According to a Financial Times report, American banks with big operations in London are making contingency plans to move some of their operations to Dublin because of worries that the UK might leave the European Union. At first sight, this adds weight to Yes campaign warnings that a “Brexit” is a bigger threat to Scottish jobs in financial services than a Scottish exit from the UK. Deeper analysis, however, suggests the opposite.
What worries the American banks is the possibility that if the Conservatives are re-elected next year, then David Cameron will carry out his pledge to renegotiate the UK’s terms of membership and then the voters reject the resulting package in an in-or-out of the EU referendum he is pledged to hold some time in 2017.
There are quite a lot of “ifs” in this – if Mr Cameron wins, if the re-negotiated package is feeble, and if the voters reject it. What that demonstrates is the sensitivity of financial firms to risks which could damage their business, even if they are quite remote risks.
And if, for pro-Yes political campaigning purposes, you want to highlight the serious implications of this risk, then surely you also have to admit that the risks perceived by Scotland-based financial firms to be posed by Scottish independence must also be serious and have equally serious implications.
The particular point concerning the Wall Street banks, according to the report, is that having a base in the EU gives a financial firm a passport to sell its services across all 28 member states and their 506 million people. So the importance to US banks of the UK being in the EU is obvious.
Among the attractions of Dublin is that it is an English-language country and has a legal system similar to England’s. It also has a low corporation tax rate (12.5 per cent versus what will soon be a 20 per cent rate in the UK). This, it should be noted, is clearly not a key locational factor for financial companies – if it was, they would have all crossed the Irish Sea a long time ago – implying that the potential gains of a company shifting to an independent Scotland from use of the corporation tax level may not be all that great.
Nevertheless, Scotland also has the same language and legal characteristics as Ireland, and if there is a Yes vote in September, then surely Edinburgh and Glasgow will also benefit from worries about a Brexit as Dublin apparently is. After all, the Scottish Government is giving emphatic assurances that Scotland will still continue using sterling and will be a member of the EU.
This may astonish some, but big financial firms don’t see it that way. The first problem is that while the currency that Ireland uses is not in question, an independent Scotland’s currency is seen as highly uncertain.
Here, for example, is what Citi Research, part of New York-based Citigroup, one of the world’s biggest banks, says: “We regard a sterling monetary union as unlikely, but we are genuinely unsure what currency and monetary policy would be adopted by an independent Scotland.”
That’s pretty much a unanimous view among all the more than a dozen big financial firms who have pronounced on independence. In fact the only difference between them is the degree to which they reject the idea that Scotland will get to share the pound with the rest of the UK. Blackrock, which says it is the world’s largest investment manager, and already has an office in Edinburgh, simply says it is “unfeasible”.
But let’s suppose they are all wrong and for reasons we can only partly imagine – avoiding the disadvantages and costs to trade is about the only one – a currency union is agreed. Would these same financial firms regard that as a settled deal?
It looks doubtful. Apart from the difficulty of having to swallow pride and admit they were wrong, such a union would entail all three main Westminster parties having to do a complete U-turn and not only say that their opposition to a currency union was simply a campaign tactic, but also that they are now completely convinced that it is the best solution for both parties.
Let’s remember that there is a general election due in May 2015. If the Labour, Conservative, and Liberal Democrat parties all take that stance, it would give Ukip a solid campaign platform. Nigel Farage could forcefully argue that if the major parties cannot be trusted on this issue, they can’t be trusted on anything else. And, he would say, having seen the mess the euro got into, how can anybody believe that a sterling union won’t get into the same mess?
And since, if there is a Yes vote, much of the campaign will be about securing the best deal for England and Wales, the likelihood of a volte face seems pretty remote. If it does emerge, this background means at the very least that the foundations for it would look very insecure.
In those circumstances, financial firms, having already judged it to be improbable, would decide that it is unlikely to endure. That then becomes a self-fulfilling prophecy as market players would find ways to bet it would fail.
Viewed from the decision-making boardrooms, directors would find it pretty hard to ignore the advice of their own analysts that Scotland is an unsafe place in which to invest.
Those analysts are also dubious, to say the least, that an independent Scotland would get a fast track into EU membership. Blackrock, for example, thinks the likely outcome is “a transitional period in which Scotland would be neither part of the UK nor the EU,” adding laconically: “This would add to regulatory, trade and economic uncertainties.”
That makes Scotland an even less likely alternative to Dublin for any financial firm considering leaving London. And if outside financial firms with no vested interest in either a Yes or No outcome think an independent Scotland is an unattractive place to do business, why should those Scottish-based financial firms have a different view?
Frankly, they don’t. They are not crying wolf when they say they will shift work away from Scotland. The only question is whether it will go to London or Dublin.