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Passport to Pimlico

Recently I remembered a great British comedy film made in 1949 by the famous Ealing Studios – Passport to Pimlico. And even though Passport to Pimlico, as in the title, sounds as puzzling as say Passport to the City Centre, it captures perfectly the essence of the story in which a part of central London is officially declared a part of Burgundy. The move frees its citizens from food rationing laws and other bureaucratic restrictions which after the war made life very difficult for British people.

 

I was reminded of Passport to Pimlico by Professor David Blake from Cass Business School City, University of London. It is funny that no one had mentioned this film before in the context of Brexit.

 

Britain’s exit from the European Union is by far one of the most important events of our times. No wonder that its consequences have been the subject of intense speculation for months. Interesting as the whole guessing game is, it has not led to any clear answers for rather obvious reasons. We don’t know how hard or soft Brexit will turn out to be in the end. Relations between the European Union and Great Britain will take shape during the forthcoming negotiations.

 

Is Brexit really such bad news for the European Union? The answer to this particular question is simple enough. Politics, defence and other such issues aside, it is enough to point out that in five years’ time the fifth largest net-contributor to the EU budget will disappear from the EU’s accounts. Since 1973, the year it joined the EU, Great Britain has transferred to the EU’s coffers 140 billion pounds. By 2021 it will have paid in another 60 billion pounds. The conclusion is quite simple – the European Union will be weaker without Britain, and that means weaker in every respect.

 

 

It is much harder to predict the potential impact Brexit will have on the British economy. The best example is the City of London. The City is the biggest financial centre of the world, a jewel in the crown of the British economy, which, depending on who you listen to, may find Britain’s departure from the EU a real threat to its existence or, quite the opposite, a fantastic opportunity.

 

To get an idea of how powerful the City is, it is worth looking at some figures. Great Britain is the largest global exporter of financial services – 12 per cent of all the country’s exports come from just this one sector. Britain has the fourth largest banking sector in the world, the third largest insurance sector and the second largest asset management sector. Banking and insurance account for 75 per cent of the country’s trade surplus in the service sector. This translates into not-so-trifling 62 billion pounds, or 3.5 per cent of its gross domestic product. This figure swells to over 70 billion pounds if we figure in all the more or less loosely finance-related sectors, such as legal, accounting and consulting services. The whole financial sector brings in over 70 billion pounds in tax receipts annually, which represents 11 per cent of all tax receipts of the Exchequer. Finally, banks and insurance companies are responsible for 8 per cent of the gross value added for the British Isles, of which half is generated precisely in London.

 

The City is equally important for the European Union. EU member states are the recipients of 40 per cent of British financial services exports. On the other hand, the City manages 40 per cent of EU assets and accounts for 60 per cent of EU capital markets. And even though the British abhorrence of the European bureaucracy and protectionism is matched by the EU member states’ contempt of a soft Brexit, isn’t the idea that one side can do without the other just a daft notion?

 

If fact, even the tone of the comments after the referendum has changed. Before June 2016, Goldman Sachs, JP Morgan and Credit Suisse predicted a disaster. Once the British people had spoken, the same institutions suddenly toned down their doomsday scenarios. Brexit began to be treated with a certain indifference. Forecasts of losses to the British economy have also become less alarmist. Earlier predictions were keen to stress that as much as one fourth of the City’s business was tied to the EU, and that a hard Brexit would mean a loss of about 20 billion pounds a year and consequently job losses in the order of about 35 thousand. Today, more modest analyses seem to enjoy more credibility, purporting that the European business generates 9 per cent of the City’s revenues, while the likely losses would run to only about 7.6 billion pounds. After all, there is nothing terribly surprising here given that the British economy has reacted less convulsively to the results of the referendum than it had been expected. Moreover, in February 2017 the Bank of England revised the British GDP for the rest of the year up from 1.4 per cent to 2 per cent, for 2018 – from 1.5 per cent to 1.6 per cent, and for 2019 – from 1.7 per cent to 1.7 per cent.

 

Soon a year will have passed since the referendum; meanwhile companies, as if to spite the pessimists, are not too keen to pull out of the City. This does not concern just retail banks doing business in EU countries on a relatively small scale. Everything seems to suggest that if this or that bank takes the idea of moving to the continent seriously, it will dust off its emergency scenario only after the UK-EU negotiations.

 

There are no prizes for guessing that invitations to firms that choose to leave the City have been pouring in from all quarters. Queuing up are Dublin, Amsterdam, Paris and Frankfurt. I’d be willing to hazard a guess that the trip to London of the deputy prime minister and minister of finance Mateusz Morawiecki is motivated by similar reasons. But do any of these cities, including Warsaw, have any chance of getting a bite of the London pie? In October 2016, the question was mulled over by the Daily Telegraph, which wrote that none of the European metropolises except for London come anywhere close to the level of infrastructure necessary to compete with any of the first ten financial centres in the world. A similar sentiment at more or less the same time was expressed by the Financial Times, which said that Frankfurt could at most shadow London. It is hard to disagree with these assessments and equally hard to say whether the passage of time and the potential hard Brexit might change this situation. There is no shortage of opinions championing the idea of the City as an independent, free from the EU, financial centre which will really be able spread its wings only after it has dropped the ballast of excessive EU regulations.

 

We can go on speculating in like-fashion for a long time. Many interesting arguments have been furnished by the current geopolitical situation. The first to consider are the traditional special relationship between Great Britain and the United States, the China-UK relations and the China-US relations, followed closely by the role of a few other countries, including one superpower, conflicts of interest and a whole lot of other sensitive issues. But this is the subject of another story, which has little to do with Passport to Pimlico.

 

All financial data come from a fascinating report by David Blake: Saying No to the Princes of Europe: The City of London as a World Financial Centre following Brexit Or Passport to Pimlico: The City of London’s post-Brexit future depending on whether it is located inside or outside Pimlico or even possibly Latvia.

 

The full report can be found here:

https://static1.squarespace.com/static/58a0b77fe58c624794f29287/t/58ca91f8e58c62741806e682/1489670684557/Brexit-and-the-City.pdf

 

Brexit in a nutshell – or the procedure of leaving the European Union set forth in article 50 of the Lisbon Treaty:

http://www.bbc.com/news/uk-politics-39143978

 

The impact of the referendum so far on the British economy:

http://www.bbc.com/news/business-36956418

https://www.theguardian.com/business/ng-interactive/2017/apr/25/how-has-the-brexit-vote-affected-the-uk-economy-april-verdict

http://www.independent.co.uk/news/business/news/brexit-economy-sterling-currency-investment-cost-impact-business-financial-banks-insurance-retail-a7695486.html

 

In order not to be one-sided, here is one of many articles expressing concern about the impact of Brexit on the British economy (Professor Blake would call them highly exaggerated):

https://www.theguardian.com/politics/2017/apr/04/uk-jobs-merkel-juncker-euro-clearing-eu-manfred-weber-brexit

 

There are many clips of Passport to Pimlico online (really worth seeing!). Here is a trailer:

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