Yesterday’s announcement by U.K. Prime Minister Theresa May that the country would be leaving the world’s largest market in favor of becoming “a truly global Britain” has been greeted with skepticism by the financial community around the world, while others are spying opportunities.
Ms. May’s promise to leave the E.U.’s single market – something that actually exists – in order to transform the country into “a truly global Britain,” something that is little more than a Conservative Party marketing concept, was described by the Marcel Fratzscher, president of the Berlin-based Institute for Economic Research, as a delusion that ultimately would disappoint the British.
Meanwhile in Frankfurt, which is well placed to win much of the financial action currently taking place in London, optimism is growing.
Unless transitional arrangements are put in place urgently, business could start leaving the City of London within months.
Hubertus Väth, chief executive of Frankfurt Main Finance, an initiative to promote and network in the financial center, said that signs that the U.K. would be pursuing a so-called “hard Brexit” had led to increased interest in Frankfurt from potential and current investors.
The Association of Foreign Banks in Germany, representing more than 200 foreign banks and financial institutions, also believes that Ms. May’s decision to go for the most extreme of the options available to her – exit from both the single market as well as the customs union – is forcing financial institutions in the City of London to think about alternative locations.
A spokesman for the association said that moderates who have spent the last seven months clinging to the hope that the U.K. would find a way to remain within some of the E.U.’s structures have to accept that this is not in the plan.
Ironically, Ms. May’s long-anticipated speech was delivered in London’s historic Lancaster House, in the same venue that, 29 years earlier, Margaret Thatcher had expressed her enthusiasm for the European single market. In 1988 Ms. Thatcher said that the single market “would give us access to the purchasing power of more than 300 million people.”
Ms. May claimed that it was only by leaving the single market and the customs union that the U.K. would regain control over immigration, its own laws and the ability to forge new trade agreements with other countries.
The U.K. might opt to contribute to the E.U. for access to particular programs, but promised “there will be no big sums.”
Her decision to go for a “hard Brexit,” or “clean Brexit” as she terms it, has been greeted with regret by both the Institute of Directors, one of the U.K.’s leading employers’ organizations, and by BMW, the car manufacturer, which has a plant in the U.K.
Political reaction in Germany was slightly more positive, with Sigmar Gabriel, Germany’s economic affairs minister, saying that, “at least there is now slightly more clarity.”
The U.K.’s decision to leave Europe’s free trade area would saddle the U.K. economy with enormous conversion costs, said Jakob von Weizsäcker, a Member of the European Parliament and a Social Democrat.
“To limit the damage, May is under pressure to ensure generous transitional arrangements and market access regulations for the U.K.,” Mr. von Weizsäcker said, adding that the E.U. would need a convincing overall strategy to deal with this.
The British financial services sector, which contributes more in taxes than any other sector and is one of the U.K.’s largest employers, is now pinning its hopes on retaining business in London with the possibility that its regulatory standards will be deemed to be sufficiently equivalent to E.U. rules that it is allowed to keep selling products throughout continental Europe.
London city councilor Mark Boleat, who is responsible for the center’s financial strategy, believes that urgent transitional measures will need to be implemented to allow firms to adapt.
Other sources in the financial sector, meanwhile, are warning that unless transitional arrangements are put in place urgently, business could start leaving the City of London within months.
The European Commission, which will lead negotiations on behalf of the 27 remaining members, yesterday reacted with caution to Ms. May’s speech, saying that it would only take a position once the U.K. formally lodged the Article 50 application to leave the union. This is expected towards the end of March.
Donald Tusk, the president of the E.U. Council, which represents member states, said that it was a “sad process” but welcomed the fact that the U.K. appeared to be becoming more realistic.
Kathleen Brooks, head of research at City Index, a London-based provider of spread betting and derivatives trading services and reports, said that the fact that Ms. May had promised that both houses of the British Parliament would have a vote on the final deal would probably mean that some of the most extreme advocates for a hard Brexit would be forced to rein in their demands.
Meanwhile the U.K.’s trade unions have criticized the government’s position with Len McCluskey, the secretary general of the U.K.’s largest union Unite, saying that it would trigger “shock waves” in the country’s factories.
Ms. May’s determination to cozy up to the right-wing of the Conservative Party as well as the populist UKIP party, will jeopardize millions of jobs in the U.K., Mr. McCluskey said.
The British economy has withstood the consequences of last June’s Brexit vote better than many had expected. While economists had warned of the country slipping into recession in the event of a Leave vote, this has not happened so far.
Mark Carney, the governor of the Bank of England, said in the last week that leaving the E.U. is no longer the greatest risk to the financial stability of the U.K. and that the Brexit was now a greater threat to the E.U. itself, because of the E.U.’s reliance on London’s capital markets.
And in a survey conducted by the auditing and consulting firm PwC, bosses from British companies expressed more optimism than those in other countries.
Still, many experts believe that, in the long-term, that optimism will begin to fade. “Brexit will hurt,” says Holger Schmieding, the chief economist at Berenberg Bank, based in London.
As Ms. May continued on with likely the most important speech she will ever make, her initially conciliatory tone became more threatening. “There are some in the E.U. who want to punish us for the Brexit vote and we will not accept that,” she said. “No deal would be better than a bad deal.”
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