A post-Brexit Britain would become a deregulated pariah state, warns Adam Posen:
In the face of a post-Brexit recession, a new government would scramble to be seen to act in retaining or creating jobs. Given the blow to trade and corporate investment, and ongoing uncertainty, it would be near impossible to do anything quick in the real economy; fiscal stimulus would be ruled out with a fallen currency and rising interest rates.
The administration would resort desperately to regulatory arbitrage. It would pull the cord on the most obvious parachute in reach: a race to the bottom by financial regulators and supervisors, hoping to attract or keep financial services.
A post-Brexit government would be desperate to be the world’s banker and go all out for market share. That is a very real threat to global financial stability. It would go beyond having AIG Financial Products blowing up markets and billionaires from a lot of nasty places putting their money in UK real estate. It would further unbalance the British economy and reinforce the UK’s increasingly pariah status after exiting the EU.
Deregulation would be a desperate gamble to attract business to an economy teetering on the brink of recession.
Far fetched? Not really. This is pretty much what the Leave campaign have said they will do. They claim to be able to save £33 billion* by removing EU red-tape but look at the second most expensive regulation on that list. It’s the CRD IV package, which apparently costs £4.6 billion a year.
Now the The CRD IV package is the EU regulation which brings into force the Basel III international accord on banking capital requirements. Of all the regulations brought in after the financial crisis, this is probably the one that offers us the most protection from a repeat of 2008. Capping bonuses and splitting up the banks are gimmicks which will make next to no difference but forcing banks to increase their capital might at least mitigate the risk of further bank failures. True, this sort of regulation hurts bank profits but look what happened last time they lent with gay abandon. Do we really want to be the only country that doesn’t implement Basel III? Do we want to become a base for pirate financial institutions?
I have been hoping that, at some point during the campaign, when a Leave advocate mentioned the £33 billion in red tape, an interviewer would say, “So you want to go back to the pre-2008 banking system that led to the crash do you?” Because that’s the implication of removing the regulation. CRD IV is one piece of red-tape that makes us all a lot safer.
The UK economy is already one of the least regulated economies in the world. Any more of it, especially in financial services, would, as Adam Posen says, “be creating a huge hole in the financial safety net”. It’s a completely mad idea yet the Brexit supporters are still banging on about the amount of money we would save from deregulation and no-one has really called them out on it.
A lot of this apparently expensive red-tape is there for a good reason. A deregulation race to the bottom would be risky and would further alienate a lot of our allies. Becoming a pariah state is not the future most of us want for this country but it’s what we will most-likely get if we vote Leave tomorrow.
*The figure comes from a report by Open Europe who have NOT said that Britain could save this amount by leaving the EU.