The City is under "continued regulatory" attacks from Europe David Cameron claimed yesterday promising to demand new safeguards when the European summit starts today. What are those regulations, why is Europe enacting them, do they constitute a threat and what part might they play in this week's negotiations?
The claim
My colleagues Nick Watt and Ian Traynor report today:
The prime minister, who faced a call from the right-winger Andrew Rosindell to show "some bulldog spirit in Brussels", told MPs that he would be seeking safeguards for the City of London.
Accusing Brussels of "continued regulatory" attacks on the City, he said: "I think there'll be an opportunity, particularly if there is a treaty at 27 [the summit meeting of all EU members], to ensure there are some safeguards – not just for the industry, but to give us greater power and control in terms of regulation here in the Commons. I think that that is in the interests of the entire country, and it is something that I will be fighting for on Friday."
The analysis
The thinktank Open Europe published a report this week called Safeguarding the UK's financial trade in a changing Europe, which you can find here. It includes a list of 49 financial regulations in the pipeline, which it says pose a threat to the UK finance sector (annex 1).
Open Europe describes itself as "in favour of cooperation with Europe, but campaigning for it to do less and better" and it declares on its website that it receives funding and support from the City and big business.
Not all of the 49 regulations listed are definitely being introduced, some are only being debated. The majority were responses to the last financial crisis to tackle irresponsibility in the financial sector, prevent risky banking practices and in some cases improve transparency and tackle tax evasion.
The chief ones include:
• Plans to introduce a Europe-wise financial transactions tax (FTT) known as a Robin Hood or Tobin tax and announced in August by Nicolas Sarkozy and Angela Merkel.
• Discussions over whether to force financial clearing houses to be based in the eurozone, which the report suggests could prompt a mass relocation from London.
• Reforms to short-selling, which has already been banned in some European countries.
• Hedge-fund reform.
On hedge-fund reform, for example, this would limit the amount of access non-EU hedge fund managers would have to the EU market. At the moment a fund manager can be based in a different country to the fund, with administrators or depositories in a third or even fourth country. The EU want these to be co-located, to improve regulation and make it easier to raise taxes. But Mats Persson of Open Europe told me:
You've had in the past a certain level of abuse and these guys not paying a lot of taxes, so there is a point to these changes. But because capital is so incredibly mobile you can't do that. These guys will move elsewhere. The intention is good but the economic reality is different. You will still have the risks but lose what you have.
Persson said:
It's not that the threat is regulation per se; regulation is clearly needed in the wake of the crisis. There were clearly regulatory failures leading up to the crisis and that has to be addressed. It's the nature of that regulation and how it is designed and what it will achieve that we are concerned with.
We're not just anti-regulation, we want the best regulation while also making sure we have trade and growth. It's a clash in regulatory approaches rather than one of wanting more and one wanting less. We're saying for example Britain meeds to have stronger capital requirements for banks [the amount banks keep in reserve to buffer against market instability]. Britain is getting stick for too stiff regulations.
He stressed that the fact that they were concerned about the relatively weaker regulations around capital requirements showed that they were not purely concerned about European regulation in itself; but about getting that right regulation.
The Robin Hood tax
I've had a brief chat with the British Banker's Association, who also raise the financial transactions tax as a potential threat. A spokesman said it was "the one he [Cameron] might stand a reasonable chance of doing something about".
The Europe-wide Robin Hood tax is an issue that all three political parties broadly share concerns about. George Osborne has indicated that it could cost the country half a million jobs (a claim disputed by the EU and fact checked by FullFact.org); Vince Cable has called it a "tax on Britain" but is not against an international transactions tax on principle; and Labour only supports a financial transaction tax that's on a global basis.
However, there is of course another view to the political front-benches, the bankers themselves and the research put forward by Open Europe, which it's worth stressing again receives support and funding from the City.
The outspoken Lord Oakeshott, the Liberal Democrat peer and former treasury spokesman in the Lords, told me:
The idea that in the worst crisis in a generation our top priority for our prime minister today is to protect the fat cats in the City is extraordinary. There's not much of a threat. There's some perfectly sensible proposals about more transparency and better corporate government in hedge funds which are perfectly reasonable. You do need some supra-national regulation. British regulations on their own haven't proved a great success in the past. Cameron is banging the drum because it's a simple scare to do – and many of the Tory donors are in the city.
