Summary Report of the seminar on “Brexit and Finance” with Dr. Scott James and Pr. David Howarth, University of Luxembourg, 12 October 2018
October 15, 2018
On 12 October 2018, the Robert Schuman Institute of the University of Luxembourg and the Luxembourg Institute of Socio-Economic Research organized a seminar on the policy developments concerning the Single Market in financial services in the context of Brexit. Here is the summary report.
- Dr Scott James, Department of Political Economy, King’s College London
Scott James studied for a BA (Hons) in Politics at the University of Liverpool between 1998 and 2002. He was awarded an ESRC Research Studentship to undertake an MA in European Politics (Research) and doctoral research on the ‘Europeanisation of National Policy Making’ at the University of Manchester from 2004 to 2008. He joined King’s College London as Lecturer in European Public Policy in September 2008, and in 2014 was made a Senior Lecturer in Political Economy and Deputy Head of Department. During 2017, Dr James was a Visiting Fellow at the Blavatnik School of Government, University of Oxford. Dr James was the Principal Investigator for the ESRC Project: ‘Voices in the City: Understanding the Role of the City of London as a Multi-Level Policy Actor and the Impact of the Financial Crisis’. From 2016, he is a co-investigator on the UK research team for the nine-country Horizon 2020 project ‘EMU Choices: The Choice for Europe since Maastricht‘.
- David Howarth, Institute of Political Science, University of Luxembourg.
David Howarth is Professor of political economy and Head of the Institute of Political Science at the University of Luxembourg. He previously ran the the University of Edinburgh’s Jean Monnet Centre of Excellence and remains an Honorary Fellow in the Department of Politics and International Relations at the University of Edinburgh. Professor Howarth is (since 2015) one of three editors of the Routledge / UACES book series on Contemporary European Studies, one of the leading series focused on European Union affairs. Professor Howarth is a founding member of the University of Luxembourg’s Robert Schuman Institute, since 2016 a leading interdisciplinary centre for study of European Union affairs and recognized and funded by the EU Commission as a Jean Monnet Centre of Excellence.
The roundtable will be chaired by Dr. Sabine Dörry.
Sabine Dörry is a Senior Research Fellow at the Luxembourg Institute of Socio-Economic Research (LISER), an Adjunct Associate Professor at the University of Luxembourg, and an Honorary Research Associate of the School of Geography and the Environment (Oxford). She is currently a GSO Leadership Fellow and recently (2013-2015) held a Marie Curie Research Fellowship at the University of Oxford. Sabine is a board member of the newly founded FINGEO Network, the Global Network on Financial Geography, where she is also deputy editor for the network’s working paper series. Sabine is also an editor of Articulo – Journal of Urban Research.
In his presentation, Scott James explained how and why the ‘City’ (represented by its main lobby groups and most prominent financial firms) was not more effective in defending their interests around Brexit. More generally, in his research, he hopes to make a broader contribution to theories of business power. He argued that the City had considerable latent structural power due to the sector’s pre-eminence in the UK economy. His findings also showed that the City frequently sought to deploy this structural power strategically in an effort to shape the political agenda around Brexit, both before and after the EU referendum. The clearest illustration of this use of structural power was how large banks signalled their intention to ‘exit’ by relocating staff and / or investment activities to the EU27 in the event of a bad Brexit deal. The City was also active in using instrumental mechanisms of power, augmenting its collective lobbying capacity in anticipation of the Brexit negotiations, and generating independent analysis on the economic costs of Brexit aimed at feeding into Whitehall impact assessments and shaping the thinking of ministers and officials.
