The EU and the City: What next?
Foreign Office Minister David Lidington spoke to the City of London Institute of Directors about what's next for the EU and the City.
Just over a year ago, and very early in the morning, I made the trek from Westminster to the City along with much of the diplomatic corps.
We came to listen to a speech that set out a positive vision for Europe.
It didn’t accept the defeatist idea that the UK was in Europe; there was nothing we could do about it; so we should keep quiet and stop complaining.
Nor did it accept the equally negative position that we could never hope to alter the status quo, so we should just get out as soon as possible and fend for ourselves.
What Prime Minister David Cameron said in his Bloomberg speech was that Britain does have influence in Europe; we have a history of successful interventions; and, if we work with our partners, we can continue to shape change in a way that will benefit everyone.
Europe’s leaders still face an urgent need to deliver jobs and growth. This requires Europe to be open and competitive.
And as we renew the EU’s institutions this year, we must work with them to make sure that any decisions taken at the European level are flexible, fair and democratically accountable.
Growing consensus
I have been known to say that, as Minister for Europe, there is never a dull moment. But what has happened in the last few months has been particularly interesting.
Domestically, we’ve seen growing support for EU reform. People see the benefits of being part of the world’s largest marketplace, but they are also looking at ways in which we can face up to, and tackle, the problems that clearly exist.
In September, the Institute of Directors polled its members. It found that six out of ten would want to stay in a Europe with improved terms of membership.
For the CBI, eight out of ten members would want to stay in a reformed EU.
And it’s not just big business. The Federation of Small Businesses says much the same, as do the British Chambers of Commerce.
Between them, these organisations speak for 600,000 businesses.
And this matters, because when you ask the British people who they listen to on Europe, overwhelmingly, it is the business voices that carry most weight. Politicians, by the way, came second in a survey by TheCityUK. I was quite glad to see us on the list.
But this is not just happening here. Across Europe – in country after country, and across the political spectrum - there is a growing consensus on what direction these reforms should take.
The debate has moved from: should we reform?, to how do we reform?, to how are we doing so far and where do we go next?
Over the last few months, the UK has hosted the leaders of Germany, France, Ireland, Bulgaria, the Netherlands and Italy. And the Prime Minister has spent many hours in conference with fellow leaders at European Councils and other gatherings.
…German Chancellor Merkel is saying that the EU must become “stronger, more stable and more competitive”.
…And Italian Prime Minister Matteo Renzi – who is from the centre-left, not the centre-right – speaks passionately about the need to improve the business environment and cut red tape.
Foreign Secretary William Hague has been engaged in whirlwind diplomacy too, leading the European coalition in support of a united Ukraine.
He has found unity and resolve not just on Crimea, but also on the urgent need to diversify our energy supplies.
I am just back from the Baltics, where we have shared interests in digital and in services - 70% of our economies but only 20% of intra-EU trade.
And George Osborne was in Cambridge last month with German Finance Minister Wolfgang Schauble. Together, they published an article in the Financial Times on the need for fairness between euro-ins and euro-outs.
Importance of the City
This last point is particularly relevant, because I want to be quite clear that, as Europe reforms, we will be standing up for the interests of the UK’s financial and professional services.
The UK is number one in the world for financial services exports – ranking above the US. And the City of London is Europe’s financial centre.
Member states across the EU are stronger for having London as their financial hub, in much the same way that the US draws strength from New York.
Having a global centre in this timezone benefits over 11 million people employed in financial and professional services around Europe: two million of them in Germany and two million in the UK.
This is an industry that accounts for 6% of Europe’s GDP, but it also underpins much of the rest: helping businesses to grow; to invest in new technology; to guard against risk.
Competitiveness
If we take this as our starting point, then what next for the EU and the City?
First, our agenda on competitiveness, which will have a direct impact on people working here.
We have just emerged from the worst financial crisis since 1929, growth remains sluggish and a quarter of young people are unemployed. Against many people’s expectations, last year, we secured a cut in the EU’s long-term budget for the first time ever.
We need to seek out sources of growth that don’t depend on the taxpayer.
Ninety percent of global growth is due to come from outside the EU in coming years, so it is imperative that we expand our trade, using the clout of the world’s biggest marketplace to secure the best deals.
