Brexit, Voice and Loyalty: The City and the Limits of Financial Power - PowerPoint Presentation

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Brexit, Voice and Loyalty: The City and the Limits of Financial Power

Scott James (King’s College London)Lucia Quaglia (University of Bologna)Slide2

The puzzle

Brexit poses a fundamental challenge to the City of London’s economic model7% of UK GDP12% of PAYE income tax and NI

15% of onshore corporation taxPays £60bn in tax a yearUK net exports of FS = $71bnEmploys 2.2 million people

(House of Lords 2016)Slide3

The puzzle

City official bodies lobbied for a soft Brexit to retain passporting rightsMay Government continues to pursue a hard BrexitQ. How can we explain the City’s apparent failure to influence the UK’s Brexit policy?Slide4

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

Post-crisis EU legislation (AIFMD, bonus caps, short selling)ECB policy on euro-denominated clearingFinancial Transactions TaxSlide5

The Cameron Years

UK defence of City interestsAttempt to use EU treaty reform to secure de facto opt-out from future FS legislationAttempt to rally support of other non-Eurozone states to defend SEM against Eurozone caucusing

Strategy backfired (Dec 2011) revealing singularity of UK position (Thompson 2017a, 2017b)Referendum (2013 Bloomberg speech) an attempt to revive opt-out strategy and re-embed EU membershipStrategy backfired as immigration, not City interests, became defining issue (Goodwin et al 2016)Slide6

?Slide7

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 governmentSlide8

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 positionFirms can manipulate SP by reshaping availability of exit options (‘structuring power’) (Farrell and Newman 2015)Slide9

Three mediating factors between SP and IP:

1. Political statecraftPursuit of electoral winning strategies determines how elected officials interpret and construct BPBP can vary suddenly in response to electoral developments and voter concerns2. Institutional structuresState capacity and bureaucratic interests structure government-business interaction

e.g. informal ‘quiet politics’ v’s formal political arenas3. Business organisationCapacity for collective action determined by alignment of economic incentives, producing shared policy preferencesRegulation produces winners and losers amongst businessSlide10

Brexit and the power of the City

Pre-referendumProduced ‘hard facts and figures’ detailing economic importance of City to UK economy, benefits of EU membership, and economic costs of Brexit

Post-referendumSignalling 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 EU27 (Paris, Frankfurt, Dublin, Amsterdam)Slide11

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)Slide12

City gears up…

EFSCAC established under Baroness Vadera to coordinate response and examine all EU regulationCity envoy, Jeremy Browne, 6-month tour of EU capitals and lobbying embassies/MEPsEuropean Banking Policy Network est by BBASlide13

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)Slide14

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 rulesDrafting Financial Services Chapter of a UK-EU FTAWhy has the City’s influence been so limited?Slide15

1. Political statecraft

Post-referendum vacuum filled by unofficial Brexit Cabinet and ‘All Souls Group’ (Redwood, Paterson, Baker, Jenkin)Hard Brexit position reflected:Short-term demands of party management (Eurosceptic backbenchers)

Long-term goal of building post-Brexit electoral winning strategy (capture UKIP voters)Slide16

May v1

City’s reputation diminished by ‘special pleading’ during the financial crisisIndustry ‘screams’ about Brexit viewed as ‘scaremongering’Hammond privately appealed to City as counter-productive‘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)Slide17

May v2

June 2017 General Election:Toning down of Brexit rhetoric, acceptance of status quo transition, and formalised business consultationBut demands of party management more acute and increased risk of no dealNo movement on post-Brexit deal, which is ‘locked in’ by Lancaster House speechSlide18

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 and 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)Slide19

2. Institutional structures

Relations based on institutionalised City-Bank-Treasury ‘nexus’ (Moran 1991, Baker 1999)But Whitehall reform has challenged channels of access:DExEU and DIT subverts traditional mechanisms for coordinating EU policy through CO, FCO and HMT

No.10 closed down access for business; DExEU a ‘black hole’ and ‘impenetrable’; critical voices deliberately ‘frozen out’Slide20

‘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 DExEU over responsibility for post-Brexit financial services BoE relations strained as UK cannot be a ‘rule taker’ and views Brexit as opportunity to goldplate regulation/strengthen supervisionSlide21

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.’Slide22

3. Business organisation

Variegated impact of Brexit on sub-sectors/firm business models generates collective action problemsReferendum 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 Slide23

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 downgradedSlide24

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)Slide25

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)Slide26

Conclusion:‘Politics trumps economics…’

What Brexit tells us:

BP is strategically (re)constructed to justify policy decisions (Jabko 2006)State’s capacity to resist BP, in face of ‘exit’ and ‘voice’, is significantPolitical interests take precedence over economic onesProvides unique test case of the contingency of BP over timeSlide27

May v1: hard Brexit shaped by political statecraft

May v2: hard Brexit ‘locked in’ by June GEImpact of economic downturn could harden, not soften, BrexitNo prospect of parliamentary arithmetic changing for foreseeable futurePublic opinion has not shifted fundamentallyNew PM would face same structural constraints

…but for how long?