Here we are. Two weeks before the referendum. Two weeks before we go to the polls to make this huge foreign and economic policy decision. And what better place than Chatham House to talk about our membership of the EU and the Single Market? I want to consider what it really means for our economy and to our financial services sector in particular. And to assess, as coolly as I can, the implications of this decision for our future.
My starting point, when I watch the debate from the other side of the Channel, is that, oddly enough, we need more, not less scepticism. Thirty years ago, the Utopians were the pro-Europeans. People like me, who campaigned against joining the Euro, who asked the irritating questions, were the sceptics. Today, the roles have reversed. Instead of scepticism from the Leave side we have blind assertions of faith. We're told not to worry about boring, nit-picking questions about the implications of an exit for our trade, for our relationship with some of our oldest allies, with our biggest export market and our biggest source of foreign investment.
And anyone asking perfectly reasonable questions about what might actually happen, about what exit would actually mean for investment, for growth and for jobs in Britain, is dismissed as defeatist, as an unpatriotic scaremonger.
Well for me, asking for the evidence before making a big decision is part of the long tradition of British empiricism. In the rest of Europe, we're known for our pragmatism and common sense. It's an approach that naturally leads us to mistrust fine visions, and grands projets, and anything that sounds too good to be true. It's an approach, in my view, that we'd do well to stick by as we weigh up our options before June 23rd. And listen to the little voice which says "are you completely sure about that?"
So let's be hard-headed about it. And let's put to one side for a moment any considerations about friendships, commitments and alliances with other European nations. Let's park for a moment questions about our place in the world. Let's focus on what is in our economic interest. What does Britain actually get out of Europe's Single Market? Why have we bothered spending the last 30 years making the case for it, pushing to take it further, shaping it to ensure it works for us, for our economy, for our financial services sector?
Well, at its most basic level, membership gives us access to a market of half a billion people: the biggest market in the world, inhabited by some of the most prosperous peoples on earth, right on our doorstep. It's a market in which, thanks to UK membership, British companies can trade freely by right. No tariffs, no custom checks, no regulatory barriers. It’s a market that's growing and that after some difficult times is on an upward trajectory – growing, incidentally, at about the same rate as the UK, and in some countries much faster than in the UK. And where trading activity between its members has, over the past 15 years, seen the largest increase among developed countries.
Membership of the single market doesn't just mean our companies can export to bigger markets. It is also crucial in attracting huge sums of foreign investment, from companies from all over the world which want to use the UK as a bridgehead into that bigger market of 500 million consumers. You can see how well being part of the Single Market has served our booming car industry, contributing over 11 and a half billion pounds to the economy, with nearly half of its exports going to other EU countries. You can see how being part of the Single Market has led prices for air travel to fall on average by 40 per cent. You can see how it has helped Britain's small businesses as 9 out of 10 SMEs which export do so to other EU countries.
But if I may, I will concentrate on the British export industry I know best – financial services, because I speak as the person responsible for overseeing the regulatory framework for the whole of Europe's financial services industry.
It's hard to think of a sector that's been more skilful and successful at tapping into the Single Market, at making the most of its passport system that gives British financial services companies the right to do business wherever they choose and offer their services in 27 other EU countries. Today, the UK isn't just the EU's largest financial centre. It's a global financial hub that attracts businesses from all over the world.
The Single Market meant that last year British banks could lend out over a trillion euros and take in over a trillion euros in deposits from across the EU. It means the British fund management industry can look after a major chunk of the 8 trillion euros invested in UCITS – Europe's globally successful investment product. It means insurance and reinsurance companies can provide their services without having to undergo any sort of equivalence assessment. And it means financial services companies can manage their businesses on a European scale. Over the past decade, the surplus from Britain's trade in financial services has more than doubled – from £23 billion in 2004 to £58 billion in 2014.
Half the world's financial firms have chosen to base their European headquarters in the UK. At the moment, one quarter of financial services income in the EU is generated in the UK. Last year, London was once again rated by the Global Financial Centres Index as the world's most competitive financial centre. So a sector being strangled by EU regulation, as some in the Leave campaign claim? Hardly.
Now I'm not saying for one instant that this success is all down to Europe, or that it is all down to the single market. Our success owes much to Britain's intrinsic strengths: flexible labour markets, deep expertise in financial and professional services and one of the most trusted legal systems in the world, the English language. But to argue that the success of our financial services owes nothing to the Single Market is patently absurd. But don't listen to me. Listen to the industry. Listen to the investors from America or China or Hong Kong. And look at the figures: nearly three out of four of those investing in Britain give Britain's membership of the Single Market as a reason for doing so.
If that’s the situation today, what would our new relationship with Europe and the Single Market look like if we vote to leave on the 23rd? Two weeks away from the referendum, after 25 years or more of preparing for this moment, you might imagine that we would by now have a clear idea what economic life outside the EU might look like. But all that's clear is that nothing is clear. We've been told that we could have a relationship like Norway's, or Switzerland's, or Canada's, or Albania’s, or just WTO rules, or a special relationship with the US.
What would these alternatives mean for Britain's ability to trade with the rest of the single market?
- Norway? Yes, it has access to the single market but has to obey its rules without having a say over them and has to pay a contribution to the EU budget for the privilege. It also has to accept free movement.
- Switzerland? Same on free movement, but it doesn't have direct access to the EU's market in services, and that includes financial services. So that would mean no market access for the most important part of Britain's economy that now makes up 40% of our exports.
- Canada? The EU is doing a great trade deal with Canada, but again it's limited in services. It doesn't give the Canadian financial services industry the passport that's so important to the UK's.
- Albania? Albania? Really?
