Brexit for finance? Structural interdependence as a source of financial political power within UK-EU withdrawal negotiations

Abstract

For most analysts, Brexit reveals the highly contingent power of finance and the clear limits to its ability to influence crucial policymaking outcomes. By contrast, I contend that UK-EU negotiations demonstrate the unique capacity of finance to secure substantial commercial protections relative to all other business sectors and that the structural sources of the City’s political power remain exceptionally robust. Elaborating a notion of ‘structural interdependence’, the paper demonstrates how policy officials on both sides came to perceive that the future prosperity and stability of their economies relied upon maintaining open trading relations in financial services. This necessitated broad continuity in access to London’s deep financial markets for EU firms and preservation of the City’s leading role in the UK growth regime. In establishing these claims empirically, I document an extensive range of contingency measures designed throughout December 2018-April 2019 that would function to protect the financial industry from economic disruption in the event of a no-deal Brexit. The outcome illustrates how finance benefits from a form of structural power that does not require instrumental mobilisation, but rather shapes policy decisions on the basis of deeply entrenched and commercially vital cross-border financial entanglements.

Keywords:

• Brexit
• City of London
• European Union
• financial political power
• structural interdependence
• structural power
• United Kingdom

Acknowledgements

The author wishes to acknowledge helpful feedback on this paper from Tobias Arbogast, Lucio Baccaro, Björn Bremer, Fabio Bulfone, Kostas Gemenis, Kathleen Lynch, Erik Neimanns, Sidney Rothstein, and Leon Wansleben. He would also like to thank those who organised and attended the ‘New Perspectives on the Structural Power of Finance’ workshop at the London School of Economics (3-4 December, 2019) during which an earlier draft of this article was discussed. A special thanks is extended to Scott James and Tasha Fairfield for their detailed engagement with the arguments presented.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Throughout the paper I will follow convention by using the term “the City” to represent the entire UK financial services sector.

2 See, for example, Finch, Warren, and Hadfield (2019); Wilkes and Chatterjee (2019); The Economist (2019). For a competing analysis, see, Wright, Benson, and Hamre (2019).

3 One other sub-sector of interdependence worth mentioning is insurance. For instance, one third of all premiums originating within the UK are sold by EU firms under passporting rights, while UK-based insurers export approximately 28% of their products to other European nations (PwC, 2018a: 8; Scarpetta & Booth, 2016, p. 25).

4 At a later point, the May government charged Stephen Barclay with leading the DExEU—an ex-London banker and FCA official highly sympathetic to the financial sector (Jenkins, 2017).

5 This can be seen as a “push-comes-to-shove” moment of truth when the strategic façade of negotiations is somewhat lowered and the analyst can make more confident claims regarding policymaker intentions.

6 Similarly, in the enormous foreign exchange market (which involves the clearing of vital FX swap derivatives), the City has significantly increased its share of daily trading volumes since Brexit, from 37% in 2016, to 43% in late 2019 (Wilkes & Chatterjee, 2019).

7 The implementation period would be triggered in the event of a successful deal and run for approximately two years after an official UK exit. During this time, the current UK-EU trading arrangements would stay in place while the future economic relationship would be worked out in greater detail.

8 For a comprehensive technical overview of all country arrangements see Norton Rose Fulbright (2019).

9 Early on, many of the large UK banks identified a wide variety of loopholes to circumvent any potential future restrictions to UK passporting into EU countries (Arnold, 2017).

Additional information

Notes on contributors

Manolis Kalaitzake

Manolis Kalaitzake is a postdoctoral researcher at the Max Planck Institute for the Study of Societies. His research focuses on finance, state-business relations, and European political economy. His research has been published in outlets such as Politics & Society, New Political Economy, Competition & Change, Business & Politics, and the European Journal of Social Theory.