The City, the EU and a very inconvenient truth

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Enoch Powell once said that the best way to keep a secret was to announce it on the floor of the House of Commons, so little notice was taken of anything that went on there.

George Osborne has found another method via a US Public Service Broadcasting chat programme.

The Chancellor used the Charlie Rose show just before Christmas to make an announcement that, if made in Britain, would have been, rightly, headline news.

Asked about reports that the UK could eventually leave the European Union, this is how the Chancellor responded: “I certainly hope not. It’s my intention to make sure it does not. I absolutely believe Britain’s future lies in its membership of the European Union.”

They may not have heard them (I’m not sure how many City grandees have PBS on their favourites) but Mr Osborne’s comments will be welcomed by many in the Square Mile.

That is not to say that the City or more precisely the major banks that locate their headquarters in Britain is naturally pro-European.

But there is a growing concern that in the political rush towards a referendum on Britain’s relationship with the EU, where exit is a distinct possibility, the voice of the finance community is not being heard.

A small reminder the financial services trade surplus with the rest of the EU is £17.6bn.

Banks are practical beasts and will eventually go wherever life is most simple, the cost of doing business is lowest and where regulation pushes them to operate.

On those terms, being in the EU is a far more attractive proposition than being outside it.

This makes for difficult politics and David Cameron knows it.

Last week, a poll by ICM revealed that more than half of Britons were sympathetic to the UK leaving the EU if they were asked the direct question.

More than 50pc said they would either “probably” or “definitely” vote to leave.

That was against 40pc who said they would “definitely” or “probably” vote to stay in.

Budget profligacy (the EU auditors have not been able to sign off the accounts for the past 18 years), endless bureaucratic rules that lack democratic legitimacy, moves towards a European state and the struggling single currency have left euro-scepticism at its highest level for years.

That is understandable.

But the Prime Minister needs to make a practical decision. Does he risk the future of the City for a decisive break with the EU?

Or does he try to put together a rather more muddy deal, whereby some limited powers are repatriated and Britain remains in the group? This would be a fiendishly difficult trick to pull off.

The debate is increasingly exercising banking leaders and the rumblings of discontent over “Europe, in or out” have reached the ears of the Treasury.

Indeed, maybe the Chancellor was giving a nod to those noises off when he made his comments from the safe distance of the other side of the Atlantic.

At the moment the talk is private, but do not be surprised if this debate breaks into the open in the new year.

The ammunition is already being stockpiled.

In November, a report by CityUK, the pro-financial services pressure group, revealed that the trade surplus with EU member states for financial services grew by 80pc between 2005 and 2011.

EU banks hold £1.4 trillion of assets in Britain (17pc of total UK bank assets) and twice as many euros are traded in the UK than in all other member states combined.

More than 160 financial services firms from the EU are based in the UK, providing thousands of jobs.

It would be facile to suggest, of course, that such figures would change radically if Britain were outside the EU, with a free-trade relationship replacing the present set-up.

London has the advantages of time zone, language and operational excellence to buttress its position.

However, the concern is that the EU is at heart a political construct.

Regulators at the European Central Bank and politicians throughout Europe must be licking their lips at the chance to put the UK as a non-member state at a substantial disadvantage when it comes to new rules for financial regulation.

As one banking executive said to me, would the German government really allow Deutsche Bank (Xetra: 514000 - news) such a large presence in London rather than Frankfurt to make its profits, even though all the risk is carried by the home country? Would Goldman Sachs (NYSE: GS-PB - news) not see Frankfurt as a better home for all its euro business?

The tone is already changing. Christian Noyer, Banque de France governor and member of the ECB governing council, said earlier this month that this country’s position as the pre-eminent financial centre for Europe would be put at risk if the UK did not join the new eurozone banking union.

Mr Noyer is likely to have a French fit if Britain leaves the EU altogether.

The concerns about Europe come at the same time as politicians in Britain speak ever more aggressively about ordering the full separation of retail and investment banking.

In stark contrast, France has recently set out its own “ring-fencing” proposals, which are set at such an insignificant level they will capture precisely 0.5pc of BNP Paribas’s total net banking income.

Now (Other OTC: NWPN - news) , all this may not matter very much.

First (Other OTC: FSTC - news) , the risk of EU exit may be overblown. Second, the economic gains from leaving the EU (greater concentration on emerging market growth, fewer bureaucratic rules) may outweigh the risks to the status quo.

Third, the political will in Britain must be listened to. For too long we have allowed the elites of business and politics to decide the country’s future in Europe with little reference to the people who pay for it, the public.

Fourth, the EU would damage itself more than London if it were to lock out the City from providing euro liquidity for EU banks and businesses.

These are all good points. But before we make a wholly political decision on staying in or getting out of the European Union, let us be very clear-eyed about what are the advantages and the risks.

Business is rightly worried about putting its head above the parapet on matters pro-European after the shambles of Britain in Europe, a business-backed lobby group for the single currency that was cut off at the knees as countries across Europe voted against closer integration after the millennium.

Maybe it is time for that worry to be put aside. If the City wants to win the argument on the EU, it is going to have to get out and make it.

You can contact Kamal Ahmed about his column at kahmed@telegraph.co.uk and follow him during the week on Twitter at kamalahmed1 .