Monthly Archives: April 2013

If US bankers in London moved to Dubai to keep their bonuses, is the good or bad for the UK?

There is a proposal to cap any bonuses paid by EU based banks next year to senior executives. This bonus cap will apply to EU based banks worldwide, and for any non-EU based banks to all their offices within the EU. Bonuses will be limited to the annual salary amount or to double the salary figure if shareholders agree.

In a report in today’s FT, (US banks put City on bonus cap watch, 2 April) it is reported that some US banks and institutions are considering moving their Europe, Middle East and Africa operations outside of the EU from London to Dubai or similar cities to be outside of the reach of the new bonus cap law. No-one is quoted, but JPMorgan, Goldman Sachs, Bank of America and Citigroup all get a mention as big employers in the City of London.

The UK chancellor George Osbourne is lobbying Brussels to exempt these US companies from the EU bonus limit. However, it might be worth looking at this in the cold light of day to ask the economic question whether such a bonus cap exemption would be good or bad for the UK?

On the one side we are told that these US banks and financial institutions are big employers in the City of London and that there would be fewer UK jobs if these firms relocated to the Middle East or South Africa to run their European operations from a distance.

But perhaps there is another argument, that excessive bonuses are bad for the UK because they distort the economy. These bonuses, and their associated very high senior salaries, have grown massively in the last 20 years in central London to the extent that they now distort the national economy and hold back sustainable growth. The relatively small number of very high net worth individuals in central London has distorted the property market as well as the retail and hospitality sectors. These distortions cause micro local benefits (“few winners”) but macro dis-benefits to the rest of the UK (“many losers”) in terms of inefficient use of resources due to significant and unsustainable overheating. Further, these extreme income inequalities of themselves can cause bad social and economic outcomes, as argued in the book The Spirit Level by Richard Wilkinson and Kate Pickett in 2009. Finally, is it a credible business proposition that tens of thousands of loyal staff and their families would be relocated to Dubai so that a few senior executives could get to keep their extreme bonuses, and all done with no adverse effect on these businesses when they have to start making investment decisions about people, organisations and places that are now four thousand miles away.

If we are serious about rebalancing the UK economy then the greed of a few must be limited to protect the jobs of the many.

What are some lessons from Cyprus for the EU?

The recent crisis in Cyprus, which started with the banks and is now spreading to the whole economy, perhaps holds lessons for other EU countries as well.

Firstly, the sense of solidarity within the EU ‘project’ has been undermined. The bonds between small and larger states, and between northern and southern states have been severely weakened. The animosity to Germany and the Netherlands is palpable. Cypriots might also wonder if Britain, the colonial power up to 1960, perhaps should have been a more active friend and not just watched from its bases. The behaviour of Greek banks in off-loading their difficulties into Cyprus was also felt to be hostile.

Secondly, the ‘troika’ of major economic institutions, here the IMF and the ECB and the European Commission, did not give out a strong sense of control, purpose and frankly competence in the handling of the crisis. This was most evident in the initial negotiations where people with less that €100,000 in their bank accounts would have lost money. Technically the international bank guarantee for smaller balances was not being dishonoured because the lost funds were to be taken as a tax. Technically. But public trust and confidence in bank guarantees has been undermined.

Thirdly, banks are not as safe as they were. In 2008 the major economies moved heaven and earth to save the banks from their errors. The impact in the national debt of the USA, UK and elsewhere is still profound and years away from being resolved, and there is significant public anger at the banks and politicians. But now in 2013 the message to banks in crisis is, there are no more business-as-usual bailouts and instead expect closures, redundancies, and bond and shareholders to take a loss.

Finally there is a lesson in economic development in smaller countries. Cyprus has been publicly reprimanded for taking bank deposits from Russia and elsewhere, and for building up the financial services sector of its economy. This sector has now been almost destroyed and Cyprus’ economy will be devastated for years to come. But how different was it to Frankfurt or London? Some commentators have drawn attention to the number of Russian millionaires living in London, buying properties and investing in owning newspapers and football clubs, settling their legal disputes in English courts. The difference between the City of London and the island of Cyprus does not stand up to close examination.

Which brings us back to the first point, the weakened sense of solidarity. I am sure the officials in Cyprus did a clear-headed calculation that staying in the euro zone was the less-worse option when they considered reverting to the Cypriot Pound, probably for bailout reasons. But I am equally sure that if ever that calculation changes in favour of a local currency they will be out in a flash. Now there is no residual sentiment at all for keeping the euro, and sentiment matters greatly in economics.