Brexit Voice and Loyalty The City and the
Brexit, Voice and Loyalty: The City and the Limits of Financial Power Scott James (King’s College London) Lucia Quaglia (University of Bologna)
The puzzle • Brexit poses a fundamental challenge to the City of London’s economic model Ø 7% of UK GDP Ø 12% of PAYE income tax and NI Ø 15% of onshore corporation tax ØPays £ 60 bn in tax a year ØUK net exports of FS = $71 bn ØEmploys 2. 2 million people (House of Lords 2016)
The puzzle • City official bodies lobbied for a soft Brexit to retain passporting rights • May Government continues to pursue a hard Brexit Q. How can we explain the City’s apparent failure to influence the UK’s Brexit policy?
The Cameron Years • Early effort to restore relations with Brussels and not exploit Eurozone crisis • Osborne’s ‘remorseless logic’ speech (e. g. supports Banking Union) EU defence of Eurozone interests ØPost-crisis EU legislation (AIFMD, bonus caps, short selling) ØECB policy on euro-denominated clearing ØFinancial Transactions Tax
The Cameron Years UK defence of City interests • Attempt to use EU treaty reform to secure de facto optout from future FS legislation • Attempt to rally support of other non-Eurozone states to defend SEM against Eurozone caucusing • Strategy backfired (Dec 2011) revealing singularity of UK position (Thompson 2017 a, 2017 b) • Referendum (2013 Bloomberg speech) an attempt to revive opt-out strategy and re-embed EU membership • Strategy backfired as immigration, not City interests, became defining issue (Goodwin et al 2016)
Existing theories – not helpful Varieties of (Financial) Capitalism (Zysman 1983, Hall and Soskice 1996, Howarth and Quaglia 2016): • UK will seek to defend a key economic sector Theories of business power (Lindblom 1977, Moran 1991, Culpepper 2013, Bell and Hindmoor 2016): • City wields significant power and influence within government
Refining theories of business power • Structural power = governments dependent on investment decisions to sustain growth and fund public services (power of ‘exit’) • Instrumental power = mobilisation of financial and human resources for lobbying and policy engagement (power of ‘voice’) • A false dichotomy (Culpepper and Reinke 2014): threat to exit has to be asserted strategically through instrumental action; a firm’s bargaining strength is related to its structural position • Firms can manipulate SP by reshaping availability of exit options (‘structuring power’) (Farrell and Newman 2015)
• Three mediating factors between SP and IP: 1. Political statecraft • Pursuit of electoral winning strategies determines how elected officials interpret and construct BP • BP can vary suddenly in response to electoral developments and voter concerns 2. Institutional structures • State capacity and bureaucratic interests structure government-business interaction • e. g. informal ‘quiet politics’ v’s formal political arenas 3. Business organisation • Capacity for collective action determined by alignment of economic incentives, producing shared policy preferences • Regulation produces winners and losers amongst business
Brexit and the power of the City Pre-referendum • Produced ‘hard facts and figures’ detailing economic importance of City to UK economy, benefits of EU membership, and economic costs of Brexit Post-referendum • Signalling credible threats to exit, e. g. JP Morgan will ‘quit’ UK (Jamie Dimon); banks ‘quivering over the relocate button’ (Anthony Browne) • Structuring power = contingency plans to relocate staff to EU 27 (Paris, Frankfurt, Dublin, Amsterdam)
May’s party conference speech (Oct 2016): ‘There was an absolute stunned reaction which left us all for the next twenty-four hours in a complete funk, because it was clear that No. 10 didn't understand what the impact of that announcement was. ’ (Interview, UK bank)
City gears up… • EFSCAC established under Baroness Vadera to coordinate response and examine all EU regulation • City envoy, Jeremy Browne, 6 -month tour of EU capitals and lobbying embassies/MEPs • European Banking Policy Network est by BBA
May’s Lancaster House speech (Jan 2017): ‘They are deaf by choice…They did not know when they made those initial choices at the Party Conference. But they went ahead anyway, which was gross negligence on their part. But once they were told they carried on anyway. ’ (Interview, UK bank)
City rolls over… • City drops demand for full passporting rights • Calls for ‘bespoke agreement’ based on mutual market access and mutual recognition • Focused on quantifying economic costs of a ‘cliff edge’ no deal and reliance on third country equivalence rules • Drafting Financial Services Chapter of a UK-EU FTA Why has the City’s influence been so limited?
