From a constitutional standpoint, the European Union is a monstrosity. Powers have been ceded to EU institutions that place them above the member nations in the constitutional hierarchy. These institutions are, in effect, federal bodies that constitute a ‘government’ for the EU as a whole. Nevertheless, the member nations have retained trappings of statehood, and in particular continue to have their own military forces, their own legal systems and their own fiscal prerogatives. Critically, most taxes are raised and most public expenditure is administered at the national level. EEC expenditure was a mere 0.03% of member states’ aggregate gross domestic product in 1960, and had climbed to 0.53% of that figure in 1973 on the UK’s accession. The ratio has subsequently risen to slightly more than 1% of EU GDP, as we saw in the last chapter. But it is striking that Germany – the main sponsor of European integration – has over the last 20 years been one of the member states most opposed to additional spending in the union’s name. At the Edinburgh meeting of the European Council in 1992 Germany actively supported a spending ceiling of 1.27% of aggregate member nations’ GDP.1
On the face of it the EU has two layers of government, one at the national level and the other for the union as a whole. But the word ‘layer’ implies, falsely, that a clear and definitive understanding has been established on the proper relationship between the two. In fact, EU member states are in the dysfunctional situation of having two distinct governments, one in the national capital and the other in Brussels, with their relative powers and responsibilities largely unsettled. The EU bureaucracy has been unable to wrench the key fiscal prerogatives, the powers to tax and spend, from the member states. To compensate for this failure, it has tried to expand its influence by pressing for more European ‘laws’. The heart of the process is that the European Commission proposes new ‘directives’ and ‘regulations’ to the Council of Ministers. Successive treaties have weakened the power of individual nations to block new EU legislation that they dislike. Particularly since the Single European Act of 1986 the nation states have become increasingly feeble in restraining the EU juggernaut. Over the 55 years of its existence the European Commission has authored thousands of directives and regulations that have the force of law across the EU.
At the last count the EU’s various legislative enactments – which are termed the acquis communitaire – covered over 120,000 pages. As far as the EU is concerned, the acquis is sacrosanct and must be adopted by all new member states without cavil. Directives and regulations are the main expression of EU authority, and nowadays infiltrate every nook and cranny of national life. In the words of Lord Denning over 20 years ago, ‘Our sovereignty has been taken away by the European Court of Justice…No longer is European law an incoming tide flowing up the estuaries of England. It is now like a tidal wave bringing down our sea walls and flowing inland over our fields and houses—to the dismay of all.’2
Cost of acquis communitaire criticized by EU supporters
The cost of implementing the 120,000 pages of legislation is massive. Given the multiplicity, complexity and diversity of the EU’s directives and regulations, precise estimates of the cost – estimates that purport to be accurate to a few hundred millions of euros – are not to be expected. Only broad-brush, rough-and-ready numbers make sense. Given the vast scope of the EU’s regulatory effort, the present study cannot pretend to offer detailed and rigorous new quantitative research. All that can be done here is to synthesize the results of other analyses that seem well-intentioned in purpose and well-grounded in fact.
Criticism of the cost of the acquis communautaire has come from a wide range of authorities, including many who are strongly supportive of European integration. The 2012 edition of this publication cited comments from such figures as a former EU commissioner, Gunter Verheugen, and Peter Mandelson, the famously Europhile politician, that pointed towards this cost being a few per cent of the EU’s gross domestic product. It also discussed at some length a 2010 report, Still Out of Control?: Measuring eleven years of EU regulation, from the London-based think-tank Open Europe, which used official ‘impact assessments’ of hundreds of regulations to quantify their costs. To quote from the 2012 edition of How much does the European Union cost Britain?, ‘A key conclusion was that, “in 2009 the cost arising from all regulations [i.e., all regulations, including those of UK origin] introduced since 1998 was £32.8 billion”, with 59% (or £19.3 billion) being EU-derived. For the purposes of presentation, this was rounded up to £20 billion a year.’ Since Open Europe has stated that it wants the UK to remain in the EU, the £20-billion-a-year figure may raise eyebrows.
The willingness of pro-EU politicians and commentators to attack the EU’s regulatory burden speaks volumes, in that it suggests that almost everyone accepts that ‘something has gone wrong’. However, the Open Europe analysis could have been more probing and begged many questions. For example, it overlooked that sensible estimates of the cost to the UK of only one part of the acquis, the renewables programme, are as much as £20 billion a year (or thereabouts). The full economic cost of EU regulations to the UK is in fact much higher than £20 billion a year, as will be readily demonstrated in the next few pages. Defenders of the acquis have to justify it in non-economic terms, because of its actual or supposed social and environmental benefits. This tension between the undoubted economic costs of the acquis and its impalpable non-economic benefits is discussed at the end of this chapter.
