Presentation to CSFI lunchtime seminar

‘Should the City worry if the UK left the EU?’

by Tim Congdon CBE – 12th November

How much does the European Union

cost Britain?

A quick summary • Direct fiscal cost• Costs of regulation• Costs of resource

misallocation, and• Miscellaneous insults

• 1% of GDP• 5%• 3 ¼%

• ¾%I will spend a lot of time here talking about ‘Cost of regulation’, particularly as they affect ‘the City cluster’ of industries.

2005 2006 2007 2008 2009 2010 20110

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Net transfers to EU institutions by the UK

- in £m., on balance-of-payments basis

Civitas BlogClassical liberal comment on the news and current affairs

Mandelson admits that EU regulation costs 4% of GDPIn a speech to the CBI Peter Mandelson, the EU Trade Commissioner designate, said that EU red tape cost about 4% of GDP. It was partially offset by a 2% addition to GDP, which he attributed to the Single Market. Having admitted that the EU is a drag on our economy, he then goes on to say that the solution is to give the European Commission even more power!Posted by David Green on November 9, 2004 3:36 PM |

Thank you, Lord Mandelson!

Evolution of UK financial regulation

• Self-regulation under the law, associated with functional differentiation (i.e., banks are banks, brokers are brokers, jobbers are jobbers, etc.), few conflicts of interest and a large mutual sector. Bank of England an informal lobbyist for City interests in Whitehall, but bank credit subject to severe restriction.

• Self-regulation under statute – 1986 Financial Services Act with the SROs, coincided with ‘Big Bang’ and functional conglomeration in international financial services (i.e., ‘the City’) (i.e., the capital of one organization supports commercial and investment banking activities, ‘bancassurance’, etc.), extensive demutualisation.

Evolution of UK financial regulation

• Comprehensive regulator for all activities from 1997 at UK level, with Financial Services Authority, modelled – loosely – on the USA’s SEC. Marked functional conglomeration (emergence of HCFIs, or ‘highly-complex financial institutions) and increased internationalization of the regulatory framework. Internationalization partly because of boom in cross-border inter-bank lending. Bank of England a large-scale economic research department rather than a bank.

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Has the City of London gone ex-growth? - Value in £b. of exports of financial services, on two

definitions, from official data

'Financial services' as such

All services receipts due to 'the City'

Evolution of UK financial regulation

• Crisis from 2007 marked by extreme uncertainty, but with two apparent trends,

i. Further internationalization of regulation, with national regulators often surprised by extent of loss of power, and

ii. Reaction against conglomeration, with a realization that conglomeration creates conflicts of interest and (so it seems) perverse cross-subsidization within HCFIs.

Evolution of UK (?) financial regulation

• Lisbon Treaty specifies three regulatory ‘pillars’, with

- European Banking Authority in London, - European Securities and Markets Authority in

Paris, and- European Insurance and Occupational Pensions

Authority in Frankfurt.

Evolution of UK financial regulation• Meanwhile law and tax relating to the financial

sector remain – to a considerable extent – ‘national’ across the EU. Tax, in particular, is local – and the design of financial products is heavily influenced by tax arrangements.

• ‘English law’ used in many international contexts, outside the EU, and keeps its ‘common law’ character, e.g., in such places as Hong Kong and Singapore.

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20

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Has the City of London gone ex-growth? - Value in £b. of exports of financial services, on two

definitions, from official data

'Financial services' as such

All services receipts due to 'the City'

The data invite the interpretation that the UK's exports of financial services have stopped growing.

‘The City’ as a financial centre

• In the early 1960s American banks began to open representative offices and then branches/subsidiaries in London to escape Fed’s cash requirements and Regulation Q, while ‘Eurobonds’ invented by…, well, someone.

• In 2012 Chinese banks decide not to develop business in London, because of costs of regulation, including various balance-sheet controls, while ‘Eurobonds’ under attack by EU authorities (understandably) for many years, as tax evasion.

