It may not matter if the City declines post-brexit

The Chancellor is naive to think Britain will get a deal on financial services but we have other strengths

London as a financial centre will suffer after Brexit, but beyond those directly affected, does it actually matter? I ask the question not as part of some cliched anti-banker rant, but to challenge the assumption that Britain’s future prosperity relies solely on its ability to maintain its current pre-eminence in finance.

Philip Hammond is often accused of Eeyore-like pessimism on Brexit. His apparent lack of enthusiasm for the adventure infuriates Brexiteers.

Yet when it comes to the City, the Chancellor has turned into a cheerleader for post-brexit Britain worthy of the most starry-eyed of Leavers. Willingness to trade fisheries for continued European access only partially spoils his message of hope for the future.

Believe me, he seemed to be saying in a speech at London’s Canary Wharf this week, the EU will eventually be persuaded of the merits of allowing the City to carry on operating after Brexit in much the same way as it does now. Nothing will change, to coin a phrase. It wasn’t what he said during the referendum campaign, and I doubt he genuinely believes it now.

But if he does, he’s being naive. The EU has consistently made it clear that continued preferential access will not be allowed. It is not bluffing. Donald Tusk went further still in explaining this week the EU’S negotiating stance on trade. If not willing to abandon its red lines, the President of the European Council insisted, the only form of trading relationship that would be available to Britain would be one that was economically harmful to all involved, the EU alongside the UK. That he could so shamefully surrender the economic interests of his own citizens to legalistic dogma was extraordinary.

But nor was it any great surprise. To Britain’s dismay, the EU has long been as much a political as an economic construct. Not for the first time, the political purpose has triumphed over the economics. Nowhere is this determination to disadvantage Britain for leaving, whatever the perceived economic costs to the EU itself, more apparent than in financial services.

In part, this is a simple land grab by Paris, Frankfurt and others jealous of London’s commanding position in finance, together with the jobs, wealth and tax revenues it bestows.

But there is also a more honourable purpose. No jurisdiction I’m aware of allows completely unfettered access to independently regulated outsiders in financial services, and with good reason. As the economic crisis of 10 years ago amply demonstrated, finance is a dangerous business. Given the systemic threat it sometimes poses, you seriously want to be in control of what it is up to.

For the City, membership of the EU has been a huge benefit, allowing a degree of access on preferential terms to overseas markets which is virtually unheard of anywhere else. American and European financiers have responded by consolidating once far flung national operations into London hubs. Estimates of how dependent the City is on EU licensed access vary, but some studies put it as high as 25 per cent of all activity. In terms of fees and commissions, it may be worth as much as £40billion annually. Loss of access is therefore going to carry a quite considerable short-term cost. But whether it really matters in the long term is much more questionable.

In championing the City, Hammond points to the efficiencies of its markets. Fragmentation would make finance more costly for all, he insists. Yet the diseconomies of City dominance are perhaps just as striking.

Focusing so much of Europe’s financial activity in London may have been good for UK tax revenues, but it is not clear it has been quite so good either for the UK economy or its European counterparts.

Disintegration of finance, making it again more local and closer to the households and businesses it is meant to serve, may be no bad thing.

Dating back to the innovations of the seventeenth century, London virtually invented finance in its modern form.

At the height of empire, the City was even more powerful than it is today. Yet its more recent successes are really only a 30- to 40-year-old phenomenon, driven substantially by membership of the EU.

Even without Brexit, it’s not clear the current degree of hegemony would have been sustainable, such is the political suspicion finance has attracted since the crisis.

Fortunately, the UK has a supremely adaptable economy, and as finance declines in relative importance, other, newer success stories will spring up to take its place.

The world’s brightest and most ambitious are still queuing up to join us, Goldman Sachs always insists, but the alternatives in technology and the creative industries are growing fast. Even as a sure fire way to make money, finance is losing its allure.

Every industry has its moment on the stage, its time of pomp and hubris. It may be that, for the City, that moment has passed.

The structure of the UK economy will change in unpredictable ways after Brexit; just what the doctor ordered, some would say.