Osborne’s abject capitulation to the EU imposition of a cap on the bonus element of bank employee remuneration was a failure on so many levels.
Even for a government as strategically vacant and tactically inept as the Cameroon Coalition, Tuesday’s defeat for Osborne at the hands of a nakedly anti-City EU marked a new nadir of incompetence, if not downright chicanery.
First, the misconception. Of all the great offices of state, that of Chancellor of the Exchequer is the one whose incumbent is most expected to be largely immune from the petty partisanship of day-to-day political advantage and concentrate on the economy. This, shamefully, has never been true of the far-too-political Osborne, and it showed. For, despite the ineffectiveness of the measure and the damage it may cause, pandering to the populist meme, wrongly propagated by a majority of British and European politicians alike, that the 2007-08 financial crisis and its aftermath were entirely the fault of the banks, would have been seen by him as good politics, trumping other and more important considerations like economic efficiency and national interest.
One of the travesties of the post- 2008 period has been how the political elite and a complicit media succeeded in obscuring, in the public mind, the role of excessively loose monetary policy on the part of fiscally-reckless, spendthrift politicians and governments in creating the debt-fueled asset bubble which collapsed from 2007 onwards. Of course banks were at fault, and, in some cases, very seriously so. But, compared with the opprobrium heaped on even well-managed banks who came through the crisis reasonably intact and without requiring transfusions from public coffers, governments and their inadequate regulatory systems, fee-chasing ratings agencies, accounts-verifying auditors, and foolishly over-borrowing consumers have all got off scott-free. Making concessions to the EU’s prejudices will do nothing either to address underlying systemic problems or to prevent repetition.
In the same week of the EU’s bonus-capping decision, Switzerland voted to increase the power of shareholders over that of boards or managements to approve or veto company remuneration arrangements. The timing, and the comparison, were ironic. The Swiss favoured enhancing the power of proprietary rights, even as the EU sought to interpose itself between proprietors and their property – a massive interference in the rights of employers and employees to negotiate pay via voluntary contract. Of such rights violation is the EU born and made.
The misguidedness of the proposal is no less egregious. Its effects will be negligible where they are supposed to be targeted, and damaging where they are not. Total remuneration will not be reduced by bonuses being restricted to twice base pay – base pay will rise to compensate, and it’s easy to imagine innovative temporary salary hikes for the period of bonus month – but what will be reduced is the ability of banks in a future downturn to reduce their fixed staff costs. Bonuses are frequently deferred and increasingly formatted in medium-term vesting period, performance-dependent, share options – even subject to clawback in some cases – while base salary is payable now, irrespective of bank financial performance, in immediate cash. Raising banks’ fixed costs at the expense of much more easily-adjustable variable costs will make them more risky, not less, as well as diluting the link between performance and reward.
The higher fixed cost base overall of the industry will make it less competitive. London-based institutions with extensive non-EU networks will be more tempted to re-locate overseas, with the likelihood of decreased tax revenue for the Exchequer, but there are even more malign effects for the wider economy. Having a higher non-variable cost base makes it likely that banks will feel obliged, or be regulatorily-compelled, to hold higher levels of capital or reserves. The first casualty of that, of course, will be lending – both willingness and capacity. At a time when politicians are exhorting banks to lend more into a cash-hoarding, deleveraging economy, while simultaneously demanding that they both rebuild balance sheets and deploy resources into gilt-buying in yet another round of Quantitative Easing, increasing their fixed staff costs just beggars belief.
The misplacement arises in Osborne’s woeful culpability to defend a key UK interest against blatant EU predation designed to reduce or negate the UK economy’s comparative advantage in financial services. It enjoys, for example, a 19% global share of cross-border bank lending, compared to the 16% share of France and Germany combined: it has a 38% share of foreign exchange business, compared to Germany’s 3% and France’s paltry 2%. The UK’s trade surplus in financial services amounted to £31bn in 2010. London has over 250 foreign banks, far, far higher than the numbers based in Frankfurt, Paris or New York. The EU has long cast envious and resentful eyes on The City’s commercial success, and this week, Osborne chose to indulge that resentment.
The 26-1 defeat was not necessary. If all else failed, Osborne was urged, invoke the EU procedure known as the Luxembourg Compromise, designed to enable a member-state to protect itself against otherwise unanimity or majority outvoting on an issue of vital national interest. Despite the UK financial services sector generating upwards of £60bn in tax revenue annually, Osborne heeded advice not to invoke it. Could anyone imagine a French or German Finance Minister caving in so meekly to an EU attack on their wine or car industries?
What, then of the much-vaunted “influence” which the irreconcilably pro-EU advocates in Britain constantly assure us is the prize for EU membership? It’s essential, we’re told, that for our national interest we must retain the mythical “seat at the top table”, to have input where key decisions are made. That argument, always dubious even at the best of times, has been unceremoniously holed below the waterline by Osborne’s utter defeat. Clearly, the “influence” which is supposed to come our way as the allegedly justifiable benefit as the price of EU membership is as much of an illusion as the EU’s relevance itself.
That Osborne has yielded such a catastrophic, economy-damaging concession is reprehensible. That he has largely escaped without being pilloried for it is profoundly depressing.