While many will see Brexit’s ultimate challenge for the UK as reconciling the desires of restricted EU immigration with unrestricted EU market access, it is in the details that we often see greater challenges of execution. Sorting through these details quickly – identifying, addressing and deciding – are the best tools to limit our economic uncertainty.
Yesterday (Thursday 14 July), media reporting focused on the new UK cabinet and the desire to move Brexit, and largely our trade stance and preparation for trade negotiations, ahead quickly, while today I noted that the former cabinet minister said that we had no experienced trade negotiators in the government. How do you negotiate quickly without negotiators? Government officials noted that we may have to go to the private sector for the skills needed, once identified, while Nigel Farage suggested hiring experienced trade negotiators from other countries. Mr Farage’s suggestion is extraordinary; I don’t know of any major capital markets centre outside of London that has had trade negotiation experience. One of countries he named was Switzerland whose banks do their European capital markets business through London as does the USA. Trade negotiators, as individuals get the best deal for their nations.
This is civil service and patriotism. Would a trade negotiator from another country really maximise the UK’s opportunity or perhaps his or her own countries? How would we pay these people? By the hour and negotiations may never end, by speedy completion and they will likely leave a messy deal with long-term complications, or by a specified achievement which may be too easily or difficult to achieve with another messy end. We could hire domestic consultants with similarly crossed or conflicted objectives, but in all cases it seems impossible to be a quick exercise. Should we prepare for long term uncertainty? Is it better to know that in advance and manage this risk? Could the UK now say that it needs five years to prepare for Brexit and then execute in two years? In banking & finance, five years might just as well be forever.
In banking & finance, many media organisations today reported on a consulting organisation report that suggests international banks in London would likely need to raise substantial equity capital for their post-Brexit UK business as they may need to be differently organised than they are today. Well, in large part these banks must have this equity capital today or their supervisors would be unlikely to allow them to do the level of business they undertake, but this equity capital isn’t in the UK. The issue is more likely or generally to be that those banks would have to specifically contribute/place some of their equity into their UK businesses from their EU home countries where it sits today and can be allocated to business in the UK or another country. A change will be inefficient and will make those banks less profitable, indeed it may make it easier for managements of those banks to judge profitability and decide on the future of their UK businesses, but it is not so certain that they will have to raise new equity capital.
Dr Peter Hahn is the Henry Grunfeld Professor of Banking at ifs. You can read his entire series on Brexit and it's implications here.