The impact of the EU’s regulatory burden is reviewed in the rest of this chapter under four headings,
– The cost of the renewables legislation,
– The cost of employment laws,
– The cost of financial regulation, and
– The cost of regulations to ban substances and to manage processes.
Also significant are the costs of the EU’s environmental legislation, and the EU’s various interventions in the farming and fishing sectors. However, the damage in these areas might be better interpreted as resource misallocation and waste, and so is discussed in the next two chapters.
Cost of EU renewables legislation
The three key directives in the renewables area are the 2001 Large Combustion Plant Directive, the 2003 Bio Fuel Directive and 2009 Renewable Energy Directive. The last of these is the most significant and the most dangerous. (The EU’s complex Emissions Trading Scheme, launched in 2005 is also worth mentioning, but there is no space here for a detailed assessment. Under the scheme permits to emit a limited amount of CO2 are issued to industries known to be heavy polluters and these can then be traded between energy-using companies.) The EU bureaucracy has accepted the so-called ‘warmist’ doctrine that, because of the carbon emissions arising from modern industrialism, mankind is largely to blame for the global warming of recent decades. The purpose of the 2009 Renewables Directive is, explicitly, to move towards a 20% drop in the EU’s carbon emissions by raising the proportion of electricity generated by renewables (wind, wave, solar and so on) to 20% by 2020. The cost of electricity generation by means of renewable energy is much higher than that by conventional methods (gas and coal firing, mostly). For example, electricity from offshore wind farms costs at least three times as much to produce as electricity from a gas-fired combined-cycle power station.
This is not the place for a lengthy discussion of the environmental impact of carbon emissions. It may or may not be proved 20 or 30 years from now that global warming has been caused predominantly by mankind. Whatever the outcome of that debate, several nations are not making major adjustments today to their policies towards energy, electricity generation and the environment. In electricity generation they continue to invest in order to minimize cost. As a result, households and companies in every country in the EU – and not just the UK – will have to pay well above the international price for electricity. Industries heavily reliant on energy usage and electricity consumption will become too high-cost compared with suppliers from other countries. They will stop investing in the UK and other EU countries. As a news story in The Sunday Times on 6th February 2011 remarked, ‘Leading chemical companies have warned the government that its energy policies will render them uncompetitive, leaving plants to “die on the vine” to quit Britain for lower-cost countries.’3 The UK no longer has an aluminum smelting industry, as the two major facilities – in Anglesey and Lynemouth, Northumberland – were closed down in 2009 and 2012 respectively. The UK’s cement industry is a heavy user of energy and is also responsible for substantial CO2 emissions when limestone is heated to make clinker. It is facing big increases in costs, partly because of higher electricity bills, but also because of the cost of obtaining permits under the Emissions Trading Scheme. As cement is expensive to transport, most countries produce most or all of the cement they use. But the UK is increasingly a net importer. As the Civitas think-tank noted in a December 2012 discussion, UK cement production in 2011 was 28% down on the 2007 level, but imports had stayed roughly constant at about 1.1 million tonnes a year. Indeed, cement imports are expected to rise if and when the construction industry recovers.4
Government departments have of course had to advise ministers on the costs of the UK’s adoption of the EU’s green agenda. The Guardian has received a series of leaks from sources in the Department for Business, Enterprise and Regulatory Reform (formerly the Department of Trade and Industry) on key energy policy issues that have been and remain in dispute. Some leaked documents indicated that the cost of meeting EU targets would be between £5 billion and £11 billion a year. Indeed, according to the documents, the long-term goal of 20% of total energy being from renewables would cost £22 billion.5 It needs to be stressed that, unlike the cost calculated in impact assessments which are in principle justified by offsetting benefits, these costs are costs, full stop. £22 billion is about 1½% of GDP. Note that this is above the direct fiscal cost, even on a gross basis, discussed in chapter one! Because the British government has at the EU’s behest imposed expensive methods of electricity generation, and because it has deliberately added to energy-using industries’ costs to stop them emitting carbon, Britain is worse-off without qualification. (The selection of costly methods of electricity generation may eventually prove to have been correct, in that lower CO2 emissions may help ‘to save the environment’. But – as of now – that is conjecture.)
