My Lords, the Government need to start talking up the UK economy now. The UK has had the most remarkable success in recent years in the explosion of new businesses in new technology areas, offering huge scope for the future and huge opportunities for investment. The eventual result that I believe will come about will leave us trading much as before with the EU, but there are huge trading opportunities with India and China. America, interestingly, is coming round to proposing free trade with the UK. The Chancellor has promised to lower corporation tax to 15%; 12.5% would compete with Ireland and be very attractive for company headquarters here. However, the Government need to spend the next two months explaining urgently why Britain cares deeply about attracting investment and jobs and what we have to offer.
I declare my interests in the register and it would be appropriate for me to talk specifically about Brexit and the City. At a macro level, the importance of our financial service exports to the EU should not be exaggerated. Some 50% of our total financial services are exported, of which only 30% go to the EU—that is, 15% of the total. This represents about 1.2% of GDP. The largest exporter is investment management, of which 80% is non-EU. As to those firms that wish to engage in the retail business in the EU, most already use Luxembourg or Dublin UCITs. Eighty-eight per cent of insurance exports are to locations other than the EU—North America and Asia. The most affected sector is investment banking and related banking, where 80% of EU capital markets business has been done in London. The big players in London already have operations on the ground in continental Europe but may look to move significant numbers of staff out of London to their continental European operations if we do not end up with access to the single market.
The financial services industry overall is of major importance to the UK economy and our largest industry. In aggregate it employs 2.1 million people and raises £66.5 billion a year in tax. Together with other related services, it accounts for a total of £75 billion of overseas income. There are also obvious multiplier economic effects from the expenditure of those working in the sector. It is, therefore, a valid point that we do not want our biggest industry damaged as a result of Brexit.
Therefore, the issues are: what sort of deal should we aim for; how should we organise and negotiate it; with whom should we negotiate; and how strong is our negotiating position? First, we will need a tough negotiating team under the Cabinet Office, which has been set up. I note that it is under the Cabinet Office and not the Foreign Office. I suggest that this should also include experienced senior politicians—for example, the two ex-Chancellors in this House, the noble Lords, Lord Lawson and Lord Lamont, and, potentially, Peter Lilley, who handled the introduction of single market regulations in the first place. It also needs to contain talented business representatives such as Luke Johnson. From a domestic perspective, it might be worth while including Nigel Farage or his successor. Among other things, this would give representation to the many who voted for Farage. It would also help to deflate the elitist attack on ordinary folk who voted for Brexit.
Before we activate Article 50, we would be wise to work closely with Germany in formulating what I will call a “heads of agreement”. Our negotiating position is, in principle, strong, reflecting both the EU’s huge trade and current account surpluses with the UK—the latter in excess of £100 billion per annum—and that the EU could not impose a harsh settlement on the UK to prevent a domino effect while, at the same time, seeking to manage a major banking crisis in Italy and to nurse the eurozone back to health. Failure to mend fences with London would risk a financial and economic crisis in the EU, exposing the disastrous economic and financial effects of monetary union. As Italy’s Finance Minister has commented:
“There is a cocktail of factors that could lead to disintegration”,
“We face a double reaction from Brexit: financial and political”.
Clearly there are also domestic political considerations. While there was a clear Brexit majority, 48% voted to remain, and there is a need to get whatever will be the required measures through the other place, where there is obviously a substantial remain majority. The new Government would be wise, therefore, to opt for a sensible and broadly acceptable compromise package for the next few years and, certainly, to achieve single market passporting.
If required as a sweetener, we should be willing to agree to contribute a reduced amount to the EU budget. The loss of the UK contribution, which net will be about £10 billion next year, is a serious financial issue for the EU.
The ideal package would be a free trade deal between the UK and the EU, with the UK withdrawing from the free movement of EU citizens, and passporting of financial services based on equivalent regulation applying to the UK financial services that are exported to the EU and as provided for under MiFID2, which is effective in 2018. Such a package is achievable and would be in the interests of the EU as well as the UK. It may be that it would be packaged as EEA membership but that would clearly work only if the EU agreed that there would be no free movement of EU citizens to the UK. That could be achieved by going back to the pre-Maastricht rules guaranteeing only the right to work, or by following the model of Liechtenstein, which is a member of both the EEA and EFTA but has been allowed to opt out of the migration issue.
The City has indicated that that it could live comfortably with the EEA option or a hybrid version that safeguarded EU passporting for financial services. But I repeat the point that others have made: as the leave campaign promised, we need to agree and clarify the rights of EU citizens already resident in the UK to remain when we leave the EU. That is something we might be able to agree with the EU right now.