However, he did add that the current plans for a European-wide transaction tax would be a threat as it stands, confined to Europe.
The Tobin tax is in principle a good idea but most serious economists and people who understand the markets know you could only work it on a world wide basis. I can't see it working if the US is not involved. But the Tobin tax couldn't possibly be imposed by some of western Europe on its own. I do think it's a red herring at the moment.
Richard Murphy, who runs Tax Research UK and campaigns against poverty and for better regulation and tax collection, told me:
It's an extraordinary statement of priorities at the moment in itself the fact that the city is at the top of the agenda when there is so much concern about the impact of bankers. The very cause of the problems addressed by Europe is to some degree being defended by David Cameron as his number one priority. We might agree that the City has a role, to make it your priority is extremely odd.
But purely economically he is also wrong. The problems in Europe there is a balance of payments crisis. As Martin Wolf argued in the FT yesterday [£] the value of payments is wrong and we need to put that right. One of the major reasons that's happened is because of the free movement of capital which is the basis of the City of London. We need to slow it down. A financial transaction tax would help do that. It's one of the essential measures to bring capital back under control. We do need capital controls.
On the wider proposals, he added:
This is about accountability and transparency and making sure that people pay their taxes. It's about effective markets. Why are they trying to maintain the status quote which is so flawed? Demanding a hedge fund is run, regulated and taxed in the same place is right. This is not being anti-market; it's arguing for a good market.
Clearly, there's an ideological divide about whether you want the City to flourish free of certain regulations, or whether you believe it is right to impose restrictions to prevent a repeat of the last banking-based financial crisis. But it's not entirely straight-forward. The City isn't opposing all regulations - for example they are backing better higher capital requirements proposed in the UK against Europe's more lax plans. And even some of those who support European regulations and a crack-down on the banks are concerned about the potential impact of a European wide transaction tax. What is the right balance?
I'm going to look for more evidence of this and talk to some of the expert reporters the Guardian has in Brussels covering the summit today. I'll update this blog shortly. Do you have any evidence that might show whether there is a real threat to the City? Get in touch below the line, email me at polly.curtis@guardian.co.uk or tweet @pollycurtis.
Ian Traynor, the Guardian's European editor, has just sent me this from Brussels.
Financial regulation is not remotely on the agenda at this summit. They have much bigger fish to fry. Cameron is being disingenuous, trying to create a separate narrative to suit his needs in contrast to the real business in which he's a bystander. He does this consistently at EU summits. But while financial markets regulation is not directly on the agenda, it is of course the bond markets that are at the heart of the crisis and will of course be discussed as part of the crisis response, plus Cameron and others can say what they like and will no doubt raise the subject
But the UK City case is not an empty posture. The UK has around 50% of the EU's financial services and the single market is critical. The government argues that 20 pieces of financial regulation in the pipeline where the UK could be outvoted. The European Central Bank, London argues, pursues a policy of urging that euro-denominated transactions be conducted in the eurozone, not London, but Frankfurt or Paris. Franco-German papers issued last night commits inter alia to a eurozone Tobin tax on financial transactions, which the UK will not accept but also can't veto.
I've been looking at the academic evidence available on the efficacy of a financial transaction tax at both regulating markets and raising money.
Jon Slater from the Robin Hood Tax campaign sent me this research tinyurl.com/6atzewz in a tweet. It's an IMF summary conducted earlier this year of the academic assessments to date of a financial transaction tax. It includes a table of all the financial transaction taxes already in place around the world, proof the campaign argues that unilateral taxes can work. The research gives a mixed verdict on the taxes. The IMF is not neutral in this, but its academic research is supposed to inform dispassionately. It concludes that such a tax would raise huge amounts of money with even a very low rate. It says:
The potentially large base of an STT promises an opportunity to raise substantial revenue with a low-rate tax. Current estimates of the revenue potential of a low-rate (0.5–1 basis point) multilateral CTT on the four major trading currencies suggest that it could raise about $20–40 billion annually, or roughly 0.05 percent of world GDP
However, it also warns the the evidence so far suggests that it would be ineffective at regulating markets and preventing instability – although its final verdict is equivocal. It says:
An STT [securities transaction tax] is also an inefficient instrument for regulating financial markets and preventing bubbles. There is no convincing evidence that STTs lower short-term price volatility, and high transaction costs are likely to increase it. Current economic thought attributes asset bubbles to excessive leverage, not excessive transactions per se.
