. It has many strengths. In a suddenly lyrical passage yesterday, the Chancellor declared that “It is a combination of intangibles — language, legal system, time zone, culture, networks, risk appetite, regulatory approach, all blending together to create an ecosystem.”
Yes, there is a threat that some firms shift jobs — or headquarters — to the EU. Or that jobs melt away to New York, Singapore and Hong Kong, not much noticed at the time but still, over the years, really amounting to something. The future of some key activities, such as Eurobond clearing, is unclear.
All the same, fewer jobs have so far moved away than many feared. Firms such as the UK’s low taxes and flexible employment laws. Bankers like London — for the schools, the houses, the lifestyle and the English language.
Meanwhile, UK officials quietly note the advantages that would come with stepping outside EU regulation — not a “race to the bottom” but a chance to improve on awkwardly-drawn rules. The Solvency II directive (on insurance) and the MiFID II (on investment) have many wrinkles, they say, which the Bank of England could sort out quickly but the EU would take years to fix.
Still, the best case is a deal that aims to preserve much of the present trade in financial services. That is the force of what the Chancellor said yesterday. It’s a pity, at least at the moment, that the reception has been so cool.
Bronwen Maddox is the director of think-tank the Institute for Government