Outcome of the European Union Referendum

Baroness Kramer Excerpts

Tuesday 5th July 2016 Lords Chamber

[Baroness Kramer (LD)]

My Lords, while politicians—I include myself in that group—talk, two parties try to sort out their leadership issues and the leadership candidates for the Tory party, of whom the winner will become Prime Minister, try to sort out what on earth their platform will be for negotiating with the EU, businesses are making decisions. They are not making short-term decisions on market movements today, tomorrow or next week; they are making decisions about their long-term future. So many businesses that I and others in this House have talked to recognise that everything they have heard from the Government suggests that they are not really interested in protecting them. The businesses I have talked to—I should be interested to find others that take a different view—are making their decisions based on access to the single market. Large companies and small—I talked again today with members of the Federation of Small Businesses—require that access to be able to export, which underpins their potential as companies. They are either direct exporters or in the supply chain and need access to the European market.

It is not just an issue of tariffs. They are concerned that as regulations diverge once we leave the single market, they will be required to run two sets of operations: one to meet UK regulations, one to meet EU regulations. It will require certification and documentation, and the estimate is that divergence in regulation is equivalent to a 10% tariff. That already threatens their viability as future exporters into the EU or their role in a supply chain.

They are making decisions now. We know from talking to the Institute of Directors and the FSB’s recent surveys that most companies have imposed a hiring freeze; it turns out that small businesses are actually cutting head count. Most of them have cancelled major contracts. They are deferring investment decisions. I have not heard of any foreign investor who is bringing significant money into the UK. We were the recipients of some of the largest amounts from foreign investment funds. They were behind our business, they countered our current account deficits but they are evaporating. Unless we get action very soon to counter this assumption that we must leave the single market, that process will continue. Companies will operate in their own best interests; that is their responsibility to their shareholders; that is what will happen.

I am fundamentally concerned because, like others, I see no way to square the circle of the leave promise to cut immigration significantly—which means ending freedom of movement—and retaining single market access. We certainly need to hear from those who led leave on how they intend to square that and, if they will not, for them to accept the consequences of the decisions that businesses are making. Businesses are not political creatures; they make their decisions based on what they see as the future of their company in the long term. Many of them are being driven to be more aggressive than ever as they cannot even get guarantees that the foreign staff they have today will be able to work in the UK. That is souring internal decision-making. Many of the senior management of our key businesses come from within the EU, and as they look at that instability, it becomes far more attractive to consider returning to continental Europe.

While I have a couple of minutes, I want to look at two areas. The first is the City. I sat on so many platforms in so many debates during the referendum campaign. To say that leave was insulting about the City would almost be an understatement, but the City is absolutely the heart of our economic viability as a nation. It funds the public services that we need in our country but which, as many have pointed out, have been incredibly inadequate. It is a major source of funding for the infrastructure, the new social housing, and the improvements in our schools and the NHS that we need.

A core of financial services in the City has been its role as the leading location for clearing financial trades. In 2014, London cleared nearly 50% of global interest rates and over-the-counter derivative transactions and nearly 40% of global foreign currency transactions. We are talking of amounts in the trillions in trading volumes. About a third of those were euro-denominated. The European Central Bank has already said that it wishes to ensure that clearing of euro-denominated instruments remains within the European Union, preferably within the eurozone. It was unable to enforce that because of the non-discrimination rules that are structured into the life of the European Union; those disappear the moment we leave. Because of the way that countries are now clearing all their trades on the same platforms in order to be able to net dollar trades, euro trades, yen trades, et cetera, if we lose euro clearing, we might as well lose dollar clearing and most of the rest of the clearing business.

Passporting is utterly dependent on being part of the single market in order to sell our services, but nobody, including the noble Lord, Lord Lawson, ever addresses the issue. I talk to the wholesale insurance industry. Its business is totally dependent on continental European institutional customers. I talk to the long-term asset managers. Their business is overwhelmingly with continental European entities. They will have no choice but to leave if passporting goes. People talk about other ways of doing business, such as equivalence and country-by-country licensing, but both of those require the movement of substantive operations into the EU area. The rules do not allow you to put up a brass plate and operate out of London, but require a substantial transfer of operations.

The last area I want to talk about in the minute I have left is the new world. I work a lot with financial technology companies. We are an absolute leader in this area. Young entrepreneurs come from all over Europe to set up in FinTech here in the UK, and they are terrified of the consequences. As the digital single market forms, they cannot afford to be outside it. Berlin is a serious rival to London. They desperately want to stay here, but they are looking at the realities, and funding has dried up for many of them. We have reports of venture capitalists that have Brexit clauses in their contracts pulling out of deals with companies over the last week. These companies recognise that if they do not move to be within the European family very rapidly, they may be unable to raise the finance which is totally necessary for their future. The very least the British Government could do is step in with the British Business Bank and replace that. There are so many specific issues, and if we ignore them and talk only in broad generalities, we will have no idea of what is coming and no way to cope with it.