Is a rethink under way? The 2009 Renewable Energy Directive was accompanied by a Fuel Quality Directive which altered the provisions in the 2003 Bio Fuel Directive. The EU’s aim in this policy area had been to reduce the carbon intensity of EU road transport fuels by 6% by 2020. Biofuels – fuels that are derived from plants grown on farmland – were always envisaged as the alternative to fossil fuels. So expansion of the land area under biofuel crops had to be a corollary of the EU’s approach. However, it is obvious that the more land is used for biofuels, the less land is available for food production. With the earth’s population increasing, the world needs more food. The 2009 Fuel Quality Directive therefore said that ‘ILUC factors’ would have to be part of fuel suppliers’ reporting requirements and warned that subsidies for biofuels might not continue after 2020. (‘ILUC’ stands for ‘indirect land use change’, i.e., the loss of land that could produce food.)6 Plainly, official policy is uncertain and confused, and it has been presented inconsistently. Nevertheless, a new petrol – called E10 – was reported by The Daily Mail (12th March 2013) as likely to be introduced before the end of the year, in order to begin the UK’s compliance with the 2003 and 2009 directives. E10 will give fewer miles to the gallon than existing fuels, while millions of cars may not have engines that are compatible with it. The Daily Mail quoted a Chatham House report that the lower mileage of E10 might cost UK motorists £1.5 billion a year.
On balance, it seems reasonable to conclude that the UK’s implementation of the EU’s renewables agenda will cost the nation between 1½% and 2% of GDP, year after year, when we are fully compliant with the directives in the 2020s. But much of that eventual recurrent cost has already hit us, as the investments to reach full compliance (in terms of offshore wind farms and the like) have been made in recent years.
Cost of EU employment legislation
The EU’s encroachment on national governments’ ability to govern began seriously in the late 1980s, following the Single European Act of 1986. The Conservative government under Margaret Thatcher was an eager supporter of the Single European Act, but Thatcher and some of her colleagues soon had second thoughts. Directives and regulations to promote the supposedly benign ‘Single Market’ were accompanied by directives and regulations to introduce undoubtedly costly measures of social protection. The Thatcher government had battled from 1979 to remove such measures in the UK, since they were believed to reduce employment and hence national output. Although Thatcher herself left office in 1990, the Conservative government under her successor, John Major, had similar priorities. It was anxious to prevent unjustified employment legislation coming onto the UK statute book as a by-product of signing EU treaties. In the negotiations related to the 1992 Maastricht Treaty the UK threatened to veto the inclusion of ‘the Social Charter’. The effect was to stop a so-called ‘Social Chapter’, with 30 general principles of employment law, being applied in the UK.7
These 30 principles covered a wide range of topics, rights to parental leave at childbirth, pension provision, rights of migrant workers, the treatment of the disabled, dismissal procedures, and even rights to decent housing and health care. The application of these principles would add to business costs and discourage companies from taking on staff, and the Conservative government under John Major was wholly opposed to making the principles part of British law. To quote from Major’s memoirs on the conduct of the Maastricht negotiations, ‘I pointed to the excellence of our record in job creation: we were creating more new employment in Britain than in all our partners put together.’8
The UK’s position in the Maastricht negotiations was resented by other EU member states. Although Major kept the Social Chapter as such out of the treaty, the treaty tacked on a protocol which said the provisions of the Social Chapter would be in force in eleven member states. That is, the Social Chapter would be in force in all the member states apart from the UK! When Labour was elected to power in the 1997 general election, the new government under Tony Blair quickly adopted the protocol for the UK. The 1997 Treaty of Amsterdam, to which the UK was a signatory, incorporated the Social Chapter in full. Over the following 16 years a host of ‘social protection’ measures have been incorporated in British law, so that in this respect the UK increasingly resembles its neighbours.
The narrative of the last three paragraphs is important, because it demonstrates that the burden of EU employment legislation was unquestionably a major concern for one of the UK’s two main political parties in the 1990s. John Major and his colleagues did think that the Social Chapter reduced employment, distorted the labour market and reduced living standards, and they made no secret of their views on the matter. So – if an analyst in 2013 holds the same view – that should not be seen, in the UK at least, as particularly iconoclastic.
