The great Brexit backtrack

There is an increasing sense that many of those people who promoted the Brexit cause last year are beginning to back away from their position. Two days ago I reported the comments by the director of the Vote Leave campaign who suggested that leaving the EU might turn out to be an “error.” One of the few economists to support Brexit, Andrew Lilico, noted yesterday on Twitter that “I'm much more pessimistic about Brexit myself since the General Election.It's the Election that changed that.” My response to that is that the election only changes the tactics of the negotiations but the strategy of Brexit itself was – and is – misguided. Finally, Treasury officials are said to have written an unpublished paper challenging the Department for International Trade to prove it can line up free-trade agreements with non-EU countries that can outweigh the loss of European trade associated with leaving the customs union.

Frankly, it is all beginning to look like the car crash which I warned it would be all along. Far too many of those responsible for setting the Brexit bonfire alight in the first place departed the scene pretty quickly when they realised the magnitude of the task ahead. Nigel Farage has resorted to his role as a sniper from the sidelines; Boris Johnson and Michael Gove backed out of their prime ministerial challenges when it became evident that neither of them was likely to win and David Cameron (at whose door much of the blame should be laid) lectures the government about austerity from his well-paid position on the international lecture circuit. The fact that apart from David Davis, nobody in government appears willing to take ownership of Brexit, speaks volumes. It is hard to believe that nobody in government did not see any of this coming – the economics profession warned long and loud – but given the apparent level of disorganisation within government and the civil service, you do have to wonder.

With the Article 50 clock ticking and no indication of progress on the things which matter to business, they are increasingly having to make their own arrangements. The financial services industry in particular is not going to wait around for government to make a decision. It looks increasingly likely that the passporting arrangements which allow EU banks to conduct cross border business, will be a casualty of the UK decision to withdraw from the Single Market. Foreign banks operating in London will in effect be treated as third country institutions and thus have to apply for a banking licence to continue operations.

It takes up to 12 months to go through the application  process for a banking licence, and around six months to conduct the preparatory work. The head of the Financial Conduct Authority today called on the government to clarify before year-end what form of transitional arrangements will be put in place to allow financial services to continue operating. But it really does need to act fast: On the basis that the UK will leave the EU in March 2019, as things currently stand this means that banks will have to begin their preparations this autumn.

Many banks are simply not going to wait around. Deutsche Bank is reported to be ready to relocate many of the banking books currently operated out of London back to Frankfurt, and they are not alone. Three Japanese institutions, Daiwa, Nomura and Sumitomo, are applying for licences to operate businesses in Frankfurt and some big US institutions are reported to be raising their German headcount. This is the business end of Brexit – jobs which might otherwise have remained in London will be transferred elsewhere. Banks, in particular, could find themselves on Brexit day unable to conduct business in the EU if they do not make plans now.

Whilst at present the numbers discussed publicly are small, the concern is that this could mark the thin end of a bigger wedge. The City of London contributed 11.5% of total government tax receipts in fiscal 2015-16, and business not conducted in London and jobs transferred elsewhere represents tax revenue which does not flow into the UK government’s coffers. In Philip Hammond’s words, voters did not vote to make themselves poorer by backing Brexit. But at a time when the government is under pressure to ease  back on austerity, allowing high value added business to slip away because government cannot get its act together will end up doing just that.