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Uncertain Future for Europe’s Center of Finance

This is an interview with British economist Tony Norfield, who recently wrote The City: London and the Global Power of Finance. He discusses the economic outlook of the old imperialist power after the Brexit referendum.

Tony Norfield

July 9, 2016
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PHOTO: Michael Duxbury/Flickr

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Tony Norfield is a London-based economist. For eight years, he worked as an economic consultant, and for close to twenty years in London’s bank dealing rooms, most recently as Executive Director of a major European bank, in charge of analyzing global FX markets. Ideas de Izquierda (Argentina) speaks with him about the consequences the Brexit will have on the UK’s status as an imperialist country and on the global economy.

After the referendum, a complex, tedious process of withdrawal will begin, according to Article 50 of the Lisbon Treaty. This process may take up to two years. You write in your book, the UK will continue to have “a say in the development of European policy to sustain its position and the workings of the world financial system that it has helped to create and from which it benefits.” What are the most important consequences for London’s financial business and do you expect it to maintain its privileged position it has maintained in the EU?

The Brexit vote will have an impact on City financial business. Some banks and other institutions have already announced plans to relocate some operations into EU countries, since the UK will no longer have the ‘passport’ rights of being able freely to do business across the EU area. However, it is not clear whether some of those job cuts would have happened in any case, given a downturn in business. The UK’s loss of status as an EU member will prevent it from influencing, or at least from having as much influence, on the framing of new financial regulations. Formerly, Britain’s Lord Hill was the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, but he resigned his position in the wake of the Brexit vote.

The UK will retain influence over European financial business. It is by far the biggest European centre, and even if its lead is reduced it will remain the biggest for a long time to come. EU policymakers will also want to continue discussions with their UK counterparts. However, the balance of power has changed, and there will be an erosion of UK-based financial business. France, especially, will aim to redirect some business its way.

it would be wrong to see the vote as a kind of ‘Lehman moment’ producing a huge and lasting impact on financial markets

Even though the threat that the referendum could end in a majority win in favor of Brexit increased during the days leading up to June 23, it seems that London and major capitalists were confident that the position of remaining in the EU would prevail. What kind of contingency measures were taken before the vote to prevent the impact of Brexit on the financial stability of the country and worldwide? After the collapse of financial markets last Friday, what kind of impact can we expect to see in the coming weeks?

All observers, the City included, thought that the vote would be close, but they were relying upon the common phenomenon of ‘returning to the status quo’ to keep the UK within the EU and to avoid Brexit. It was a shock when the vote was counted, but it would be wrong to see the vote as a kind of ‘Lehman moment’ producing a huge and lasting impact on financial markets, as some have predicted. The world economy is in a mess, and of course this is another negative factor. But it is not the abrupt realisation that trillions of dollars of financial assets are suddenly worthless as in 2008. The Bank of England had plans in place to add liquidity to the market, if required, and offered calming words, notably that it was likely in the next months to cut interest rates. European stockmarkets fell by less than 10 percent in the wake of the vote, and largely rebounded in the following week. Similar reactions occurred elsewhere. I think the Brexit vote will remain very unsettling for financial markets, nevertheless, because it has shaken up the established system of power, as discussed below.

the Brexit vote will remain very unsettling for financial markets, nevertheless, because it has shaken up the established system of power

In your book, you point out “other avenues of parasitism” for the UK “to pursue” that could gain importance in the face of Brexit. Which are the ones you believe could become relevant in the near future?

Two options I discussed in the book were Islamic finance and further deals with China. I noted that prospects for the growth of Islamic finance were likely to be reduced, however, by the fall in oil prices. China remains important for British policy, but it is likely that China will now be worried that Britain will have less influence within the EU and so be a less valuable partner for it. This will no doubt be a big concern for the new, post-Brexit British government. Despite its nationalistic motives, the Brexit vote has ironically led to the UK exiting an influential club and reduced the power and status of the UK!

London’s status in global finance is reinforced by the presence of US banks and the financial institutions of the most important global powers. How might this status be affected by Brexit? Do you think that there will be a significant relocation of power from London to Frankurt or other European financial centers?

There will be some impact on London’s financial business from the Brexit vote, and a loss of some business to Paris and/or Frankfurt. However, I do not see that as being very significant, for several reasons. Financial business is likely to remain less politically regulated in the UK compared to elsewhere, when it comes to proposals for new taxes on financial transactions or other such things. British commercial law will remain important as the basis for many financial contracts. Lastly, the international language of business remains English, London is in a good time zone for deals with Asia and the Americas, and London has the most extensive international links of all financial centres. These things may eventually become less important, but not very quickly. It is difficult to replicate the advantages that London has built up. In the early 2000s, it looked as if a euro-based dealing centre such as Frankfurt could build up a strong base and challenge London, but the crisis led the euro financial system to become more fragmented along national lines.

