The Biggest Worry for British Bankers Isn’t Brexit

(Bloomberg View) -- It's no wonder they never talk: One wears neatly tailored suits of superfine Italian wool; the other is so anti-fashion that his uniform of choice -- flat caps, mismatched suits and anything beige -- prompted hand-wringing from British Vogue. U.K. Labour leader Jeremy Corbyn's Islington constituency is on the doorstep of the City of London, Britain's financial heart, but these neighbors have little in common. That will have to change.

Last summer (and the one before that) Corbyn was fighting to keep his job as party chief. Now, not only is the U.K. Labour leader actually popular beyond just the hard left of his party, he's also getting traction with the middle classes in Britain at a time when the Tories seem to lack real leadership, a coordinated position on Brexit and even an organizing idea as a party. And he's spending the summer in campaign mode, traveling the country to make his case to marginal constituencies.

All of that suggests that the City of London, one of the world's pre-eminent financial centers, has more to worry about than Brexit. Suddenly a political leader who showed no obvious thirst for real power -- he has long seemed content to be a thorn in the posterior of her majesty's government -- is out to win. It can't afford to ignore the prospect of a Corbyn government, however remote it might seem now.

Corbyn has been quite clear that he sees the financial industry as disproportionately powerful and has promised a "reckoning" for those responsible for the financial crisis. In addition to tax hikes, nationalizations and various other spending plans, he plans a regulatory overhaul that will put in place "a firm ring-fence between investment and retail banking."

Perhaps most alarmingly for a sector that is a major world player in derivatives trades and other financial services, he would like to see a tax on financial transactions. That goes to the heart of Corbyn's fundamental mistrust of the City and his belief that Britain needs rebalancing away from financial services.

The so-called Robin Hood tax proposal is a long-standing project of Labour's shadow chancellor John McDonnell, who would presumably occupy the country's second-most-powerful position under a Labour government. McDonnell recently went to the London Stock Exchange to seek feedback on the proposals from the banks. They should give it.

The Robin Hood tax is not a Labour invention though; it has been around since John Maynard Keynes proposed it. The European Union has mostly shelved a six-year effort to impose one after it couldn't get the support of enough countries (after Brexit it no longer appeals to its main backers, France and Germany, who are keen to lure U.K.-based banking jobs). Britain already imposes a tax, known as a stamp duty, when shares are bought and traded. Labour wants to extend that to bonds and derivatives -- 0.5 percent of the value of trades -- and claims that would raise £26 billion ($33.98 billion) over a five-year parliamentary term and also curb speculative trading.

Although the tax has its high-profile defenders and a number of countries have it in one form or another, evidence that it will achieve either goal remains thin. There are concerns that it will reduce market liquidity but not volatility, and that it will hurt growth, destroy jobs and raise costs for ordinary people.

A Dutch central bank study of the EU idea concluded it would slow economic growth without reducing volatility. A study on parts of France's own financial transaction tax noted that the tax only slightly reduces high-frequency trading (regarded as largely speculative and a major target of Labour's tax) but "significantly affects market liquidity, increases market volatility and deteriorates market efficiency."

Sweden's experience also suggests caution. The Nordic country introduced a transaction tax in 1984 and doubled the 0.5 percent rate on the purchase and sale of shares in 1986 to cover share options and convertibles. Average turnover on the Stockholm stock exchange dropped 30 percent. Over half of Swedish share trading moved to London by 1990, as Magnus Wiberg, a former economist at the Swedish ministry of finance and the Riksbank, wrote in the Financial Times in 2013.

And yet, for Corbyn, anything that shrinks the size of the financial sector, as Brexit will already, is a feature not a bug. The transaction tax also has what former IMF chief economist Kenneth Rogoff, who has argued against it, called gut-level appeal. A 2011 poll showed widespread support for an FTT. Corbyn knows his audience.

Corbyn's rebalancing argument isn't wrong; it's one the Tories have made too. But that should happen by attracting capital to other centers and encouraging innovation and investment -- not by handicapping one of the country's most globally successful industries. And at a time when Britain has cut itself down to size with the Brexit vote, more self-inflicted wounds would just be cruel. That's an argument, among others, that the City will need to make to Corbyn and the wider public.

If he does eventually lead a government, Corbyn is not going to be as chummy with the City as Tony Blair once was, but nor is he as impervious to argument or as resistant to change as many believe. He increasingly dons crisp white shirts and red tie for major engagements; he has shown pragmatism in policy when it's called for. The City's unfriendly neighbor is, after all, a politician. It's time they talk.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael writes editorials on European politics and economics for Bloomberg View. She was editorial page editor of the Wall Street Journal Europe.

To contact the author of this story: Therese Raphael at traphael4@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

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