Were the Conservatives of the Thatcher-Major era right to be worried about the consequences of the Social Chapter? Their main concern was that, because implementing such a wide range of social and employment protection measures would raise the effective price of labour, the level of employment would be reduced. As explained, the Social Chapter is now in force across the whole of the EU, although labour market policy continues to differ significantly between EU member states. If the Social Chapter had indeed destroyed jobs, one result ought to be a lower level of employment (as a proportion of the employable workforce) in the EU than in the rest of the advanced world. The relevant information is compiled by the Paris-based Organization of Economic Cooperation and Development, and given in the table below. It relates to the final quarter of 2012.
In Europe two important countries do not belong to the EU, namely Switzerland and Norway, while the UK had for an extended period in the 1990s a consciously less restrictive labour market policy than other EU member states. The table shows that the employment ratios in these three nations are well above those in the EU on average and, to a somewhat greater extent, than in the Eurozone. The gap between the EU/Eurozone on the one hand and Switzerland and Norway on the other amounts to over 10% of the workforce, and must go some way to accounting for the considerably higher living standards in the two fortunate non-EU countries. The difference is less marked compared with the UK, but it still amounts to over 6% of the working-age population. Meanwhile the employment ratios in the USA, Japan and the three high-income Commonwealth countries are plainly well above those in the EU/Eurozone. On the face of it, something is wrong with the labour market in the EU/Eurozone.
What is the cost to the UK of its incorporation of the EU’s social and employment legislation in its law? Of course, the kind of people excluded from employment by the EU’s rules and regulations are unlikely to be of average productivity, since they are on the margin of employment. Suppose – for the sake of argument – that they are half as productive as the average worker, and that the difference (which is about 8%) between employment ratios in the non-Eurozone European states (i.e., the UK, Switzerland, Norway) and the Eurozone is entirely attributable to the Social Chapter, then the output cost of the Social Chapter is 4% of GDP. On that basis John Major and his ministerial colleagues were correct to keep the UK out of the Social Chapter in 1992, and Blair and his team were wrong to allow it to come to the UK after 1997.
Of course, the proposition being made here – that all of the difference in employment ratios between the Eurozone countries, with their commitment to ‘ever closer union’, and three more semi-detached European countries is 100% due to Social Chapter measures – is controversial. Perhaps only part of the difference in employment ratios is to be interpreted in these terms. It is interesting, for example, that within the Eurozone the employment ratio in Germany (73.1%) at the end of 2012 was actually above the UK level, and far higher than in France (64.1%), Italy (56.5%) and Spain (54.6%). If Germany does so well despite having social protection arrangements comparable with those elsewhere in the EU, are those arrangements the sole cause of the EU/Eurozone’s apparently severe under-performance?
No doubt the debating points can be batted around endlessly. However, other more specific evidence on particular examples of regulation argues strongly that EU labour legislation is bad for jobs and output. In the Thatcher-Major period the UK government tried hard to promote a flexible labour market, with employers enabled to offer temporary work, work to agencies and so on freely. That has been reversed since 1997. For instance, in late 2011 the UK was obliged to implement the Agency Workers Regulations which say that, after 12 weeks on an assignment, agency workers are to have the same rights (to pay, holidays and so on) as permanent staff. As the Open Europe think-tank estimated in research published in September 2011, around 28,000 temporary employment contracts for those aged between 16 and 24 were threatened by the new regulations. The government itself calculated that the total annual cost of the new regulations would be £1.8 billion a year, with the bulk of that falling on the private sector.9 But the Agency Workers Regulations are only a fraction of the total of EU- based employment law. Dozens of other regulations could be mentioned, analysed and discussed. The box below lists just seven directives, to give a flavour of the mass of regulatory injunctions now affecting British companies (and of course companies all over the EU).10
A few weeks after issuing its press release on the cost of the Agency Workers Regulations, Open Europe published a more detailed report on EU social policy as a whole. The remit of this report Repatriating EU social policy: the best choice for jobs and growth was to consider how the UK could bring control over these areas of national life back to the UK legislature and government, and to estimate the size of the benefit that might follow.11 To quote, Repatriating EU social law could allow the UK to seek changes and cost savings that would be very difficult to achieve if they were subject to agreement at the EU level…[C]utting the cost of EU regulations in this area by 50% could result in the equivalent of 140,000 new jobs…if the entire increase in output as a result…goes into employment. In reality, however, the benefits from deregulation would likely be split between employment and productivity. Under such a scenario, a 50% cut in regulation could create the equivalent of 60,000 new jobs in the UK in addition to adding £43 billion to the country’s economic output. We also estimate that 100% deregulation of EU social law would yield an annual £14.8 billion boost to UK GDP – though the figure is merely illustrative as complete deregulation is not a practical option.
