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Thursday, 9 October 2014

Cretinous Jealousy in the EU

Britain's retiring EU Commissioner, Baroness Ashton, has been toe-curlingly embarrassing. The new appointee is a symbol of the arrogance of the political class: a Tory lobbyist who was shunted into the overblown House of Lords has been confirmed as the partial head of Financial Services for the EU for the next quinquennium. The Commission would not trust any Briton with the whole job, so the function has been split into two non-jobs; and the EU Parliament has bought into that.

Now the Europeans are busily saying that the financial services must be spread around Europe, to the detriment of London. This completely ignores the basic truth that London is - and has been for at least 250 years - a totally different sort of marketplace in financial services from those in Paris, Vienna and Rome.

 This is exemplified most clearly in the insurance market. Both Lloyds and the London-market companies accept business from all over the world. They will price emergent risks of which there is no quantifiable history on the basis of well-honed judgement of a quality that has never been equalled anywhere else: and they are almost always right. There are, from time to time and rarely, egregious mistakes made. The biggest recent one was in a London office of AIG [formerly the greatest of American Insurers] when they accepted hundreds of billions of dollarsworth of bankers' risk against a new form of contract that was untested: and it brought down the whole company, which was then 'rescued' by the US government because the collapse of the American International Group would have made the US economy unsustainable.

Only London can manage such risks, and only in London is there a subscription system whereby most new and many well-known risks are only accepted by the Market on the basis that the risk is carried on the balance sheets of a consortium of experienced, intelligent underwriters who all have to agree before the contract can be completed. If the contracts that AIG concentrated on its own balance sheet had been offered to the subscription system, they would never have been accepted. It would be lunatic to think that a subscription market could be created involving underwriters in twenty-six financial capitals. Smashing London's 'monopoly' would not spread the market around Europe: it would just deprive the world of a market that has been developing and adapting to change [and increasing its access to capital] since 1670.

The same truth applies to the innovative areas of finance that are misguidedly called 'banking' [or damned as 'casino banking']. Derivatives, in particular, have been developed in London and New York - and copied worldwide - because they are very useful, and they work. Managing such contracts, and developing new variants, is a London speciality. It earns good wages and bonuses for the experts who work in the market, profits for the companies that finance them, and taxes for the British government. There are no losers: but envious Europeans feel that they are deprived of a 'fair share' of the business. The business is open to them: they can just enter the London Market [and some have done so]. But many continentals want the protection of their own governments, their own central banks and their own regulators; they want to play by rules that do not permit the innovation that is common in London. The big rewards come from carefully-calculated expert risk-taking, which is available only in London and [now to a lesser extent, due to regulatory changes since the crunch] in New York.

Derivatives have not failed: it was bad old-fashioned moneylending, especially on property, that brought down banks in 2007-9. This simple fact creates furious jealousy in non-London financial services as regulatory screws are tightened and the prospects of profitability are reduced. The EU has power to kill London's unique capability. It cannot be spread around: it is the very fact of concentration in the single market place that gives it that combination of strength and flexibility that the cretins want to tear apart. The wet, half-comprehending political caste state - but understate - this problem. The threat is urgent. It is a national issue. We need a popular campaign to save London - now!

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