The Corner

Bonuses of Contention

Pushed by a drive from a greedy and expensive EU ’parliament’ with, apparently, no sense of irony, the European Union is moving rapidly toward capping bankers’ bonuses. The Economist (“defending bankers over their pay is like siding with bigots in the name of free speech: not much fun but occasionally necessary”) is unimpressed:

A higher fixed-cost base would weaken the link between pay and performance, reversing efforts since the crisis to tighten that link through the use of “clawbacks” to retrieve deferred-bonus payments if a bank gets into trouble. It would also limit banks’ ability to cut costs in a downturn. Pay has come down sharply since the financial crisis, partly because higher capital ratios have reduced the profitability of banks. CEBR, a consultancy, reckons that the total bonus pool paid out to London-based bankers in the current pay round will fall to about £1.6 billion ($2.5 billion), down from a peak of £11.6 billion in 2008. That sort of flexibility is useful if you want banks to preserve capital in a crisis.

Dan Hannan would clearly agree, and makes a broader (and important) point:

It ought to be a principle of a free society that, if I want to work for you and you want to employ me, and we are both happy with the terms and conditions, the state shouldn’t declare our arrangement illegal.

Indeed. And to those who say (not unreasonably) that the potential cost to the state of supporting troubled banks gives it the right to set these sort of rules (however possibly misguided), the answer ought to be (and as I work in the financial sector I should make clear that I am writing purely in my personal capacity) this: There needs to be a much clearer division between — tightly regulated — financial institutions that would in extremis benefit from state support and a freer sector that does not. Firms in the latter category should be allowed to fail. That’s the sanction. And it needs to be enforced. If a bank is “too big to fail,” it belongs in the more tightly regulated column.

But the truth of the matter is that none of this is really about prudential regulation. As Dan hints in his next sentence (clue: I’ve added emphasis), it’s about something else:

In any event, what has any of this to do with Brussels? When we talk about bankers’ remuneration in the EU, we really mean bankers’ remuneration in London. Again and again, the effect of anti-London regulation is to disadvantage Europe’s only major financial centre. The business driven away from the City is not going to Frankfurt or Milan, but to New York and Hong Kong.

This move is really about two things. At one level, it’s a grudge match between two sections of the elite, the political elite on the one side, the financial elite on the other. More than that, however, it is, as so often in the EU, about power. London’s heft as a financial center has not come without its costs (as the U.K. has discovered — most expensively — in recent years), but it gives Britain both a bridge to America, and far greater economic and political clout than would otherwise be the case. Neither the bridge nor the clout are acceptable to the oligarchs of Brussels. And if they have to lay waste to Britain’s financial sector to tear them down, that’s what they will do.

Hannan continues:

Last night’s vote neatly symbolised Britain’s weakness within the EU. We were outvoted 26-to-1 on an issue that was, fundamentally, no one’s business but ours. The Treasury will lose billions in tax revenue. My constituency, which surrounds London, and benefits from the knock-on impact of the financial services industry, will suffer. Britain will fall behind in one of the few sectors where it enjoys a global lead. The EU will pile on regulations which, paradoxically, make a future crash more likely. All to satisfy the prejudices of people who dislike the whole notion of capitalism.

And their leaders dislike the U.K. even more.

There is nothing to be gained by prolonging the rancid farce that is Britain’s membership of the EU, and, contrary to what David Cameron likes to claim, there is nothing realistically to “negotiate” about with Brussels, other than the terms of — it is to be hoped — a speedy and tolerably civilized divorce. Article 50 of the Lisbon Treaty sets out the procedure, and it is that, rather than Cameron’s implausible, impossible, and distant referendum, that needs to the focus of Britain’s domestic debate.


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