Tag Archives: Rachel Reeves

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, Economic, European Union, Government, Politics, Society, United States

EU reset: No time for UK passiveness

EUROPEAN REALIGNMENT

FANATICS of Britain’s departure from the European Union have struggled to quantify the Brexit dividend and what benefits it brought, but when Donald Trump unveiled his schedule of global tariffs they finally had a number to point towards. It was the difference between the 20% levy imposed on all continental exports and the 10% baseline figure payable on British goods.

A week later the gap closed leaving Brexiteers melancholic and dejected when Mr Trump reversed his plans. What the tariff schedules will look like at the end of the 90-day “pause” is no more predictable than any other feature of current US policy. There is no obvious concession from the UK government that might induce Washington to lower its 25% barrier against car exports, and the 10% rate on everything else looks non-negotiable.

Meanwhile, dialogue with the EU about closer cooperation continue apace. The UK hopes to have a framework agreement in place in time for a summit in London in May. The primary focus is security, but that is intended to be a forerunner to closer trade alignment.

As an indication of accelerating rapprochement, Rachel Reeves, the Chancellor, has just attended a meeting of EU finance ministers in Warsaw. Plans have been announced for a pan-European defence procurement fund with the UK expressing an interest to be included. There are hurdles still to be overcome but also strong will on both sides to make it happen. It is a measure of how much more constructive diplomacy has become under Labour. No Tory government would have sought such collaboration. Regime change in Westminster made a closer EU-UK relationship possible, then Mr Trump’s rampage of destruction through the norms of transatlantic security and global trade made it urgent.

The Brexit withdrawal treaty and subsequent trade and cooperation agreement were deliberately shaped by Boris Johnson’s government to impede reintegration on any level. Irreversible divergence was the whole point. But, while there is no great appetite in Brussels to revisit the terms of Brexit that damaged British businesses and interests more than the EU, recognition of a mutual strategic interest and a more constructive disposition are necessary. The long-term economic rational is being hampered as the UK continues to operate within red-lines drawn by domestic electoral imperatives.

European leaders fully understand that democratic politicians must defer to public opinion. But with Sir Keir Starmer having earned goodwill through his diplomatic advances, the prime minister’s reluctance to ever challenge the fallacious premises of Brexit, even after winning a landslide general election victory last year, raises doubts about the true scale of his ambition when it comes to the EU reset. That misgiving is magnified whenever British ministers talk enthusiastically about their dealings with Mr Trump, who doesn’t hide his hostility to the European project. Sir Keir insists it is not a binary choice, but it will become one as soon as concessions to the White House threaten to destroy trust in Brussels or further impede access to the single market.

The claim that the UK can be equidistant between Europe and the US may feel like keeping options open, but in Brussels it looks like a reversion to typical British Eurosceptic ambivalence. Sir Keir faces a stark strategic dilemma, and his options get worse the longer he defers the choice.

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Britain, Economic, Financial Markets, Government, Politics

Spring statement 2025: A stage built on myths

BRITAIN

BRITAIN is tightening its belt. The chancellor’s spring statement arrives with the gloomy tone of inevitability. Welfare payments for the sick and disabled will be shrunk, and public services from transport to criminal justice face much leaner times. The language is that of necessity. There is no money. The choices are hard, but unavoidable. So runs the rhetorical script.

The notion that painful cuts are inevitable is political theatre and grandstanding. Either Rachel Reeves knows the constraints are self-imposed – or, more troubling, believes they are real. Last October, she announced £190bn in extra spending, £140bn in additional borrowing, and £35bn more in taxes than previously forecast. The Treasury has expounded upon this by insisting “you can’t pour that amount of money into the state and call it austerity”.

Yes you can. Particularly where tens of billions are siphoned off in debt interest to uphold economic orthodoxy rather than meet social needs. The UK now spends more than £100bn a year on debt interest not because it is financially insolvent, but to a substantial degree because the Bank of England is offloading vast amounts of gilts, bought during quantitative easing, at a loss. The Treasury must cover these losses, while the flood of gilts into financial markets drives up interest rates on new borrowing. This is quantitative tightening (QT), with the state left to foot the bill for soaring interest costs and Bank payouts. Nonetheless, the Office for Budget Responsibility assumes that it will continue, locking in high costs.

This is ideology posing as policy. And it’s far from prudent. No money for free school meals or youth clubs, some parliamentarians warn, yet billions pour into the pockets of bondholders, for the sake of “stability”. Ending QT could redirect that money to public services – a better priority than reassuring markets with symbolic gestures.

If the Bank won’t stop on its own, it must be pushed. Under Gordon Brown, the Central Bank gained its independence in 1998 but included a safeguarding caveat: in “extreme economic circumstances” ministers can override the Bank in the public interest. If £100bn in spending isn’t extreme, what is? QT should be paused. The Bank stands alone among G7 peers in actively selling bonds and demanding Treasury cash to cover paper losses. This is self-defeating in a dangerously volatile world. Gilts could be strategically managed. Before New Labour, Kenneth Clarke often ignored the Bank’s advice – and was often right. But such thinking is now deemed heretical in a political culture that treats Central Bank independence as sacred, even when it deepens and exasperates public hardship.

The deeper irony cannot be lost on anyone. The chancellor refuses to raise taxes on the wealthy, will not relax her fiscal rules, and has ruled out borrowing more. So she claims that there is no alternative to cuts. Yet, these are self-imposed constraints – combined with deference to an unelected monetary authority – that sustain the illusion of necessity. Labour has been here before: Snowden did the same in the 1930s, and very nearly destroyed his party.

The spring statement is a performance. She asks the public to accept a diminished state as the result of external forces, when actually it’s the result of internal dogma. Worse, she may believe the script – failing to recall the economic tools once used to steer interest rates, debt, and public investment. Austerity isn’t the price of prudence, but the cost of forgetting. We have a chancellor of the exchequer who wears the mask of making tough decisions, but on a stage built on myths. The better choice would be to trim the Bank’s power, even if the spotlight has been carefully trained away from its damaging role.

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