Reports in the Financial Times that Labour’s new shadow City minister wants to “repair bridges” with Britain’s financial services industry read oddly to me. I remember accompanying the then shadow chancellor, John McDonnell, on his “tea offensive” meetings with City figures – with the emphasis on the cups of tea and digestive biscuits, rather than the offence.
McDonnell had the great advantage of dramatically low expectations among the bigwigs of high finance, who (as he joked to them) would turn up half-expecting to be sent to a re-education camp by the end of the meeting. They actually left, as far as could be told, pleasantly surprised. But behind the joke, and McDonnell’s personal charm, was a serious attempt to address the issue that any Labour shadow chancellor or chancellor will run up against: what is the party’s relationship to finance?
It’s unavoidable, because Britain contains arguably the world’s most important global financial hub. If you aspire to form a government here, there is no path to doing so that does not, at some point, run through the City of London. The truth is that Labour party shadow Treasury teams – whether from the left, centre or right of the party – tend to have a lot in common in this respect. John Smith, shadow chancellor before becoming Labour leader, had his early 1990s “prawn cocktail offensive” with the financial sector. Gordon Brown praised the financiers right up until the 2007-8 crash. McDonnell promised the financial sector that it would have “a seat at the policymaking and policy delivery table”.
This might sound surprising. Particularly in the wake of the global financial crisis only a decade ago, public opprobrium against the bankers was sky-high, and the ability of international finance to bring leftwing governments to heel occupies a major space in the left’s folk memory: François Mitterrand’s government in France, and, more recently, Syriza in Greece are the standout examples. There is also a longstanding critique from the left in Britain, which views the whole economy as distorted by the excesses of “bad”, unproductive finance, leaving “good”, productive capital starved of investment.
There’s a substantial truth in the last point. Evidence from the OECD suggests that, not just for Britain, but across the world over the last 50 years, larger domestic financial systems tend to slow growth and worsen inequality. But pointing to an issue does not solve it. Nor, as the 2008 crisis unhappily revealed, does the left’s preferred policy of nationalisation necessarily make finance behave any better – as the accusations of “widespread inappropriate treatment of customers” at the majority state-owned RBS’s global restructuring group suggest. New figures from the Institute for Public Policy Research show that 22% of the government’s job retention scheme money is making its way straight back into the financial system. Simply making the state bigger, or more generous, is not enough to shift the underlying balance of power. Instead, a future social democratic government intent on serious reform needs to base its thinking about financial services on three fundamental points.
First, financial services are not a monolith. What insurance companies want is not the same as what hedge funds want, and this is not the same as what the major banks are after. The critical point for a reforming government is to understand where those differences lie, and to make distinctions between different types of activity. While clearly some financial activities and institutions – hedge funds, for example – are very much driven by short-term gains, others – like pension funds – have interests that are far more closely aligned to those of a would-be reforming government.
Pension funds look for long-term, stable investments that produce steady returns; potentially the sorts of investment in renewable power generation, or new public transport, for instance, that are so urgently needed. Policy should be designed around an understanding of these varied interests. Some of that should include support for a greater variety of financial institutions, catering for local, regional and sector-specific needs.
Second, the global financial system itself is not primed to trash a reforming government in Britain. With a floating exchange rate and interest rates on government borrowing at world-historic lows, neither currency speculation nor the attacks of “bond vigilantes”, pushing up interest rates, are the dangers they might once have been. Instead, in a world where international co-operation is in short supply, the bigger risks are from political decisions taken elsewhere that can threaten financial stability here.
For instance, Britain’s financial institutions require access to the EU’s vast capital markets. Outside of the EU, however, this access is no longer a right, but conditional on Brussels’ approval. The commission has already used the threat of withdrawing access rights to put pressure on Switzerland in negotiations. It could do so against other non-members. Similarly, the operation of the Federal Reserve’s “swap lines” – cheap, fast access to dollars, essential in a crisis and reopened for the Bank of England in March – depends on decisions made in Washington. These are more diplomatic challenges than they are financial constraints and there is no reason to act as if global finance is the biggest danger a future Labour government might face.
Third, the challenges facing society – even before Covid-19 – are now so large that every part of the economy is affected, reducing distinctions between the interests of finance and the interests of other businesses. Climate breakdown, and environmental destruction generally, directly threatens billions of pounds of investments across the globe. Former Bank of England governor Mark Carney was ahead of the curve in raising the risk of climate breakdown to financial stability, and major asset managers are themselves reportedly looking to divest from high-climate risk investments. Last year’s report to the shadow chancellor on green finance is a model of the kind of detailed policy needed here, where a political lead could help reshape the sector.
Complete accommodation to the presumed wishes of the City will not work, but nor will sloganeering hostility. In truth, no Labour shadow chancellor has ever done either. The key strategic task for the party over the next few years, as it seeks to win the next election, is to understand how the different interests at play within the finance sector can align with a plan to address those three challenges, and build back better from the pandemic.
• James Meadway is an associate fellow of the Institute for Public Policy Research