Despite this, James argued, the City was surprisingly unsuccessful in shaping the UK government’s Brexit policy due to three factors. First, the influence of the financial sector was severely constrained by political statecraft. Motivated by the need to build a new electoral winning strategy (focused on capturing pro-Leave voters) and the demands of party management (satisfying the demands of Eurosceptic backbench MPs), the new May Government pursued a hard Brexit policy which led to the downgrading of the City’s interests. Second, departmental reconfiguration associated with the Brexit negotiations, together with deliberate attempts by ministers to control and restrict access to key decision makers, undermined the influence that City lobbyists had historically enjoyed within the UK polity. Third, the financial sector faced significant obstacles in its ability to organise and lobby collectively around Brexit. This stemmed from the variegated impact of Brexit on different financial sub-sectors and firms: for example, while large US investment banks continued to campaign for full passporting rights to protect their business model, UK retail-focused banks were notably less vocal in their concerns about the UK’s withdrawal from the EU, while many firms in the non-banking sector actively campaigned for Brexit.
James’ research aims to make a broader contribution to the development of a new research agenda on Brexit, drawing on both comparative and international political economy analyses. James’ analysis shows how and why the interests and influence of powerful transnational firms in the City of London declined in the wake of the Brexit vote. It does so by specifying a series of scope conditions for business power; that is, the boundaries or parameters of the theory which identify the empirical phenomena to be explained.
His analysis of the UK financial services sector highlights three scope conditions under which business can translate its latent structural power into effective forms of instrumental influence. First, business power is conditional on the nature of the incentives generated by political statecraft. Brexit highlights the importance of electoral ‘shocks’ and the demands of building an electoral winning strategy and party management, both of which can lead governments to marginalise the concerns of powerful interest groups in the pursuit of electoral success. Second, business power relies on institutionalised structures which enable firms to strategically exert their structural power by signalling that their claims about economic costs are credible and trustworthy. Equally, however, Brexit reveals how business power can be constrained when institutions are reconfigured and established channels of access are deliberately closed down by ministers. Finally, business power is dependent on the capacity of industry to organise collectively and to send a coherent message to policy makers. Where the effectiveness of business organisation is limited by heterogeneous preferences and weak coordination, policy makers have reason to doubt the veracity of firms’ threats to ‘exit’. Brexit highlights in stark terms the extent to which business power reflects: a deliberate choice on the part of policy makers to facilitate business influence in the policy process; and is consciously constructed by policy makers to justify particular policy decisions and outcomes. Overall, governments have considerable autonomy to push back against business influence, even when large firms are actively taking steps to relocate jobs and investment overseas.
A critical remaining question is how long the political imperatives driving hard Brexit can take precedence over economic pressures, or indeed whether these can ultimately be reconciled? As the negotiations unfold, the City of London therefore promises to provide an important test case for future research on the contingency of business power over time.
In his presentation, David Howarth makes use of two main theoretical approaches derived from the existing literature on the political-economy of European financial integration to shed light on the implications of Brexit for finance and the dynamics that have been unleashed. He argues that some ‘transnational alliances’ on the subject of finance and Brexit were formed as the result of financial interdependence. Yet, these alliances were limited in scope and failed to involve or mobilise significantly EU private and public sector actors. In the private sector, the AFME – one of the main EU-level lobbying groups – and several UK-based financial associations argued for a long transition period for finance following the conclusion of Brexit negotiations and, ideally, a special deal on finance. In the public sector, a number of German (and other EU27) officials noted their awareness of the importance of the City of London in European finance and reiterated the arguments presented by both UK public authorities and a range of UK-based financial companies and their representative associations. The main caveat to be noted with regard to this conclusion about the lobbying efforts and demands of international finance, is that it remained possible that transnational coalitions involving EU partners could gain momentum as Brexit negotiations progressed. Howarth argued that there is far greater evidence of a neo-mercantilist ‘ battle’ amongst member states, with individual national governments promoting their financial centres and competing to attract financial operations from the UK. Frankfurt was touted as the main destination for banks. French efforts to improve the attractiveness of Paris had limited success to date, although the 2017 election of Emmanuel Macron boded well for further reform. In this context, the EU authorities, namely the Commission and the ECB, were keen to preserve the integrity of the Single Market and its four freedoms. They sought to prevent a regulatory ‘ race to the bottom’ in finance – with financial centres and national authorities attempting to undercut each other – thus undermining longstanding efforts to construct a level playing field across the EU.Frédéric Allemand