The first is by ripping up the legal framework, as the EU cancels the “passports” that let City firms operate across the continent. Activity may move in search of certainty. The second is by the remaining 27 EU members adopting an industrial policy that uses regulation to compel financial firms to move to the Euro zone. As Amsterdam, Frankfurt and Paris jostle for business, this fight is turning ugly. And the last is from within Britain—if a Corbyn government takes the country back decades, with nationalisation at below-market prices, a financial-transactions tax, a tough line on mergers and acquisitions and possibly even capital controls. If a Labour government also attacks private schools and second homes, London’s giant pools of capital will disappear faster than a trader’s cocktail.
Given the sums at stake—London hosts $20trn of bank assets and securities—you might expect a grand bargain between the EUand its financial hub. Some chance. Britain has spurned the option of staying in the single market. A bespoke deal for financial services is not on the table because the EU is loth to grant special favours to a departing country. It is as if New York and Wall Street were divorcing America without any agreement. Thanks to temporary licences, the risk of a financial crisis on Brexit day is slim. But these arrangements will not last long—the deal over derivatives, say, expires next year.
Behind the stand-off is a deep divide. The City could keep free access to the EU if it agreed to be regulated by it. But Britain rightly fears handing control of its largest industry to the bloc, particularly if the EU’s unspoken goal is to shrink London. Europe’s motives blend principle and greed. It wants to supervise its own financial system, but also to grab jobs and tax revenues from London. In the long run the most likely set-up is “equivalence”, in which firms receive recognition from Europe. The catch is that, as Switzerland is discovering, this can be withdrawn at any time, leading to a state of permanent instability. That threat will lead to a drift of activity and people into the Euro zone as EU authorities win full sovereignty over the Euro zone’s capital markets.