The City has moved on and accepted Brexit. Why won’t the EU do the same?

The City is quaking in its boots. The French are putting up barricades around the La Defence and other Parisienne financial districts to ward off the Brexiter Brits from looting their country’s riches, while in Brussels the Berlaymont technocrats – led by Germany’s former defence minister and president of the European Commission, Ursula von der Leyen – have placed the city under curfew.

Just joking. But not entirely. With all the palaver over who paid what and how for No 11’s new gold wallpaper dominating the UK headlines, you may have missed that the French artillery – with von der Leyen taking up the rear – have been waving their swords at the City, threatening “brutal” reprisals because of the UK’s supposed misdemeanours against French fishermen and other potential transgressions.  

In an interview with BFM TV, Clément Beaune, the French minister for Europe and an unreconstructed federalist, warned that unless the UK gives French fishermen access to the six to 12-mile zone in the Channel, the French would force through powers in the post-Brexit Trade and Co-operation Agreement signed this week. 

And if not, Beaune threatened that the French will respond with retaliatory measures against the City and manufacturing industries. This is what he said: “We are asking for the whole deal, nothing but the deal, and for as long as it has not been implemented we will carry out reprisals in other sectors if it is necessary. It is not a blank cheque.” 

Translated, the Europe minister warned that UK financial firms seeking authorisation in France could be blocked from entry to the ‘portes de Paris’.

“We won’t give any for as long as we don’t have guarantees on fishing and other issues. It’s give-give. Everyone needs to respect their commitments, if not we will be as brutal and difficult as is necessary as a partner.”

The white smoke from Brussels was equally menacing. While von der Leyen said the TCA was the basis for a strong partnership, she also told the European Union in her speech made after signing the agreement, that the EU will not hesitate to use “real teeth” to enforce the TCA and that Britain would face penalties, including unilaterally imposed trade tariffs, if it failed to honour the terms of the agreement, whether over fishing rights or Northern Ireland.

The TCA passed with a big majority, as everybody knew it would as, well, there was no other option. Why then were both Beaune and von der Leyen so extremely hostile in their comments about the UK when the TCA was finally approved by the EU? 

Was this the tetchiness of the inadequate? An attempt by both Beaune and VDL to deflect from their own serious problems at home? A gnashing of teeth from the ideologues who still cannot accept that the UK has decided to take an independent and different route from the EU?

Who knows… but the tone and nuance of their language was not what you would expect of friends and neighbours. Beaune can perhaps be excused: he must be feeling seriously rattled. As a senior member of President Macron’s government, the heat is on after the extraordinary events of this week when France’s military chiefs – present and retired –  warned of a coup against the government to seize control in order to fight “radical Islam” and prevent the “disintegration” of France. Meanwhile, Marine Le Pen soldiers onwards. 

Beaune may be right about the UK not giving out enough licenses – although that is disputed – but his words don’t suggest someone who wishes for more harmonious relations. Instead, his anti-UK rhetoric came across as the words of a politician desperate to deflect attention away from the generals while winning over voters in the fishing areas of Brittany ahead of next year’s elections. 

In Brussels, VDL is under enormous pressure from politicians and industrialists in several EU member countries furious with her handling of the vaccine procurement and the roll-out. Although all EU members have backed VDL’s decision to sue AstraZeneca – or the “UK-Swedish AstraZeneca” as she describes it – for allegedly not fulfilling its contract with the EU, there are growing fears that taking such legal action will have enormous consequences for those wishing to do business in the EU. 

What, though, of this “brutal” warning to the City? Do either Beaune or VDL have legs to stand on with their threats to use their teeth from the TCA against businesses wanting to do business in the EU? And can they prevent them from doing so?

Word from the Square Mile is that neither the authorities nor the firms are that worried by the latest threats. In that Gallic way, they are shrugging their shoulders, and have moved on, as they say. 

Most firms now accept the EU is not going to grant the UK equivalence – even though the UK authorities have unilaterally given EU firms equivalence – and that there will be no substantial agreement on financial services. Indeed, the Memorandum of Understanding which has just been signed does little more than promise there will be another future MoU. 

But what has changed in the City mood is that many of its most senior figures – the majority of whom were ardent Remainers – have accepted the Brexit game is over, and that there is no longer any point in shadowing all the EU rules.

By all accounts, equivalence is dead. The big exodus out of the City that was predicted has not happened. What people are now looking at is pivoting their businesses to other markets – to the Far East and the US.

While there has been much hot air over fears that the big US and international firms will up sticks across the Channel, the reality is quite different. There have been losses: a recent report by New Financial showed that 400 financial services firms in the UK have relocated part of their business, assets, staff, or legal entities to the EU. About £900bn in bank assets – roughly 10 per cent of the entire UK banking system – have been or are being moved. 

Forecasts that tens of thousands of jobs will be slashed have been overdone: only about 7,000 out of a total of 1.1 million jobs in financial services overall have moved.

According to the latest government figures, the financial services sector contributed £132 billion to the UK economy, 6.9 per cent of total economic output. More than half that was generated in the City of London. Exports of UK financial services were worth £60 billion in 2019 and imports were worth £18 billion, so there was a surplus in financial services trade of £41 billion. Business between the UK and the EU is a big chunk of this, generating a trade surplus of £15 billion according to estimates from the CityUK. This accounts for about a third of the UK’s trade surplus in financial services, making it our single biggest market.

What is fascinating is that there is no bigger winner from the moves: Dublin has gained the most businesses with 135 relocations, well ahead of Paris with 102,  Luxembourg with 93, Frankfurt with 62 and Amsterdam with 48. 

In terms of London’s future dominance, that is important because it demonstrates that there is no one capital which is deemed more attractive to do business in than others, although Frankfurt is emerging as the magnet for banking assets.

With respect to the future of clearing – an area of business which the French are particularly keen to steal away from the City – this is important because it means the infrastructure required for big scale clearing is simply not available on the continent. 

Even if the EU domestic markets were to force their banks to bring the clearing of euros onshore, it will take years to build up the necessary technical skills and legal frameworks to operate the machinery for central counterparts of scale.

Yet the City is not complacent. Those in the hot seat know that firms have to pivot to new markets, become even more innovative and inventive in providing their services in a more liberalised trading environment.

Only yesterday the Bank of England said it was looking at how to liberate smaller banks and building societies that operate only in the UK from the more onerous regulations they have to follow which were designed to control the world’s biggest financial institutions. It’s a move that’s been taken in the US but would be banned under EU law.  

Indeed, the Bank’s Victoria Saporta, head of prudential policy, talked of how the Old Lady is now beginning to adopt a post-Brexit move from being a “rule-taker” to a “rule-maker.” Hurray. Long may it last. 

All we need now is for Michel Barnier, the EU’s former Brexit negotiator, to enter the race to become president of France and all will be well. During this week’s debate on the TCA, Barnier repeated his plea for the EU to “learn lessons” from Brexit. “This is a divorce. It’s a warning, Brexit, and it’s a failure — a failure of the EU,” he said. On the future of the UK-EU relationship, Barnier quoted Jo Cox, the Labour MP who was murdered by a far-right extremist during the Brexit referendum. “We have far more in common than that which divides us.”