The UK no longer looks like a diplomatically astute partner who knows how to ‘play the game’, but more like a troublemaker.

The UK’s capacity to continue acting as a major imperialist power was helped by its ability to transition from acting as the world’s banker at the beginning of the 20th century to serving as the “broker” for global capitalism, after WWII. Since the 70s, this position as the world’s broker has been central to Britain’s role as an EU member. How do you think the Brexit will affect the UK’s imperialist status, especially considering the City of London’s role as a former major player in the EU, and the fact that the territorial integrity of the British state is also threatened by the result, with Scotland seeking independence?

Within European politics and beyond, the UK has acted both as a conduit for US influence and also in its own interests. One can consider the UK as what the Mafia calls a ‘consigliere’, offering advice and brokering deals! This includes playing a key role in policy towards Russia, on military interventions, economic sanctions and so forth. Brexit will damage this imperial status. The other powers cannot understand why the vote needed to take place, and the result has been to disrupt international relationships. The UK no longer looks like a diplomatically astute partner who knows how to ‘play the game’, but more like a troublemaker. This goes beyond anything directly linked to the City of London’s business.

Scotland is a big question for the UK, but one needs to see that the ‘exit from the UK’ option for Scotland is far from an obvious choice. While Scots are annoyed that their 62-38 percent vote in favour of Remain was easily outweighed by England’s Leave vote, there is nothing they can do about it. The Scottish National Party (SNP) is trying to negotiate with the EU but it has been turned away as not really being the nation with whom they have to deal, which is the UK. The EU does not want to encourage an example of a regional secession that would affect Spain and possibly Italy. The SNP might try to initiate another referendum to exit the UK, having lost the previous one 55-45 in September 2014. But if it won and Scotland left the UK, it would then be faced with trying to join the EU without joining the euro, trying to replace the subsidies it gets from the rest of the UK and trying to manage a budget on the back of $50 per barrel of oil. It is nevertheless likely the Scottish independence question will stay in the headlines, and it is a further problem for the UK’s political status in the world.

The Left in the UK adopted different positions on the referendum. Some, like the SWP, were in favor of “Lexit”. Others, like Socialist Resistance or Left Unity, were in favor of a critical Remain vote, against xenophobia. What is your view on those positions?

Frankly, all these positions were irrelevant, since the Left in Britain is irrelevant. The Left has always been small, and it has not managed to grow in recent years, even in the wake of the biggest crisis capitalism has ever faced. The Left traditionally adapts to popular opinion and usually tries to put a radical spin on sentiment that emerges in what is essentially a very conservative country. In the 2015 UK General Election, 50% of the votes cast were for the Conservative Party and the UK Independence Party, the main anti-immigration force. In addition, the supposedly more progressive Labour Party had ‘controls on immigration’ as one of its key election pledges. Despite this, most of the Left argued to vote Labour to keep the Conservatives out.

The Left traditionally adapts to popular opinion and usually tries to put a radical spin on sentiment that emerges in what is essentially a very conservative country.

My view was not to take sides in the Remain/Leave debate, and I abstained. The reason was that I saw neither option as being ‘better’ or in the least progressive. My rationale was as follows. The Conservative Party had to call the referendum because its popular support was being undermined by anti-EU sentiment, reflected in rising support for UKIP. That sentiment was clearly shared by large numbers of working class people, and was also having an impact on Labour Party votes. While this was in many respects a protest vote against austerity and government policies, it was also a reactionary protest centred on an anti-immigration theme, whatever the Left might argue. The anti-EU dimension was because most of the immigration into Britain in the past decade has come from other EU countries, especially from Poland.

My view was not to take sides in the Remain/Leave debate, and I abstained. The reason was that I saw neither option as being ‘better’ or in the least progressive

The anti-immigration sentiment in the UK is not necessarily racist. There were many supporters of Leave who were from ethnic minorities. Instead, it is a way of calling for the state to protect domestic workers from foreign competition, whether for jobs, housing or social services. This is a revolt against ‘globalisation’ policies that have undermined the position of the domestic working class, but a reactionary revolt, nonetheless. By comparison, the support for Remain was happier with the status quo, and endorsed, at least implicitly, the UK’s existing privileges and power relationships in the world economy. How can one take sides in such a debate? My decision in this referendum vote was to explain what was really going on.

Interviewed by Esteban Mercatante

You can visit Tony Norfield’s blog here

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