Cameron Demands Risk U.K. Becoming Hedge Fund Island for MerkelJames G. Neuger
U.K. Prime Minister David Cameron and German Chancellor Angela Merkel are both talking up competitiveness -- in two incompatible languages.
Cameron’s determination to protect the financial-services powerhouse in London and tame what he sees as the bureaucratic leviathan known as the European Union risks turning his country into an island of hedge funds, in the German view.
“It’s dangerous for them to think the City can stay top of the pops outside the union,” said Otto Fricke, budget-policy spokesman for the German Free Democrats, the junior party in Merkel’s coalition.
The British-German disconnect will shape two parallel processes: whether the U.K. remains in the 27-nation EU, and whether the 17-nation euro area evolves past the debt crisis into an economy productive enough to afford its social-safety nets.
Britain generated 23 percent of the EU’s financial-services output in 2011, with 13 percent of the population, according to EU data. Finance made up 9.6 percent of British gross domestic product, compared to an EU average of 5.7 percent. It was 4.4 percent in Germany, the world’s second-biggest exporter and home of manufacturers such as Siemens AG and Volkswagen AG.
“The British view is that the City is the largest financial center in Europe by a mile, so there is that attitude that we know how to do it and we’ll tell you,” said Graham Bishop, who has advised European officials on financial regulations for two decades and is author of the book, “The EU Fiscal Crisis.” “It doesn’t go down too well.”
The non-meeting of minds played out at the World Economic Forum in Davos, Switzerland. Cameron gave a Jan. 24 speech defending his planned referendum on a U.K. pullout from the EU. Taking the same stage three hours later, Merkel headed in the opposite direction: her goal is to remodel the euro economy so it looks more like Germany’s.
“It comes down to the strength of the political will to keep the euro zone together, the commitment to reform, the strength of solidarity in the euro zone,” Merkel said.
The drive to impose euro-zone bank regulation will widen the divergence between Berlin and London. As a country sitting out the euro, Britain has a natural exemption from the regional banking supervisor to be housed within the European Central Bank. It will also have nothing to do with a financial-transaction tax being engineered by 11 countries, including Germany and France, over British opposition.
Since the onset of the financial crisis with the collapse of Lehman Brothers Holdings Inc. in September 2008, Britain and Germany have scuffled over the regulation of credit-default swaps, commodity derivatives, high-frequency trading and hedge funds. In each case, Berlin wanted heavier regulation, London lighter.
While Cameron has scored points among his voters with occasional blasts at irresponsible bankers, his government maintains the traditional defense of the City of London when its officials go to Brussels.
Of Europe’s $423 billion of hedge-fund assets, about 70 percent is managed out of London, according to EuroHedge, which has covered the industry since 1999.
As a share of the domestic economy, Luxembourg, at 23.5 percent, and Ireland, at 10.7 percent, have financial industries bigger than the U.K. in 2011, the EU data show. In absolute terms, Germany and France ranked behind the U.K.
Merkel spelled out her attitude in a speech to the German federation of banks in March 2011. Germany’s banking brass, which holds a formal conference once every five years, was assembled for the first time since the financial world began to come apart.
In the turmoil before the euro crisis became the global economy’s biggest threat, Germany was forced to bail out a lender for the first time since the Great Depression, taking over Hypo Real Estate Holding AG. IKB Deutsche Industriebank AG’s wrongway bets on the U.S. mortgage market led to losses that required a government guarantee before it was bought by private-equity firm Lone Star Funds in 2008. Kfw Group, the state development bank, took losses in Iceland and with Lehman.
“Let me put it this way: in the social-market economy, banks’ function is to serve,” Merkel said. “You are service providers for citizens and companies.”
To be sure, Germany and the U.K. are frequent allies in setting rules for the single market that governs all 27 EU economies. Both share free-trading instincts, offsetting the French bias toward industrial control and protectionism; both want far-reaching climate regulation, blunting the more lenient stance on pollution of lesser-developed eastern European economies.
Britain stakes its influence on “competitiveness,” a catch-all term that can mean growth, productivity, labor mobility, appeal to foreign investors and business startups, regulatory standards, tech-friendliness, education, the citizenry’s health and well-being -- or a combination of these.
Whatever the definition, the U.K. lags behind Germany. The Davos organizers rank Germany sixth in international competitiveness, two spots ahead of Britain, based on 12 factors including the strength of the financial sector and “business sophistication.”
Straightforward economic comparisons give Germany a wider lead. Output per capita -- a gauge of productivity and individual prosperity -- has been diverging for a decade. German per capita output reached 121 percent of the EU average in 2011, with the U.K. at 109 percent, EU data show.
The EU forecasts unemployment at 5.6 percent in Germany in 2013, 8.1 percent in the U.K., higher than Romania; a German budget deficit of 0.2 percent of gross domestic product, compared to 7.2 percent in the U.K., higher than Greece; a German current-account surplus of 5 percent of GDP, compared to a U.K. deficit of 2.2 percent, worse than Spain’s.
Merkel’s Davos speech was as notable for what it didn’t say. While offering a hat tip to Cameron’s plea for a crackdown on tax evasion, she was silent on the unprecedented EU exit roadmap that Cameron laid out in London the day before and reprised in Davos.
Merkel’s omission indicated that whatever transpires on the other side of the English Channel, a deeper and better-managed euro area is the German priority. It also reflected the posture elsewhere on the continent of dismissing Cameron’s meditations as a domestic political ploy, to be factored in only if he wins reelection in 2015.
Cameron “is playing a dangerous game for tactical, domestic reasons,” said European Parliament President Martin Schulz said, a German Social Democrat. He “resembles the sorcerer’s apprentice, who cannot tame the forces that he has conjured -- forces that want to leave the EU for ideological reasons.”