The financial crisis defines our age. It helps explain everything from the presidential nomination of Donald Trump to Jeremy Corbyn’s leadership of the Labour party after 30 years on the political fringe. Certainly, the Brexit vote wouldn’t have happened without it. The crash of 2008 created a sense of unfairness that is still roiling our politics, as well as calling into question the competence of the West’s ruling class.
The soi disant ‘experts’ were easily dismissed during the EU referendum campaign because nearly all of them had got the economic crisis so wrong. The Brexiteers asked: why should the public listen to the arguments of organisations and businesses that had made such disastrous misjudgments? The same thing is happening now when possible Brexit settlements are discussed. It is easy to undermine the economists who warn of financial disaster by simply citing their forecasting records. Of course, this does not mean that the latest predictions are wrong. But it does make it harder to persuade voters to take notice of them. Another factor that counts against them is that the fall in the pound — since Theresa May announced she would invoke Article 50 by the end of March — has pushed the FTSE 100 up to a record daytime high.
One irony of the impending Brexit negotiations is that Britain’s most important industry is its least popular one: financial services. As a banker lamented to me this week, this isn’t the case in Germany, where manufacturing industry is a source of national pride. This creates a particular issue, because few politicians would want to argue publicly for compromises on, say, controls over immigration for the sake of bankers’ access to EU markets.
A decade ago, things were far simpler for the banks. Under New Labour’s Brownian pact the City was allowed to let rip because the tax revenues generated could be used to pay for public services. Bankers were regarded as the sages of our age, asked to lead various reviews into complex policy problems and courted hard by both parties.
But since the bailouts, they have had few political friends. The Treasury, too, is far less influential than it used to be. Not only is Philip Hammond not as close to Theresa May as George Osborne was to David Cameron, but May herself has been shaped by her experience in the Home Office: she regards order and security as of primary importance.
It is not only her Home Office worldview she has brought with her to No. 10 but key personnel, too. Nick Timothy and Fiona Hill — her joint chiefs of staff — were her special advisers in the Home Office. And the Europe adviser at No. 10 is Peter Storr, a former head of the immigration policy group at the Home Office (much to the frustration of some in the City, who would prefer a Treasury type.) The Permanent Secretary at the Department for Exiting the European Union, Oliver Robbins, is also a former Home Office mandarin.
It isn’t just the officials in the Brexit department that bankers worry about, but the secretary of state. ‘David Davis is famously unfriendly to banks,’ one senior City source complains. The Square Mile is particularly wary because of his role on the Commission on the Future of Banking, which proposed breaking up the big banks. But relations have not been improved by the high handed way the banks have approached Brexit discussions with the government.
Add to this the desire of other EU member states to help themselves to a slice of the UK financial services industry and it looks like trouble ahead for the City’s European operations. Indeed, many banks are already working on the basis of a worst case scenario in which the UK ends up falling back on WTO rules for trade with the EU, which don’t adequately cover financial services.
However, there are reasons to think that it might be possible to keep an integrated European financial market even after Brexit. First, banks and regulators across Europe are broadly happy with the current arrangements. Plans are even being hatched for a cross border lobbying effort to keep it in place once Britain has left the EU. Secondly, the more trouble the European banking system is in, the more EU governments will be prepared to accept the City continuing in its current role. London is the de facto banking capital of the eurozone. For this reason, it would be risky for the eurozone to cut itself off from the City.
Indeed, J.P. Morgan head honcho Jamie Dimon warned at the IMF meeting in Washington last weekend that ‘Brexit was always about the survival of the eurozone’. He said that Britain’s vote to leave had increased the risk of the single currency failing in the next ten years by a factor of five. One of the reasons for this is that 80 per cent of the European sovereign debt market is in London. If governments in the EU cut themselves off from this market, it is hard to see where in the eurozone would make up the shortfall.
The importance of the London market to those eurozone countries that need to sell large amounts of sovereign debt was demonstrated by the fact that Matteo Renzi, the Italian prime minister, visited London twice during his first few months in office. In his first meeting with bankers at the Italian embassy, he told those present that he would come back soon to update them on how his reform programme was going.
None of this means that a deal is guaranteed; politics could well end up trumping economics. But it does mean that the end of the integrated European financial market is not as much of a given as current analysis suggests.
Whatever Brexit deal is negotiated, the consequences of the 2008 financial crash will continue to be felt throughout the western world. What started out as a financial crisis has morphed into a political one too, so the bitter memories will linger on.