Herald agenda: grasp the thistle
Farewell London, hello Edinburgh has been a persistent refrain in the UK finance sector since the Brexit vote. Facing the loss of their European passport, London-based firms are looking to relocate. Luxembourg and Dublin are the obvious choices but Edinburgh is in the mix too. Lord Turner, former head of the Financial Services Authority, has told Le Monde the city could take over as Europe’s leading financial centre.
This shows both how friable the Union between Scotland and England has become and how solid Edinburgh’s and Scotland’s skills are in the sector. While Luxembourg and Dublin are primarily administrative centres, Edinburgh has the money management expertise that makes the wheels of industry whirr and spin.
First Minister Nicola Sturgeon presumably knows this. Scottish Financial Enterprise (SFE) was among the business groups going through the door at Bute House after the Brexit vote.
Whether SFE and the First Minister share a vision for the future is another matter. Edinburgh’s finance sector was not a fervent supporter of Scottish independence in 2014. But financiers are nothing if not pragmatic and the curtain has lifted on a new act. To remain within a polity that stages a cavalier referendum to lance a boil within one political party no longer feels like a prudent choice.
So could an expanded financial centre in Edinburgh provide an injection of economic adrenalin if Scotland opts for independence in the EU? Yes.
Edinburgh is already a major European financial centre, managing £800 billion of funds. Crucially, its backbone is not the complex derivatives that caused so much trouble in 2008 or even hyperactive banks; it is investment management and insurance.
Investment management is one of the fastest-growing areas in financial services for two reasons: one of supply, the other demand. On the supply side, companies increasingly look to the capital markets for finance as banks cut back on lending. On the demand side, modern-day pensions mean we are all investors now.
This is not the failed casino capitalism decried by Ben Wray in an Agenda column last week. Investment managers are not perfect; fees need to fall and there are too many closet index huggers. But they didn’t cause the financial crisis and came through it largely unsullied. In response to client demand, sustainability is knit into what they do.
Collective investments in the UK were pioneered by a Scotsman, Robert Fleming of Dundee, and the Scottish approach retains a distinctive sobriety. Martin Currie, Baillie Gifford, Walter Scott & Partners: these are not high-octane gamblers who tell their clients “it’s a black box” when they ask how returns are generated.
The threat posed to this industry by Brexit is hard to overstate. Most UK fund groups sell in the EU and beyond, using the European passport that has become a globally recognised brand. Unless the UK joins the European Economic Area, which requires the same free movement of labour as EU membership, that business will be compromised.
Scotland can do itself a favour by opting out of this madness, and it is perhaps instructive to consider the alternative: becoming an unloved backwater within an unloved backwater. It can do the rest of Europe a favour as well. We are good at this. Actually, we’re brilliant at it. And we have the kind of considered, long-term approach to investment that promotes economic stability.
Of course, we should not turn Edinburgh into a mini London. However, we can make not just Edinburgh but Scotland a centre for investment excellence in the EU. It is worth remembering that one of Europe’s largest fund managers is headquartered in Aberdeen and 30,000 people work in financial services in Glasgow.
Some claim exports to England and Wales will suffer if we choose this route. They must ask themselves if our neighbours can traverse the difficult terrain ahead without Scotch whisky, never mind Scottish investment acumen. There is no universe in which it makes sense to erect trade barriers within these islands, whichever destinies the constituent nations choose.
“Life punishes those who come too late,” Mikhail Gorbachev told the East German leader Erich Honecker in 1989 weeks before the Berlin Wall was torn down. This is our Berlin Wall moment. We must grasp it. Building on existing strengths to create a high-quality European finance hub can set us on the right path.