- WTO membership? There's a lot of wishful talk of 'returning to WTO membership rights'. Let's spell that out. It means accepting the basic tariffs on offer from Russia, China, Argentina, India. And by 'basic' it can mean 'high'. And it would not give any preferential access to the European single market for our goods and services.
- So is it a strengthened special relationship with the US that we need? Well, I don't know what an economic relationship feels like from the back of a queue. Probably not that special, would be my guess.
And before they get to India, here's the head of the Federation of Indian Chambers of Commerce and Industry: ' we firmly believe that leaving the EU would create considerable uncertainty for Indian businesses engaged with the UK'.
That's the same message I've heard from Hong Kong to the United States. It is a cool assessment of how the global economy works. As Pascal Lamy said last week, trade negotiations are not about love, they are about bargaining power. And it's a message that comes from the kind of people that the Leave campaign felt should be on their side. If you're betting Britain's whole future on leaving your neighbours and hoping the rest of the world opens up to you, it's normally a good idea to ask the rest of the world what they actually think. But in this case, when the rest of the world says what it thinks, this outward-looking, global Leave campaign stick their fingers in their ears, shout at them for having the temerity to express their opinion and accuse them of being part of some giant global conspiracy.
With the collapse of their economic arguments, one by one, the Leave campaign now appears to have moved to the position they never wanted to adopt: Nigel Farage's. They now say that we shouldn't be part of the Single Market at all. So, for the moment at least, we have to work on the basis that – for the Leave side - a vote to leave the EU is a vote to leave the single market. It’s a vote for an unspecified agreement to be negotiated with 27 countries who sell 8% of their exports to the UK, but on whom we depend for nearly half of ours.
What would that mean for the financial services sector? Well, leaving the single market completely would leave our financial services industry without its passport; without that crucial right to provide services anywhere in the EU from just one country. Without a new agreement, our banks, our investment firms and insurers could face new restrictions on cross-border business.
Even countries with deep trading agreements with the EU, like Canada or, except for life insurance, Switzerland, don't have that passport. You can, in some cases seek equivalence, whereby the EU deems your national standards to be as good as the EU's. Equivalence lets a company provide services into the EU but, unlike passporting, it doesn't let you set yourself up in the European market. To do that, you would have to set up a separate subsidiary with its own capital requirements, subject to EU and any additional national rules. That is neither cheap nor simple.
Let me give you an example. A couple of months ago I reached an agreement with the United States on equivalence negotiations on central counterparties – CCPs or clearing houses. That negotiation on that one narrow issue took four years, even though there was good will on both sides and both I and my counterpart wanted to do a deal quickly.
And if you don't have passporting; if you haven't yet negotiated or aren't able to negotiate equivalence; then you're left subject to “third country” rules. That means you can only do business with an EU country if its regulator and supervisors agree and you're subject to their rules, and you could have to do that individually for each EU Member State you want to do business in, so no cross border rights.
If Britain votes to leave the EU and wants to continue trading with the Single Market, we’d have to face up to a new reality. The reality of negotiating access from outside the room. And the reality of having to negotiate with people whom we had turned from partners into competitors. People who had wanted us to stay, but who had been roundly criticised and insulted. People who would be looking – quite legitimately – to maximise their own competitive advantage. Who, even if they weren't seeking such an advantage, would be setting rules to suit their industries, which are shaped differently from Britain's. And what better way to warm Europeans up to a vitally important set of trade negotiations than to compare them to the Third Reich?
So let's be absolutely clear. There is no alternative option that gives our financial services a better trade relationship with the single market than the one we have today. None.
But what happens if the UK votes to remain in the EU on the 23rd June?
For our financial services industry, a vote to remain would give the certainty needed for it to get on with lending to the wider economy, and supporting investment and growth. The UK would retain its seat at the negotiating table and its ability to shape the rules and standards in a way that works for financial services firms up and down the country. And, as part of the UK's settlement, its interests as a non-eurozone country will be protected and discrimination on the grounds of currency made illegal.
But a vote to remain in the EU and the Single Market has the potential to give us more than just the status quo.
In my job as European Commissioner for financial services, I’m working to strengthen and deepen that single market. That is part of a much bigger Commission drive to strengthen the Single Market, to push for free trade, and to regulate less – 80% less than the previous Commission. It's why we're in the middle of reviewing Europe's regulatory framework for the financial sector, checking it's as growth friendly as possible. It's why I'm looking at financial services from the point of view of the consumer to see whether we can improve competition and choice – and lower costs and improve the quality of the services we use every day. And it's why I'm working to build a Capital Markets Union – a Single Market for capital - to help money flow throughout the EU, to connect savings more effectively to growth.
All 28 Member States stand to gain, but Britain is obviously well placed to make the most of the opportunities that deeper capital markets would create. The UK is already running a surplus in exporting financial services to the rest of the EU. If capital markets were to grow across the single market, British services would be more in demand, and our financial service companies would have more new investment opportunities to tap.
If, on the 23rd June, we vote to leave, our exports would face restrictions; our inward investment would take a hit; our status as a global financial hub would be diminished; our voice in the world would be reduced. If we vote to remain, we’d remain on the pitch, a force to be reckoned with, pushing for opportunities to deepen the single market, to reduce regulatory burdens, to increase trade and investment with the rest of the world, pushing for the agenda which Mrs Thatcher championed in her Bruges speech and which has now become mainstream. Looking at Britain from inside the system I'm struck by how much we under-estimate the influence we have had, how much we under-estimate the support there is for Britain in the EU, and how much we under-estimate the potential we have to help lead and shape the debate about Europe's future.
So before turning our back on our neighbours, before striking out into the unknown, before taking a step that would mean a profound change in the UK’s economic and strategic relationships, I hope that voters will separate dreams from reality, and make a decision based on evidence, on reason and in the long tradition of British empiricism.