London is the world’s greatest financial center. The financial services it houses are vital to Britain’s economy, no matter how unpopular its bankers may be. More than one tenth of the government’s income comes from taxes on the financial sector. It is just about the only industry in Britain which sells more to the rest of the world than it imports. Britain is uniquely dependent on its finance industry—more so than any other major power.
Without London’s financial services, Britain’s tax revenues, exports, and the economy would collapse.
Yet Britain’s “friends” in Europe seem determined to destroy, or at least cripple, London.
On Tuesday, the European Parliament voted to impose a cap on the amount of money bankers can receive in bonuses. This is socialist legislation that will do the opposite of its intended task and will damage the EU as a whole.
This cap has been in the works for several months. Britain has opposed it at every turn and at every turn been defeated. Its approval marks a watershed moment in Britain’s relationship with Europe.
“Whether or not you think there is a concerted assault on Britain, the fact is that for the first time in EU history a major country has been overridden in a field where it is the dominant player and has a vital interest,” writes the Telegraph’s Ambrose Evans-Pritchard. “The rules of the game are that Germany is never threatened on the car industry, nor France on agriculture. This principle has been breached. It is a declaration of economic war.”
And don’t forget, this is an economic war on an industry vital to Britain’s economy. The EU is attacking the financial health of the nation.
The bonus cap interferes with pay in private companies in a way that most thought ended with the fall of the Berlin Wall. A banker’s bonus is not allowed to be any more than his salary, though this limit can be raised to twice his salary with the explicit approval of shareholders.
This may still seem like a huge amount. But surely it is for individual companies to decide what they pay their staff, not the government and least of all the European Union.
The reason why bankers receive so much of their money in a bonus is that it’s related to performance. If they do well, they get a lot of money. If they don’t, they lose out. And if they appeared to be doing well at the time, but were later found out to be engaging in some dodgy practices, there are ways for banks to get the bonus money back. Salaries are much harder to raise and lower and much harder to recover in cases of malpractice.
Under EU caps, bankers will receive higher salaries instead of the bonuses, and be rewarded whether the bank does well or not. Star performers who are capable of earning a lot of money—and therefore large bonuses—will go elsewhere.
“Not to put too fine a point on it, the bonus cap is a piece of economic lunacy that reflects tellingly on why it was a huge mistake giving the pointless hybrid parliament in Brussels any legislative powers at all,” wrote Britain’s former Chancellor of the Exchequer Norman Lamont.
Mayor of London Boris Johnson said: “This is a vengeful and self-defeating attempt to pick on London. We don’t try to cap the pay of oil executives or football players. I can see why people rage about what happened with the banks, but this is an attempt to knock London off its perch, and we’re not going to let it happen.”
The trouble is, within the EU, there’s not much Britain can do to stop it.
And this isn’t Europe’s only attack on London. Eleven EU nations plan to introduce a financial transaction tax. This means specific trade industries must pay whenever they buy or sell shares, bonds and other financial instruments. Here, Britain succeeded in blocking this at the EU level. But Europe still found a way to make it hurt.
If shares in a company that has signed up to the transaction tax, like France or Germany, are sold in London, Britain would be required to collect the tax and pass it on. The same would be true for trades in New York. But the EU can legally force Britain to hand over the taxes. If America refused to hand the money over, there’s little the EU can do, bar sending gunboats up the Hudson. Some parts of the world will refuse to cooperate with Europe, and business will leave Britain.
How the EU will collect this tax is unclear. But it is already obvious that the EU would be cutting off its nose to spite Britain. France introduced a financial transaction tax last August. Its finance industry is now dying, and the tax has raised only a third of the amount the government predicted it would. The director of the French debt agency Maya Atig said that any extra revenue raised by the tax would be lost, because the government has been forced to pay more to borrow money as a result. French newspaper Les Echos quoted an anonymous banker saying the tax was “a weapon of mass destruction that is going to ruin our financial sector.”
British Prime Minister David Cameron called the tax to be adopted by 11 EU states next year “sheer madness.” The European Commission’s original analysis is that the tax would slow the EU’s economic growth by 1.75 percent, and cause half a million people to lose their jobs.
The tax forces traders to hand over a huge amount of money. Terry Smith, chief executive of Tullett Prebon, the world’s largest broker of European government bonds, stated at a recent meeting of the Bruges Group that his firm earned around £50 million (us$76 million) a year in fees for brokering those bonds. The amount of tax its clients would have to pay under the new system is €600 million ($783 million). It increases the cost of trading in these bonds tenfold.
That tax, as France has found, will have a huge effect on bond markets. Traders won’t actually pay €600 million—they’ll simply trade in something else, trade somewhere else, or not trade at all.
Members of Britain’s House of Lords Sub-Committee on Economic and Financial Affairs said that they were “astonished by the paucity of thinking exhibited by the [European] Commission.” They warned that there could be “far-reaching adverse consequences for UK resident financial institutions.”
“Some in London appear to hope that by closing their eyes to the proposal it will go away,” they said.
Typical of the EU, these proposals are chaotic. Some provisions of the financial transaction tax may be illegal. And the European Commission has not given many details on how it will force other countries to collect the tax.
Bankers also seem confident that they can get around the bonus cap. The Telegraph’s cartoonist paints a picture: “We can’t give you a huge bonus,” he shows a banker saying, “but the bank would like to buy your tie for £3 million.” It is doubtless banks will have less entertaining—but more practical—ways of getting around the cap.
Still, bankers in Britain will know they’re not welcome. The EU has shown it’s out to get them. Business will begin to seep away to freer countries. And now the EU has set the precedent of interfering in Britain’s financial industry, its laws will only get worse.
Britain bears some of the blame for this situation for becoming so dependent on financial services. It created a strategic weakness that Europe is now exploiting.
The government’s solution appears to be to court Germany for help. That may work for a time. German politicians are starting to wave olive branches in Britain’s direction.
But Europe’s attack on London shows it is not Britain’s friend. Britain’s EU membership has steadily weakened it.
“Britain is going to look back on Monday, January 1, 1973, in all probability, as a most tragically historic date—a date fraught with ominous potentialities! For that date marked the United Kingdom’s entry into the European Community,” wrote Herbert W. Armstrong at the time (Plain Truth, March 1973).
Already, many in Britain are looking back at that date with regret. By going after Britain’s finance industry, the EU threatens to wreak havoc on Britain’s whole economy. Bring down London and you bring down the UK.
Mr. Armstrong was right, and soon the whole country will look back on its EU membership as a tragic mistake. The European Union is not really Britain’s ally, and this attack on London proves it. ▪