The UK has championed the Transatlantic Trade & Investment Partnership (TTIP) that could be worth £10bn a year to the UK; the EU-Japan deal that could be worth £5bn a year; and the EU-Canada deal that could be worth £1.3bn a year. The EU is also working with China on an investment deal, and the UK is pushing to start talks on trade with China.
The EU-US deal alone could have a substantial impact on the City.
Analysis from the Department of Business, Innovation and Skills suggests that if we can achieve an ambitious deal – which is what we hope to conclude next year - UK finance exports to the US could increase by over three percent, while insurance exports could increase by almost four percent.
This is a goal that we’re throwing our full weight behind. As the hosts to the world’s two largest financial centres, there is a premium to the EU and the US having consistent financial regulation and open markets. This proposed partnership could promote more consistent and higher standards worldwide, and enhance global trade.
Then, there are tens of billions of euros to be saved by cutting back on unnecessary EU red tape.
We have pushed the Commission to go further and faster to streamline regulation. In October, David Cameron gathered seven other heads of state and Commission President Jose Manuel Barroso to hear concrete recommendations from his Business Task Force about what we can do.
We have allies on this in Germany, Italy, Sweden and many other countries, and have already made real progress, Chancellor Merkel said in February that it was Britain and Germany working together that had made the Commission take this issue seriously.
Flexibility and Fairness
Next month, a new European Parliament will be elected. In November, a new European Commission will be formed. These institutions will need a strong competitiveness agenda.
But we’d also to see an understanding of the need for flexibility and fairness, reflecting Europe’s great diversity; and this is my second point.
A snapshot of the EU would show 28 member states, ranging in population from over 80 million to 400,000; some in Schengen, some outside; some islands, some landlocked; some have decades of membership under their belts, while Croatia has been a member for less than a year. Then, of course, you have the euro-ins and euro-outs.
The UK won’t join the euro. That’s clear.
But a stable euro is in the interests of the City and the UK as a whole. We want the euro to work.
It is plain – and has been since the economic crisis – that the euro needs to be put on firmer foundations to ensure its long-term stability. We support the Eurozone’s efforts to put in place the governance and structures needed for that to happen, as the Chancellor and the Minister Schauble made clear.
The European Stability Mechanism has been created to support countries in difficulty.
The Single Supervisory Mechanism is now overseeing major banks.
The next step is the Single Resolution Mechanism.
Fairness between euro-ins and euro-outs has been central to the UK negotiating position on all of these.
We have ensured that member states that don’t take part in the banking union are treated in the same way as participating member states. For example, decisions about state aid and the application of the European Central Bank’s tasks and powers will be applied equally to those inside and outside the banking union.
The legislation also contains an explicit requirement to ensure the rules do not discriminate on the basis of nationality.
Then, Liikanen.
In January, the European Commission published its proposals on structural reform. It has two main components: a ban on proprietary trading, and the structural separation between trading activities and deposit-taking for banks that meet certain criteria.
The proposal is part of European efforts to tackle the perceived implicit guarantee that Governments will be compelled to step in to support failing banks. This is a key part of the reform package to increase the resilience and resolvability of the banking sector.
Domestically, the UK has already brought forward significant reforms – which go further than the measures outlined.
The European Commission, recognising this, included in its proposals a derogation for countries like the UK that have already introduced equivalent provisions in their national legislation. A victory for fairness and for common sense.
Conclusion
To wrap up, let me quote from evidence submitted by TheCityUK to the balance of competences review this year:
The UK has an essential role to play within the EU to continue to make the case for open international capital markets, to influence the creation of a Single Rule Book, and to secure an appropriate completion of the Single Market in services. It should also champion a positive agenda for Europe, which will be essential in making Europe competitive in global markets and ensuring it is able to deliver the jobs and growth across the continent that everyone wishes to see.
Using our seat at the table, this Government is championing a positive agenda in Europe. We are successfully making the case for open markets and we are winning allies on regulation and trade.
2014 is a critical year.
We need to make sure that despite events on the global stage - despite the changeovers in Brussels - we do not take our eye off the ball.
We need to build on the growing consensus of opinion to push through reforms that will deliver jobs, growth and prosperity.
We need to ensure fairness and flexibility that will protect our vital financial and professional services, and allow them to flourish.
And we need to show people across Europe that have genuine and well-founded concerns that the status quo is not a given. Change is happening; we are shaping it; and it can deliver real benefits to everyone in Europe, including here in the UK.