1. Political statecraft • Post-referendum vacuum filled by unofficial Brexit Cabinet and ‘All Souls Group’ (Redwood, Paterson, Baker, Jenkin) • Hard Brexit position reflected: 1. Short-term demands of party management (Eurosceptic backbenchers) 2. Long-term goal of building post-Brexit electoral winning strategy (capture UKIP voters)
May v 1 • City’s reputation diminished by ‘special pleading’ during the financial crisis • Industry ‘screams’ about Brexit viewed as ‘scaremongering’ • Hammond privately appealed to City as counterproductive ‘We took the lesson that we needed to observe a degree of restraint and comparative silence…There was a massive toning down from the industry post-referendum. It wasn't that our messages were no longer true, it was simply that we saw only downside risk in communicating them publicly. ’ (Interview, US bank)
May v 2 June 2017 General Election: • Toning down of Brexit rhetoric, acceptance of status quo transition, and formalised business consultation • But demands of party management more acute and increased risk of no deal • No movement on post-Brexit deal, which is ‘locked in’ by Lancaster House speech
City influence subordinated to political statecraft: ‘There’s a disconnect between technocratic arguments and the political arguments. We can have all the support that we want for some kind of pragmatic solution from the Bank of England the Treasury. But no one’s willing to say anything or speak to European counterparts until such time as they have political cover to do so. ’ (Interview, UK bank)
2. Institutional structures • Relations based on institutionalised City-Bank. Treasury ‘nexus’ (Moran 1991, Baker 1999) • But Whitehall reform has challenged channels of access: ØDEx. EU and DIT subverts traditional mechanisms for coordinating EU policy through CO, FCO and HMT ØNo. 10 closed down access for business; DEx. EU a ‘black hole’ and ‘impenetrable’; critical voices deliberately ‘frozen out’
‘What really gets you a good hearing is if you come in and say that you see opportunities around Brexit and come up with solutions to any problems. ’ (Interview, trade association) • HMT ‘completely downgraded’, sparking turf war with DEx. EU over responsibility for post-Brexit financial services • Bo. E relations strained as UK cannot be a ‘rule taker’ and views Brexit as opportunity to goldplate regulation/strengthen supervision
City’s response: Abandons soft Brexit: • ‘HSBC were pushing [the EEA] as an option. But I think it was quashed by the Bank of England who were adamant that a financial services sector of this size could not realistically operate on that model. ’ Disengagement: • ‘Ultimately the PM was the one calling the shots with her little cabal in No. 10. We didn't see any point as a bank in asking for a meeting with the Chancellor, let alone with anyone in No. 10. ’ Government capture? • ‘We have to challenge ourselves about whether we are just being captured by the UK government. How the government shuts FS out if it’s not saying things that it wants to hear is a big risk. Over time the FS sector has ended up singing to the same tune as the government. ’
3. Business organisation • Variegated impact of Brexit on sub-sectors/firm business models generates collective action problems Referendum campaign: • UK banks forced to go ‘silent’ due to electoral rules to avoid alienating customers and ‘hedge bets’ • But US banks very vocal and made campaign donations to official Remain campaign
Post-referendum: • Divergence over strategy has posed a ‘massive challenge’ • Groups competing to play a lead role: ‘What you saw was a slightly unseemly scramble in the form of EFSCAC. Which was partly a vehicle for self-promotion, partly a sense of desperation. It was badly executed, not representative, and not very influential. ’ (Interview, UK bank) • US banks resisted efforts to centralise lobbying and small firms felt marginalised = EFSCAC downgraded
Preference divergence: 1. US/EU banks (passporting) v’s UK banks (UK as rule-maker) ‘As a wholesale bank, we would rather give up the influence over rules being made, and have access to the single market than not…Now the Bank of England, and banks that have just a domestic footprint, they don’t want to be rule takers and they’re not really very fussed about the single market. So the trade-offs are different. ’ (Interview, US bank)
2. Banks (soft Brexit) v’s non-banks (‘pockets of Euroscepticism’) • Many investment/hedge funds contributed to Leave campaign, fund pro-Brexit FSNF, and view Brexit as opportunity to roll back regulation (‘one third of City’) ‘As an industry, we haven’t said this is a disaster for us because there are ways in which our industry can, on a very technical level, overcome obstacles without access to the single market… We have a different set of priorities [from the banks] and they are not quite as polarised. ’ (Interview, trade association)
Conclusion: ‘Politics trumps economics…’ What Brexit tells us: 1. BP is strategically (re)constructed to justify policy decisions (Jabko 2006) 2. State’s capacity to resist BP, in face of ‘exit’ and ‘voice’, is significant 3. Political interests take precedence over economic ones 4. Provides unique test case of the contingency of BP over time
…but for how long? May v 1: hard Brexit shaped by political statecraft May v 2: hard Brexit ‘locked in’ by June GE • Impact of economic downturn could harden, not soften, Brexit • No prospect of parliamentary arithmetic changing foreseeable future • Public opinion has not shifted fundamentally • New PM would face same structural constraints
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