Andrea Leadsom MP: We must defend our financial services like Merkel protects Germany's automotive industry and Sarkozy protects French farmers
Andrea Leadsom is MP for South Northamptonshire. Follow Andrea on Twitter.
Last week the Fresh Start Project published the second chapter of its green paper on EU Reform. This one is on financial services. The project, led by me - together with Chris Heaton Harris MP and George Eustice MP - was set up to look in detail at how the UK can achieve a better relationship with the European Union that works in Britain's national interest. Over 100 Conservative MPs have given their support to the project.
It's clear that financial services, for understandable reasons, is a widely despised industry in Britain today. But it's vital to remember that this unpopular industry is not just a bunch of wealthy investment bankers – in fact it employs over a million people in Britain, over 200,000 in Birmingham alone. Not only that but financial services generates over 10% of all tax receipts each year and makes a massive contribution to our balance of trade.
Within the EU, the UK dominates the financial services sector, representing 36% of the EU’s financial wholesale markets and 61 per cent of its net exports in financial services.
In short, in terms of contribution to GDP, financial services matter as much to Britain as the automotive sector matters to the Germans and more than agriculture matters to the French. That is why we must stand up for the industry no matter how unloved it may be at times.
Yet the EU does dictate terms. Prior to the financial crisis, EU involvement in regulating this market supported British led calls for liberalisation; since the crisis it is now openly more hostile and restrictive. When the Frenchman Michel Barnier was made Commissioner for the Internal Market and Financial Services, Nicolas Sarkozy boasted that it was a ‘defeat for Anglo Saxon capitalism’.
The European Central Bank has demanded that clearing houses which deal in ‘sizeable amounts’ of business in euros must be located in the eurozone. The UK has more clearing houses than anywhere else in the EU, and the government has quite rightly taken the case to the European Court of Justice.
The idea of an EU wide financial transactions tax (FTT) is gaining in popularity. Superficially, it sounds like a great idea: a tiny charge would be levied on every financial transaction and it would be a painless way of raising money. Celebrities are queuing up endorse it. But it would not be the 'no pain' solution it's made out to be because it would in fact be a tax on pension funds and on savers as banks could quite legitimately pass it straight on to them as a transaction cost.
Not only that but If, as the EU wants, an FTT was imposed only on banks trading in the EU, it would make the EU’s financial services massively uncompetitive compared to other global centres such as New York and Tokyo. The European Commission itself has estimated that the turnover on derivatives markets could be ‘expected to decline by up to 90% in some market segments’ and that half a million jobs across Europe could be lost.
David Cameron was therefore absolutely right at last December's EU Council to seek safeguards for this critical industry, and when his modest demands fell on deaf ears, he was right to use his veto.
Ironically, there are also times when the EU stops the UK going as far it would like. The Vickers Commission on banking identified a lack of capital held by banks as a major problem and something that must be addressed if a future crisis is to be averted. The government agrees. However, the EU’s proposed regulations, called CRD IV, intend to impose not only a minimum capital requirement but a maximum one as well.
The question then is what to do about all this. Our paper presents a range of options, which we have coded green, amber and red.
The green options involve working within current structures, and doing things like: increasing and improving select committee scrutiny of the EU’s involvement with financial services; working harder to place Britons in key posts in Brussels; and forcing the European Commission to reconsider a proposal if one-third of all national parliaments object to it (as provided for in the Lisbon Treaty).
Amber options include a ‘single market protocol’ that would better codify regulation objectives, establishing a one-in-one-out system for regulation and emphasising the need for pro-growth measures, trying to change qualified majority voting rules and negotiating for other industry-specific protections. We have also described an idea for an emergency break or ‘double lock’ outlined by the think tank Open Europe. Lock One would make clear the UK’s special interest in financial services and require the Commission to reconsider proposals that impact disproportionately on us. Lock Two would give the UK a right of appeal for any proposal at any stage during the decision-making process before the proposal has been agreed by the Council and European Parliament, giving us a veto (because unanimity applies at the European Council level).
Finally, in the red category the UK Parliament could refuse to accept EU jurisdiction over financial services measures which are not in our national interest.
These are some of the options. One thing is for sure – the status-quo is not one of them. We have to defend our financial services like Chancellor Merkel protects her automotive industry and President Sarkozy protects his farmers.