Now £14.8 billion is about 1% of the UK’s GDP. So, again, we are talking about the adverse economic impact of the EU regulatory burden being similar to or larger than the direct fiscal costs discussed in the first chapter. Further, this critical appraisal of the EU’s impact on the UK came from an organization which believed that the UK should remain in the EU.12
The exact cost of Social Chapter-type measures to the UK economy will always be a matter of debate. Undoubtedly, employment and output are lower than they would be without all the rules and regulations, and it is a matter of opinion whether people value extra job security, guaranteed paternity leave and so on. (Many employees can find work easily and arrange paternity leave with employers, regardless of government diktats on the subject.) The intensity of the well-argued opposition to such measures suggests the Open Europe estimate of their cost may be viewed as a lower bound, whereas the 4%-of-GDP figure implied by the EU/Eurozone’s low employment ratio is an upper bound. It is therefore proposed that a cost of between 1½% and 2% of GDP is plausible.13 Moreover, this cost may well be rising over time as more Social Chapter-type measures are introduced.14
The cost of EU-imposed financial regulation
The 2012 edition of this study had an extended discussion, running to about 2,500 words, on the boom in the UK’s exports of financial services in the 40 years to the onset of the Great Financial Crisis in This boom was central to the UK’s good ‘supply-side performance’ in the two decades from the mid-1980s, when its national output grew faster than that of its European neighbours. As is well-known, the UK financial service sector is concentrated in London and particularly in the ‘City of London’ itself (i.e., ‘the Square Mile’, with boundaries that correspond more or less to those of the Roman city 2,000 years ago). It was pointed out in the 2012 edition of How much does the European Union cost Britain? that in the decades of the City’s success the regulation of the financial sector was predominantly a UK matter. Concern was expressed that the Lisbon Treaty had transferred ultimate regulatory control to authorities subordinate to the European Commission, and taken it away from national parliaments, including the UK’s own Parliament in Westminster. The three newly-formed authorities were the European Banking Authority (located in London), the European Securities and Markets Authority (in Paris), and the European Insurance and Occupational Pensions Authority (in Frankfurt).
The fear was that these bodies would be remote from, and so unsympathetic to, the UK’s own financial sector. Large financial firms, often with a global scope and perspective, would therefore emphasize the growth of businesses outside the UK and indeed outside the EU altogether. As Anthony Belchambers, chief executive of the London-based Futures and Options Association, commented to the Financial Times that ‘red tape, ill-informed tax initiatives, protectionist policies and high “pass on” costs will damage the international reach of the City’.15
Bluntly, key policy-making individuals in Germany, France and other continental European countries have long disliked the financial services industry, and resented the UK’s past success in these activities. The euro was seen as a means of shifting Europe’s financial centre of gravity from London to the European mainland. In the words of Wolfgang Munchau, a prominent columnist on the Financial Times, ‘…if the Eurozone has a collective interest in anything, it is to stop the City acting as its main financial centre’.16 But that does not go far enough. Prominent European politicians hardly bother to hide their aversion to financial activity or their desire to handicap or even expel the most complex and highly-paid financial industries from the EU. While the UK remains a member of the EU, expulsion from the EU means expulsion from the UK.
Have the fears of an EU-based campaign against the UK financial sector been justified so far? The last year has seen vigorous advocacy by the EU of a number of policy changes that, if and when implemented, would profoundly harm the City of London. For the commercial banking and securities industries, much the most damaging would be the proposed ‘financial transactions tax’. The European Commission published a range of documents and policy statements about this tax, and there is little doubt that it wanted the tax to go ahead. To an uninformed observer, the tax rates (of 0.1% on securities and 0.01% on derivatives) were very low and therefore innocuous. However, the City of London specializes in highly competitive areas of financial trade, mostly between big firms and of a so-called ‘wholesale’ nature, with very narrow margins between buying and selling prices. The 0.1% and 0.01% tax rates were higher than the profit margins in some kinds of financial transaction, which would therefore become uneconomic and would either leave the EU or cease. On 14th February 2013 the European Commission put its name on a Powerpoint presentation that unashamedly envisaged a 75% fall in derivatives trading.17 It was plainly indifferent to the job losses (running into the tens of thousands) and ruined livelihoods that would result. Its officials must have been aware – indeed, they may have been delighted – that the job losses and ruined livelihoods would be mostly in London and the South-east of England.
