Category Archives: Economic

Banking, Britain, Economic, Financial Markets, Government, Politics, Society

Financial deregulation of the City: too risky by far

BRITAIN

THE UK Government has launched a consultation about whether it is time to lighten the rules governing alternative asset managers, including private equity and hedge funds, in the belief that doing so will boost growth.

That is radical because, in its desire to ensure the City of London remains attractive post-Brexit, the government seems to have forgotten one of the major lessons of the 2008 financial crisis: when regulation is lax, risks accumulate. And there is little evidence to support this idea, but every reason to think it could exacerbate systemic risks.

The proposal is consistent with the Treasury’s belief that expanding the financial sector will deliver economic prosperity. It has suggested that post-crisis regulations went “too far”. Those regulations included an EU directive targeting alternative investment funds. Before 2008, these funds operated mostly in the dark. There was no means of systematically tracking the leverage they were using, nor the dangers this might pose.

Under the EU rules, leveraged funds managing Euros100m or more in assets had to comply with strict reporting requirements and hold enough capital to absorb losses. The Chancellor is now considering lifting that threshold to £5bn, which would exempt many funds from the full list of EU rules. It will fall to the Financial Conduct Authority to decide which rules to apply. This is troubling.

The FCA has been instructed to encourage financial “risk-taking”, and the regulator has boasted about slashing “red tape”. Taken together, this sounds like a recipe for recklessness. Though the marketplace for private equity and hedge funds was too small to cause a crisis back in 2008, it has since tripled in size. Many private equity funds have started borrowing from shadow banks, which aren’t subject to the same regulations or capital requirements as normal banks. Others have begun taking on even more debt than usual. The Bank of England raised the alarm about these risky practices in 2023, and has suggested that mainstream banks may be unwittingly exposed to the industry. Hence, these are reasons for more financial oversight and discipline, not less.

If the FCA loosens the rules, fund managers will be less constrained in their dealings. They lobbied to have the EU directive watered down in 2010, and the UK was one of the few countries to oppose the rules. Then, as now, the government wanted to protect the City, believing it to be a goose that lays golden eggs. This antipathy towards financial regulation was a prelude to the “Singapore on Thames” worldview promoted by Brexiters. Hedge fund and private equity managers donated heavily to their cause: a study of Electoral Commission data by the academics Théo Bourgeron and Marlène Benquet revealed some £7.4m was donated to the leave campaign, as opposed to just £1.25m for remain.

The Treasury seems to be of the belief that unless the City gets what it wants, Britain may lose its fund managers to countries such as Luxembourg. There are many reasons to be wary of liberalising finance. One is that it will hinder, rather than help, economic growth. Research suggests that once the sector exceeds a certain size, it starts to become a drag on growth and productivity. A study from the University of Sheffield found that the UK lost out on roughly three years of average GDP growth between 1995 and 2015 thanks to its bloated financial sector. Watering down regulations might be helpful for fund managers who like to take huge risks, but it is hard to see who else would benefit.

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Britain, China, Economic, Europe, European Union, Government, Politics, Society, United States

UK-China relations: The Brexit dilemma

BRITAIN-CHINA

Intro: Trump’s trade wars have exasperated the Eurosceptic model, which is more outdated than ever

WHEN the transatlantic alliance was more functional than now, there was never a united view of China. Beijing has always been perceived as a commercial rival and potential security threat, and a common wariness has existed. For hawks in Washington, however, the idea of an alternative superpower closing in on economic and technological parity feels existential. More dovish Europeans have been openly compromising and readier to leaven caution with engagement.

Britain has veered between the two poles. In 2015, David Cameron promised a “golden era” of open trade with China. In 2020, under pressure from the US, Boris Johnson banned Huawei, a Chinese telecoms company, from UK 5G infrastructure.

In opposition, Conservative politicians have become increasingly hawkish against Beijing. Keir Starmer’s Labour government has tilted back towards cooperation. Several Labour ministers have visited China, including the chancellor. Other ministers, including the business secretary, will go there later this year, to revive a trade commission that has been dormant since 2018. Despite being manifestly frustrated with the Chinese owners of British Steel during the recent dash to keep Scunthorpe’s blast furnaces operating, the UK government has retreated from intimations of deliberate sabotage.

At some point, a reckoning has to be made. The pursuit of economic growth and investment will inevitably come into conflict with a national security interest in keeping China at arm’s length. The question is where to draw the line. The official line is that judgment is deferred pending a Whitehall “audit” of relations with Beijing. That is due in June.

A UK government decision is also imminent on China’s status under the foreign influence registration scheme – a system for keeping tabs on international organisations and companies exercising political influence in Britain. China is not expected to be named in the “enhanced tier” of risky states, alongside Russia and Iran, but some Chinese institutions might have that designation.

