Finance was the major cause of the last big economic crisis, but this time it has found itself – unusually for an industry used to being demonised – part of the solution rather than the problem.
This happy disposition would, admittedly, not have occurred but for Government instruction and largesse. Virtually all the economically supportive new lending we have seen in the UK since the start of pandemic is government-guaranteed.
The industry’s new found reputation for competent kindliness has, moreover, been somewhat tarnished by refusal among major providers to pay out on business interruption insurance – now being tested in the Supreme Court.
In some respects, this is a defensible position. In past pandemics, people died but business carried on regardless; this is the first time in history that economies have been forcibly closed down by edict to save lives and prevent health services being overwhelmed. Yet we live in an age of assumed handouts; the insurance industry’s intransigence has met with predictable fury.
Be that as it may, markets have on the whole functioned well throughout the lockdowns, with finance adapting more swiftly and effectively than perhaps any other industry to the challenges of home working, and, despite the unprecedented size of the downturn, no apparent threat to solvency.
Interestingly for a sector that threatens to be more damaged by Brexit than any other, wholesale finance is also seemingly much better prepared for leaving Europe’s single market than the rest of the economy. Whether or not lorries backup in Kent, all necessary steps have apparently been taken to ensure that financial markets continue to operate smoothly.
What makes this state of preparedness all the more remarkable is that there is virtually nothing for finance in the ongoing trade talks with Brussels. Initially, the Government had hoped for a Canada-plus type arrangement, which almost uniquely for a free trade agreement, would have included some form of continued access for finance to European markets. It was not to be. Britain’s unilateral offer of “equivalence” has not been reciprocated.
But here’s the point. During the referendum, there were warnings of a likely bloodbath of City jobs if Britain voted to leave, but so far it just hasn’t happened on anything like the scale feared. At the last count, “only” 7,500 jobs had been transferred; what is more, these “losses” have been more than compensated for by job gains elsewhere in finance.
This is not to say that the City has undergone some kind of Damascene conversion on the merits of Brexit. Virtually all practitioners of my acquaintance have held to their pre-existing view, which is predominantly that whatever its cultural appeal, Brexit is a wholly unnecessary, business unfriendly, pain in the backside.
What we see, however, is that it takes a lot more than an event like Brexit to tip the balance. It is actually historically extremely uncommon for a dominant financial centre once established to lose its position. When such upheaval does occur, it is generally because finance becomes in some way politically threatened, as occurred with Amsterdam, once on a par with London in providing finance to Europe and beyond, during the Napoleonic wars. Fearing despoilment at the hands of the French, activity and market share shifted wholesale to the relative safety of London.
Whatever else Brexit might be, it is not the existential threat of Napoleon.
In fintech, payments systems, securities innovation and its simple, finance friendly culture, the City remains streets ahead of anywhere else in Europe, where the industry remains substantially mired in a bygone age of political constraint and hostility. Christine Lagarde, President of the European Central Bank, talks a good game in this regard, but she’s struggling to shift the dial in any meaningful way.
The Germans are good at making cars; as shown by the scandal of Wirecard, the Munich based fintech firm that turned out to be no more than an accounting mirage, they are not much good at finance.
The big bet in the City is that an FTA that initially excludes finance will provide a platform that over time can be used to deepen and extend the relationship to include much capital markets activity.
In the poisonous atmosphere of no deal at all, of course, attitudes might change, but for the moment there is little appetite for the wholesale transfer of activity to the Continent once feared.
In any case, the rather bigger threat to the City comes not from Europe, but from within. Whatever its rhetoric, there is little that is business and finance friendly about the UK Government right now. The narrative is entirely about spending public money, with almost nothing in our cultural and political discourse on how the country is going to earn the pounds to pay for it all.
Banning banks from paying dividends, threatening to raise capital gains tax and other similarly counterproductive initiatives pose a much more significant threat to the well being of the City than Europe’s attempted land grab.
The City looks set to survive Brexit largely intact, but there are only so many hammer blows it can take before its position as a great dynamo of economic activity and tax revenue begins to seep away.