London is worried that its vast and precious financial services industry, known as the City, is about to take a Thelma and Louise-style plunge over the cliff.
Brexit – Britain's exit from the Europe Union – will slow the economy, hurting the banking, trading, foreign exchange, fund management and insurance businesses. Jobs will be lost. But that's not the real threat. The real threat will come from Paris and Frankfurt, which have long envied London's position as Europe's, and perhaps the world's, premier financial centre and would love to plunder its gold and silver.
Brexit may give them that opportunity, but snatching great chunks of the city and shipping them across the English Channel won't be easy. And if some of the City's jobs vanish, so what? A City trim job might even be a good thing for London and the rest of Britain.
The economies of London and Britain are way too heavily skewed towards the City and we know that creating one-product wonders, as Alberta has done with oil, is never a good idea. According to the City of London Corporation, the British financial service sector is responsible for almost 10 per cent of national output, the highest among the Group of Seven countries, with associated professional services contributing another 5 per cent or so.
The 2008 financial crisis revealed that Britain's banks were time bombs disguised as glass and steel skyscrapers. The government of then-prime minister Gordon Brown had to nationalize half the banking industry to prevent wholesale financial and economic collapse. In spite of the new safeguards, such as dramatically toughened up bank capital requirements, it could happen again.
Plundering wealthy European financial centres has been good sport for decades. In 2012, when newly elected French president François Hollande launched his soak-the-rich campaign, Boris Johnson, who was then mayor of London, invited French bankers to decamp to low-tax Britain ("Vous êtes tous bienvenus," he told them). Some made the trek and the City took another small step toward world financial-services domination.
Not long later, the European Central Bank launched an assault on the City by challenging its status as the global powerhouse of euro-denominated trades (the city has a 70-per-cent share of the euro-denominated clearing business). The ECB argued that it could not be expected to provide emergency support to clearing houses that operated outside the euro zone, as Britain does since it does not use the euro. Britain went to court to argue that "location policy" was discriminatory and won. The ECB retreated with its tail between its legs.
The outcome of the June 23 referendum shifted the advantage back to the continental Europeans, who see Brexit as an opportunity of a lifetime to swing a lot of business to Paris and Frankfurt. Smaller European financial centres – Dublin, Luxembourg, Milan, Warsaw – are also planning mini-raids of their own. Their game plan centres on the "passporting" rule that allows banks anywhere in the EU to offer their services across the EU without authorization from each member country. The rule has been a godsend to the British banks. Britain's EU membership also meant the banks could hire anyone they wanted from any EU country – no special work visas required.
The Brexit-inspired loss of passporting rights is the nightmare scenario for the British banks and their investment banking arms. Overnight, it would wreck or severely damage their pan-EU business models. Within days of the Brexit vote, Mr. Hollande ramped up the fear factor in the City with a threat. "The City, which, thanks to the EU, was able to handle clearing operations for the euro zone, will not be able to do them," he said. "It can serve as an example for those who seek the end of Europe … It can serve as a lesson."
Some banks will hedge their bets by placing some trading jobs in Paris or Frankfurt; in a small way, that process has already started. But it's way too early to predict doom for the City. In spite of the Brexit vote, Britain remains a full member of the EU and will stay for at least another two years, probably longer, as stalling tactics drag out the exit negotiations.
There is a chance, however small, that the new Conservative leader, perhaps front-runner Theresa May, will be able to negotiate a U-turn that would keep Britain's EU membership intact. Failing that, there is a fair-to-good chance that the negotiations to form a new trading deal with the EU will keep some or all of the passporting rules alive.
It's hard to imagine a scenario where the City gets utterly gutted. The City has enormous advantages. It operates in English, the international language of finance and commerce. Britain's contract law is cherished. London's talent pool of traders, lawyers, accountants, researchers and techies is unmatched anywhere else in Europe. They will not disappear in great numbers, but some will go.
In spite of the City's success, or because of it, the average Briton probably wouldn't care, or might even welcome, the loss of a good chunk of the 500,000 City jobs. The flood of bankers and their outlandish incomes have jacked up house prices to absurd levels, making great swathes of London unaffordable to the middle class. Prices for everything from taxis to restaurants are painfully high.
Losing 10 per cent of those jobs would take some hot air out of the London housing bubble, giving the unrich the opportunity to buy houses. The City's loss would be Britain's gain.