Brexit Counterrevolution Is Risk to London
Posted by hkarner - 15. Juli 2016
Source: The Wall Street Journal
Though likely to remain Europe’s financial hub, it faces home-grown political uncertainty
Three weeks after the Brexit vote, a consensus is emerging that the U.K.’s decision to quit the European Union was primarily a revolt against globalization by “left behind” voters registering their anger at excessive immigration, which they blamed for driving down wages and putting pressure on public services.
There is plenty of evidence to buttress this thesis. Support for Brexit was strongest in areas that tend to be the most economically disadvantaged and where average levels of education are low, according to Professor Matthew Goodwin of Kent University.
But this “left behind” narrative hardly tells the whole story. It doesn’t explain why 75% of Conservative-held constituencies voted for Brexit, or nearly half of Tory MPs, or 58% of Conservative voters. Nor does it explain why support for Brexit tended to be higher in areas where immigration was lowest or highest among pensioners, while younger voters who are more exposed to globalization backed staying in the EU.Clearly, there was strong support for Brexit among many who were economically relatively well off. A case in point is in some quarters of the City of London.
Few square miles in the world can have benefited more from globalization. There is no polling data on how financial services industry workers voted. But while many of the big financial institutions adopted an official pro-remain position, anecdotally it seems there was strong support for Brexit in certain markets, particularly hedge funds, asset management and insurance and domestic-focused equity markets.
One senior banker reckons that up to 40% of participants in every meeting he attended this year were enthusiastic Brexiters.
Perhaps this isn’t so surprising. The rising tide of asset prices over the past 30 years may have lifted all boats but it didn’t lift them all equally. Globalization—and in particular the transformation of the City into Europe’s financial center as a result of the creation of the single market and the euro—brought about a revolution in the City, in which many of the old City elites did indeed find themselves “left behind”.
Until the Europeanization of London began in earnest in the 1990s, the primary business of the City was raising capital for British firms by British firms from British institutions and wealthy families.
That old domestic City still exists and plays an important role in the U.K. economy. But today, the primary business of the City is to raise capital for European firms in a pan-European equity market and a vast pan-European euro-denominated bond market that barely existed 15 years ago, while providing all the complex new derivatives-based hedging products that are central to the functioning of globalized trade.
The providers of this capital are now global and the skills needed to reach the top in these markets are very different than 30 years ago. A successful City career today hinges on the ability to forge relationships with a new technocratic class of European managers, rather than a few hundred families in the U.K.
A smattering of Latin and Greek from a top British university is less useful than fluency in half a dozen modern European languages or an advanced degree in economics or mathematics. Power has shifted to a new elite. Only one of the six biggest U.K. banks, HSBC, now has a British-born chief executive.
Many City Brexiters insist they are motivated by a desire to take back control of the U.K. from an interfering Brussels bureaucracy. But the strength of Brexit support in the traditional domestic capital markets points also to a desire by the old City elite to take back control from the new elite—and reassert the political influence of domestic capital over British institutions.
In this, they would appear to have broad support in the country outside London. In this respect, Brexit can be seen not so much as a revolution but a counterrevolution.
Certainly, the referendum appears to have catapulted hostility to the City to center stage in political debate. First articulated by leading Brexiters such as Boris Johnson and Michael Gove, it formed a centerpiece of new Prime Minister Theresa May’s leadership campaign speech on Monday, in which she took aim at excessive boardroom pay, weak corporate governance and foreign company takeovers.
How this agenda might be delivered and where it might lead is still unclear. Outside the confines of EU rules, however, a U.K. government will have much greater scope to pursue more nationalistic policies, particularly regarding takeovers.
There is an irony to this: What much of the City most feared about Brexit was that a vengeful EU might put regulatory obstacles to business in London’s way. Yet these fears increasingly seem overblown.
There is growing acknowledgment on both sides of the English Channel that the City will remain Europe’s financial center even after Brexit and that even if the EU denies U.K.-based firms passporting rights or refuses to allow them to clear euro-denominated trades, the loss of business and jobs to the EU will be small. Instead, the biggest post-Brexit political risks to the City may yet come from the U.K. itself.