Tim Harford, an economist and FT columnist, makes a similar case to the IMF but in slightly more accessible terms. (Hat tip to Bloomberg's reporter in the Commons, @RobDotHutton, for pointing me towards this.) Harford writes:
An analogy: if I have to pay a charge whenever I use a cash machine, I make fewer, larger withdrawals and the amount of money in my wallet fluctuates more widely. Bear in mind, too, that the most bubble-prone asset market is for housing, which is bought in very lumpy, long-term chunks. There isn't much evidence as to whether transaction charges reduce volatility. What there is is mixed – but perhaps leaning against the Robin Hood tax. On the French stock market, coarser "tick sizes" raise spreads and act like a tax: they increase volatility. Transaction taxes on Swedish stocks in the 1980s reduced prices and turnover but left volatility unchanged.
Neil McCulloch, a research fellow at the Institute for Development Studies, who is conducting a major review of all the evidence about the Tobin tax, argues that although it isn't a panacea, the research shows it is effective. He argues the more broadly it is implemented, the more effect it would be. He writes:
A Tobin tax is implementable, both at a European and national level. It isn't a panacea and won't "calm the markets", but it might make a useful contribution to public finances and to generating resources for tackling global problems such as climate change and poverty. With increasing political support for such a tax among EU leaders, it is time for policymakers and the financial sector to take these proposals far more seriously.
I've just been speaking with Aditya Chakrabortty, our economics leader writer, who said something similar. He said that a Tobin tax would raise money and make the banks pay, but it won't regulate their behaviour. He said:
There are now three objectives placed upon a Tobin tax. The first is what its inventor, James Tobin, called 'throwing sand into the wheels of finance'. He wanted to slow the pace of financial transactions. Back then, his target was foreign exchange and he was influenced by the experience of small developing countries, which would suddenly get a rush of investment and just as suddenly lose it. I don't think that would affect London.
The second objective was to raise money. Will it raise money? Everyone from the IMF to Bill Gates thinks so. The third objective, which has gone right up the political agenda, is that banks need to be seen to be paying their share of the bill for the financial crisis. I fail to see on economic grounds – as opposed to vested interests – the arguments against it. It's hard to argue that such a small tax would deter trade. Nor would it replace the central bank or regulator; it just raises a bit more cash.
Verdict
Is the City really under threat from Europe?
Yes. The financial regulations being implemented and considered in Europe are largely a response to the last financial crisis and measures such as a financial transactions tax, the reform of short-selling and hedge-funds are all designed to create more responsible behaviour in all the major financial centres. The banks certainly see that as a threat to them; it is supposed to be.
Whether the response is proportional or not depends on the faith you have in the City and whether you want to protect, control or punish it. A Tobin tax, for example, would raise significant amounts of money (although it's not entirely clear where this would go), it would show the electorates across Europe that the bankers are paying for their past mistakes but the evidence suggests that it wouldn't regulate risky behaviour. If, as is the plan, it's only implemented in Europe, the markets could simply move elsewhere.
Cameron has come down clearly on the side of the City – which might be an irony for some, seeing as many of the problems that the euro summit in Brussels will be discussing were, one way or the other, born in the financial centres of the world. The issue isn't officially on the agenda at the summit and Cameron's promise to his eurosceptic backbenchers is already have ructions even before the summit begins.
Below the line, a journalist from Welt online, the German website, has posted a translation from the Liveblog they are running today ahead of the summit. His translation says:
... but the british don't just want to stop the Financial Transaction Tax that Merkel wants. They want to withdraw from already established European banking regulation and wouldn't even accept the new Basel-III rules for credit institutions. These plans would create nothing less than a british special zone in the EU, where precisely the unregulated speculation that Merkel wants to stop, would continue.
The British plan is so radical, that the chancellor's office didn't believe that Cameron would take it to the summit. Even when the Premier was in the chancellor's office in november and wouldn't budge from his plans, they doubted his determination.
The alarm bells only started ringing on tuesday night, when in a guest column in the London Times, Cameron made the protection of his finance sector a condition to his agreement to a treaty change.
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