But who is to blame? And isn’t the City wicked anyway?

• But is the EU to blame for the end of the City boom? Or is it largely self-imposed?

• My point is that – inside the EU – the British government does not set the rules for the conduct of financial business in the UK, and cannot do so.

• I realize that many people – journalists, plumbers, industrialists, archbishops and so on – see the financial sector as inherently wicked and unproductive, so that nothing is lost by restricting it.

• Well, quite.

Gains from better resource allocation if the UK leaves the EU

Table shows gains/losses, as % of GDP, from improved resource allocation (mostly), if the UK leaves the EU and unilaterally adopts free trade.

Gain/loss as % of GDP

To the UK To the rest of the EU

Agriculture +0.3 -0.06Basic manufacturing +1.4 -0.06High-tech manufacturing +1.6 -0.1Traded services - -

Total +3.3 -0.22

Source: Main, Minford and Nowell, 2009 working paper, see text.

The insults • Destruction of jobs because of immigration from

the EU8• Common Fisheries Policy – ‘do you know what a

tonne of discarded fish looks or smells like?’• Boom in spending on Euro-politico jollies, via pan-

European political parties (‘brass-plate political parties’)

• ‘Benefits tourism’• ECJ fines because our government breaks the

acquis communautaire

A quick summary 1.

• The total cost to us of our membership is about 10% of what we produce and receive in income each year. If we had been independent and sovereign over the last 40 years, that is how much better-off we would now be.

• The average British household is over £5,000 a year worse-off because of our EU membership than if we were independent and sovereign, like Australia or Canada, or Norway or Switzerland. (The direct fiscal cost is much less, at about £750 a year.)

Table 7.1: Summary of the costs to the UK of its EU membership Nature of cost % of

GDP Rationale (In all cases, see relevant chapter for detailed argument)

Direct fiscal cost

1 Relatively easy to quantify from official publications and balance-of-payments data; concept is of gross payments to EU institutions over which UK government has no further control.

Costs of regulation

5 Mandelson 2004 to CBI conference 4% of GDP, but many other sources confirm approximate estimate of this size; many subsequent directives etc. have increased costs.

Costs of resource misallocation

3¼

CAP long recognised to cause large resource misallocation. This may now be only ½% of GDP, but other EU protectionism estimated by Minford et al 2005 to cost further 3% of GDP.

Cost of lost jobs

¼

Open UK labour market from 2004 allowed 700,000 Eastern Europeans into the UK, taking away jobs of over 100,000 UK-born people; UK labour market remains open

Costs of waste, fraud and corruption

¼ CFP involves fish discard and effective ‘gift’ to other nations of fishing rights in UK territorial waters, but cost under 0.1% of GDP; waste of over-prescriptive water standards; abuse of UK student loan system

Contingent liabilities

¼ Costs of ‘benefits tourism’, plus some allowance for possible recapitalization of EIB and other EU institutions

Total 10 Conclusion: the UK is about 10% of GDP worse-off because of its membership of the EU

Hence, ‘A quick summary’ 2.

• Direct fiscal cost• Costs of regulation• Costs of resource

misallocation, and• Miscellaneous insults

• 1% of GDP• 5%• 3 ¼%

• ¾%

Economics of our EU membership basic in

the public debate

My hope/intention is that this will become an annual publication; it is to be a statement of the economic case for withdrawal, constantly updated to allow for the extra cost of the latest batch of directives and regulations from Brussels and Strasbourg, and to reflect the latest research.

Some conceptual problems

• The problem of the ‘counter-factual’

• The ambiguity of the notion of ‘cost’

The nature of the exercise

• I am not claiming to have the final answer.• I don’t in fact think that there is a unique

‘final answer’. • Nevertheless, I believe that my answer has

emerged from a fair sample of the best available evidence, and can be defended readily on the bases of logic and fact. (The paleolithic fruitcakes are on the other side.)

The paleolithic fruitcakes are on the other side.