Calibrating these judgments – choosing when to prioritise security over commerce – is much harder with Donald Trump in the White House. What used to be a difference of emphasis between the US and Europe looks like an irreparable fracture in the west.

Trump has started a ferocious trade war with Beijing without a convincing strategic rationale. His officials have told Europeans they will have to choose a side when it comes to vital communications technology. Yet, what we see is a US president who has become routinely aggressive in his rhetoric towards the EU, dismissive of NATO, and reliably emollient towards Putin’s Russia.

From that pattern it is clear in Brussels and other continental capitals that Washington is no longer a reliable ally and the trajectory must be “strategic autonomy” for Europe. That is changing the calculus of risk and potential benefit from a more pragmatic China policy. The authoritarian character of Xi Jinping’s regime hasn’t changed, but it presents itself as a more predictable force in international affairs while US democracy declines in harsh and sporadic spasms.

Such changes illuminate a crisis of international orientation for Britain that has been building since Brexit. Economic detachment from Europe was promised on a model of the UK as a lone sovereign agent in an open, free-trading globalised world. That concept has aged very poorly, and it stands more of an outdated concept now than it ever has. Britain is not alone in struggling to navigate relations with China in the turbulent new geopolitical climate, but choosing loneliness and isolation in a world of rival continental blocks is making the struggle much harder.

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Britain, Economic, Government, International trade, Politics, Society, United States

UK-US trade deal: Parliament must vote on any agreement

TRADE DEAL

Intro: Abolishing tariffs would be welcome for UK firms, but not at the price of reducing high regulatory standards or a reset with the European Union

LOOKED at dispassionately and objectively, a bilateral trade agreement between Britain and the United States is of relatively small economic significance to this country. Even ardent supporters of UK-US relations will find it difficult to argue otherwise. Back in 2020, for instance, Boris Johnson’s government estimated that a US deal “could increase UK GDP in the long run by around 0.07%” – a statistical calculation that is not exactly transformative. The view touted by some Brexiters that a US trade deal would fire up the entire British economy was always fantastical. Based on the assumption of a yearning for deregulation, there was little public support, even among leave voters themselves. Any urge of that kind now is even more delusional, in the wake of Donald Trump’s tariff wars.

The deregulatory alarm is hopefully a thing of the past. But global trade has new traumas too. Trump’s protectionist policies and bullying of US rivals are resetting the terms. There are nevertheless specific reasons why it is in Britain’s interest to pursue free trade talks with the US. Chief among these is the direct threat posed by current tariffs, especially on cars and pharmaceuticals. There is also the distinct prospect that a 10% tariff will be re-imposed on all UK exports to the US after the current 90-day pause ends in July.

The problem with any trade deal lies with the prices that the US may try to extract for tariff reductions or exemptions. And while the U.S. vice-president, J.D. Vance, has said that he sees a “good chance” of a deal, this could still be contingent on UK concessions in sectors such as agriculture, sanitary rules, and digital regulation. These are the same sectors that, for good reason, proved to be stumbling blocks in the post-Brexit discussions. Efforts to rebrand things like AI, biotech, and digital infrastructure, as strategically vital industries of the future, do not dispel some real threats now facing British food standards, healthcare, or online controls.

All this is multiplied by the Trump administration’s unreliability and geostrategic approach. Trump’s policy in Europe is to weaken and destroy the EU. Urged on by right-wing Brexiter politicians, the president sees pulling Britain away from the EU’s orbit as part of that effort. So, however, does the EU. As a result, any attempt by Washington to offer generous terms to the UK in particular sectors is likely to make any reset with the EU far more problematic. Sir Keir Starmer says that Britain does not need to make an either/or choice. Insisting that Britain can have its cake and eat it, that’s hardly the brutal reality being faced; neither the US nor the EU will necessarily take the same generous view that Starmer holds.

Even if the prospective UK-US deal is less wide-ranging than it once might have been, it is still significant. Politically, the Trump factor also makes any such deal more explosive. UK treaties and international trade deals are traditionally delivered under prerogative powers. As the Brexit argument about a “meaningful vote” showed, there is a very limited role for parliament. That needs to change. It would be intolerable in the UK-US case. This is clearly a matter for parliament to debate, both during and after negotiations, and for both houses of parliament to vote on.

In recent days, the Labour chairs of the Commons foreign affairs and trade select committees called for such votes. The Liberal Democrats and the Scottish National Party are both in favour. The UK government should make clear that no agreement will go ahead without a meaningful Commons vote in favour. Democracy cannot be usurped on this issue.

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