Such activities as derivatives trading and futures broking are complex, often requiring substantial back-up in terms of information technology and professional support (i.e., law, accountancy and so on). In banks and other organizations active in these areas profit streams can be large and volatile, and so also are the incomes of top staff. Incomes in the City of London often therefore have a major or even dominant bonus element, which helps the banks in handling the marked and unpredictable fluctuations in the profitability of different revenue streams. Here, too, the EU has decided to interfere. A new cap on top bankers’ bonuses, which are to be limited to the same level as salary (or twice salary with explicit shareholder approval), is to take effect in 2014. The effects on Britain’s banking industry will undoubtedly be adverse. The largest bank headquartered in the UK is HSBC, although most (about 80%) of its operations are outside the EU. Because it is UK-based, it will have to apply the bonus cap to all its operations around the world, a development about which it has been openly angry and hostile. Of course, one way of side-stepping the new EU regulation would be to relocate the headquarters from London to, for example, Hong Kong, where in fact the bulk of the profit is earned. As Norman Lamont, a former Chancellor of the Exchequer, remarked in an article in The Daily Telegraph on 26th February 2013, government interventions in pay create ‘distortions, as companies find ways of circumventing them. If implemented, the new pay restrictions would lead to an exodus of bankers and traders to Switzerland and the Far East.’18
Compared with banking, insurance has been out of the media limelight in the last few years. Unlike bankers, top insurance underwriters and brokers have not been blamed for the Great Recession of late 2008 and 2009. However, the UK’s insurance industry also has been affected by EU regulation. Lloyd’s of London, which dates its origins back to 1688, remains the focal point for the UK’s international insurance industry. Its four largest national markets (by premium written) are the USA, the UK, Canada and Australia, while the EU is something of a side-show. (Premiums from the USA are 20 times those from France.) But Lloyd’s’ global outlook has not exempted it from the EU’s regulations. Because it is located in the EU, it must comply with them whether it likes to or not. In the last few years these have taken the form of the introduction, or rather the attempted introduction, of a capital regime known as ‘Solvency II’. UK insurers have spent billions of pounds – in management time, consultancy fees and the like – so that their businesses can meet the Solvency II standards. Unfortunately, German and French insurance companies are at loggerheads over the provisions of Solvency II, and cannot reach agreement. So all the money committed to Solvency II by Lloyd’s of London and other UK insurance companies has been spent prematurely and, to that extent, wasted. Andrew Bailey, a top Bank of England official, said in February 2013 that the ‘mounting costs’ of Solvency II implementation were ‘frankly indefensible’.19 Some insurance companies have become so irritated by the delays and inefficiency of EU regulation that they have left London altogether.20
The impact of EU regulation on the British financial sector is a large and painful subject, but a brief summary is needed. The verdict at this point in last year’s How much does the European Union cost Britain? was that
The Lisbon Treaty has led to the surrender, to hostile European politicians and bureaucrats, of regulatory control over industries in which the UK had been particularly dynamic and successful, and which account for about 5% of UK GDP. A case can surely be argued that the regulatory follow-through of the Lisbon Treaty will check the growth of the UK’s international financial services sector and may even cause it to contract. What is the cost of that to the UK in terms of lost opportunities for highly-paid employment, profits and tax revenues? Given that the value added in the international financial services industries runs at perhaps £40 billion to £75 billion a year, that they had been growing at 15% a year and now face stagnation, and that use of the same resources will be less productive elsewhere, the UK’s loss from EU- imposed regulation might be estimated at £1.7 billion in the first year, but increasing with time. The capital loss to the UK – on assumptions which discount the loss aggressively (i.e., make it smaller than it otherwise would be) – might be almost £60 billion.21
That assessment again seems reasonable, although the loss now needs to be raised towards £3.5 billion, which is about ¼% of GDP. In fact, given the waste arising only from the botched introduction of Solvency II, the £3.5 billion number is probably on the low side. The surmise that the City of London would stagnate, instead of growing at 15% a year as it had done for over a generation until 2007, has so far been correct. (See the chart above. The figure for ‘financial exports as such’ is taken directly from official statistics. The wider category adds insurance to that figure and 40% of ‘other business services’, on the grounds that the demand for a high proportion of these services is derived from the financial sector.) According to official UK balance-of-payments data, the UK’s exports of financial service exports in 2012 were £46.0 billion, slightly down on the 2007 figure of £47.4 billion and much less than the 2008 figure of £54.8 billion. The impressive growth of the 40 years to 2007 lies in the past, with EU regulation now a major obstacle to the dynamism and prosperity of the City of London.