Prime Minister David Cameron is in a pickle. A vote Wednesday by rebels in Parliament, although nonbinding, called for him to demand a reduction in the European Union’s (EU) budget instead of the budget freeze he had intended to push. Opposition to such a freeze and to Britain’s joining a eurozone banking union could cost the City of London, its financial heart, its position at the top of the world’s financial centers.
Bloomberg reported Thursday that the vote defeat, the worst that Cameron has suffered, caused senior ministers in the government to warn Tories—who teamed up with the Labour Party for the vote—that their euroskeptic attitudes could cost them more than they know.
While those opposed to the EU insist Britain should demand that the EU cut its budget, the form of their opposition, said officials, threatens Cameron’s ability to make a deal at the EU summit meeting scheduled for later this month.
Since Cameron also planned to push for London’s continued financial autonomy while at the same time threatening to exercise Britain’s veto against the budget unless the country gets “a good deal” at the meeting, the City could find itself left out in the cold as his leverage vanishes.
If Britain stands against the banking union in the same way it is standing against the budget, it will lose its ability to have a voice in making the rules. It could also lose its position as the center of euro trading, which would likely move to Frankfurt or Paris so that it can be regulated by the European Central Bank (ECB)—so said Thomas Huertas in the report. Huertas is a former representative for the U.K. on the European Banking Authority, the body that drafts financial rules for the 27-nation EU. He is now with Ernst & Young in London.
Jay Ralph, the management board member responsible for asset management at Munich-based Allianz SE, said in the report, “If there is a European banking union and a notable missing member of that is the U.K., then that will likely hurt London as a major financial market.” He added, “A strong pan-European banking union ex the U.K. will have negative implications for Europe and the U.K.”
According to Huertas, a European banking union giving the ECB new supervisory powers will create an “inner core” of eurozone countries and push aside the rest of Europe, including the U.K.
He added that two sets of regulations, one for each tier of the so-called inner and outer segments of Europe, would make it more difficult for U.K. banks to access European markets.