This is a guest post by Natty
As we all struggle to grasp what David Cameron’s veto in Brussels last Friday actually means, one theme continues to re-emerge. Indeed it’s a theme that has emerged time and time again in the history of British politics. When asking ourselves why the PM decided to ostracise the British economy from 26 other EU countries, of which we do over half our trade with, one answer stands out above all others; The City.
This was not simply some principled stand by an aristocratic leader with frankly aristocratic views of Britain’s place in the world, although Cameron’s ‘defiant’ post-match analysis did betray such a worldview. Neither was this a weak PM caving into his Europhobic MPs. Instead Friday morning’s events were an archetypal case of the financial hub of British capital, and one of the financial hubs of world capital, exercising their veto.
All 27 European leaders in Brussels knew this. Sarkozy explicitly (and by some reports expletives were used) made it clear to Cameron that several of the safeguards and protections The City had enjoyed for decades would be dropped if Britain were to retain their already awkward place in Europe. Commentators are now painting the picture of a ‘two-track’ Europe, although a multilane highway may be a far more accurate analogy.
Cameron’s use of the ‘veto’ has clear implications on the UK’s trade and diplomatic relations with what we can now more than ever demarcate as ‘Europe’. However the veto also conveys what the Coalition government believe a recovery in our economy should look like. Despite sound bites suggesting an economic recovery based on growth in manufacturing [note Obsorne’s ‘march of the makers’] it seems that productive capital will yet again play second fiddle to The City. It is here where the Government is hoping growth will arrive and the money to cut the deficit will be found. Cameron’s veto was not only a diplomatic gamble, but also an economic one.
But what do we mean by The City? Well for one thing its no longer a ‘square mile’ geographically, with many banks and all London offices of the big three rating agencies based in Canary Wharf. The financial core of The City consists of the Bank of England, Merchant Banks (the traditional trading houses and newer investment banks), Clearing Banks (you’re everyday high street banks) and the London Stock Exchange. Obviously despite their interconnectedness, to completely homogenise the interests of such a diverse range of institutions is a simplification. They can however be impressively cohesive in advancing their cases on capital controls and tax regulation to government.
Indeed The City have historically counted the Treasury as close friends in these battles, consistently supporting the role of The City as a global hub of financial transactions. Their help has historical foundations in the civil service’s sense of imperial entitlement that Cameron himself expressed on Friday. The relationship between the Bank of England and Government has been crucial too. In the mid 1960s the Bank’s chief Lord Cromer explicitly told Harold Wilson that his much-vaunted plans for industrial modernisation were to be curtailed in order to retain the position of sterling as a world currency. Wilson backed down. In 1947 Clement Atlee was forced to make a very similar decision by the Treasury. This is not to say that what many term ‘productive capital’ have starved over the last hundred years; they clearly haven’t. But as far as the direction of the British economic policy goes, with a few short exceptions, its been the financial hub who have been in the driving seat.
Clearly Cameron’s desperation to protect The City has short-term benefits for the ‘Square Mile’. But some commentators are already arguing that in the long term it may hasten its demise. The City doesn’t always follow their long-term interests and regulations from Europe may still arrive. Many merchant banks opposed the ‘Big Bang’ deregulation of the 1980s, and already some are pointing to the powerful enemies in Europe and elsewhere the British have made. Given the speed at which EU institutions work there will be the time, if not the political will for U-turns. History tells us whatever happens those in The City are up for a fight. And for the coalition government, we now know that they need The City to win big.