Brexit and City

(As published on the Kings of War blogsite)

The 2017 referendum concerning the UK’s membership of the EU will turn on many factors, even if most sage observers think that the vote to remain will be won. Those factors splay across nationality and identity politics, the Scottish question, the cohesion of the Conservative and Labour parties, contested economic analyses and the various mystery x-factors such as the far more likely ‘Grexit’.

So, despite the received wisdom being that the vote to remain will be won (and Open Europe declared on the 5th June – with its methodological workings – that the chance of Brexit sits currently at 19% and the chance of the vote being lost as 28%) the City of London has begun to speak with a louder voice about why it sees its core interests being best served with a UK that sits in the EU. That the City feels moved to speak is both interesting and important: it is interesting because it implies that they feel that there is a chance of Brexit beyond that which they can reasonably sit back and ignore. It is important because 1) there are political and economic impacts to be endured by The City (and thus the wider economy) in a time of political uncertainty prior to December 2017, and thus potentially after that date too and 2) because there are other important sub-questions around Brexit too that deal with the type of economy the UK will continue to enjoy, and to whose benefit these sorts of political issues are settled.

The economic impacts to be endured are most likely to be felt as investment decisions. Uncertainty is the enemy of investment: the UK will already be being priced with a risk premium, and this will only get worse as we get nearer to 2017. As the pre-eminent financial centre in the EU (for mostly historical reasons initially, but now in terms of sheer weight of activity), the City carries great sway over the conduct of financial services in the Union. The proposed banking union (which the City and the UK government opposes) might be developed as a rival bloc to the City which would impact upon the UK’s global competitiveness, whilst the move to encourage EU level business activity away from bank-led finance to alternative forms of financial instrument would likely be led by the UK – who is the largest player in this field currently and who has the best developed understanding of the regulatory frameworks required for it in the post-2008 climate. Simple politics would dictate that European rivals will be quick to question why the UK should have an influential say over this area if it looks to be disengaging from the European project altogether.

The City and financial services amount to 9% of the UK’s GDP. Damage to this area of activity (particularly to a host of investment decisions) has a whole-economy impact. My question – as a security studies academic – is does the potential impact, and thus the roll out across the entire economy, amount to a security impact? Strapping on various different lenses – that of economic performance and the money to invest in key attributes to maintaining fighting fitness (and not necessarily military fitness) is one holistic way to assess an economic impact. Such an analysis fits closely to the far reaches of ‘hybrid warfare’, and looks at the maintenance of education and health as elements of holistic effect. The other is to look at the maintenance of the integrity of social fabric. We can draw simplistic correlations around a time of economic contraction and the emergence of complex threats generated by the disaffected.

In terms of ‘the business dimension’ to Brexit. The City wants to remain in. Small businesses, who are doing less and less trade with continental Europe, might reasonably want to leave. Large manufacturing concerns have welcomed the prospect of having more flexible regulatory conditions outside of the EU – and so divide reasonably equally. Looking at the question from a UK Plc perspective, where is our influence best felt? Where do we exercise most ‘power’? In an era that has seen and will continue to see us effectively winding down our military power (SDSR 2015 will need to do something radical to stop this rot), activities that we do that our globally important should be retained. Even in the context of the disaster of 2008, the City remains a vastly overpaid wealth generator for the nation, and a lever of power on the international stage. Looking from the outside the UK, if one was to do an assessment of what to try and undermine in the UK as part of a hybrid war, the City would be a large target. Where are the successor sources of wealth generation outside of The City?

The fate of the City in the question around Brexit is fundamental to whether the UK remains a mid-range power, or a small power with an expansive history. More particularly, it is a security question.