Conclusion

The 2007-2008 financial crisis and Great Recession led to a prolonged fall in UK living standards. The Coalition government from 2010 to 2015 responded to the ensuing rise in government deficits by making substantial spending cuts, halving the public deficit from about 10% to 5%. The initial position of the Conservative government elected in 2015 was to press on with this deficit reduction, through spending cuts. In the meantime, while there has been substantial re-regulation of financial services, on balance the structure of banking and international finance has changed little. At the same time, net immigration into the UK (from the EU and from outside the EU) expanded quite strongly, exceeding 300,000 persons per year in the two years before June 2016. It was against this background, that David Cameron held Britain's referendum on whether to leave the European Union.

In the run-up to the referendum, most economic analysts and commentators warned that leaving the EU will be bad for Britain's economy, and could be very costly if the UK loses access to the Single Market. In the event, the aspirations associated with "taking back control" triumphed over what the Leave campaign labelled "project fear", the warnings by the Cameron government and the broader Establishment of the economic fallout from quitting the Union. Since the vote, the dire predictions meted out before the referendum have not come true. Growth in the UK remained buoyant throughout 2016, and financial market turmoil was kept to a minimum, partly thanks to strong, proactive measures by the Bank of England. By contrast, the pound has fallen in value against other currencies by about 15%, compared to the year before the vote. This is leading to a pickup in inflation, which is set to accelerate in the medium term

Yet it still appears likely that growth may slow down as companies readjust to the strategic decision of the May Government to prioritise immigration control and independence from EU legislation over access to the Single Market. Serious negotiations between the UK and its EU partners will begin, probably towards the end of 2017, once the French and German general elections have taken place. Quite what will happen then is almost impossible to predict. The British government is seeking to negotiate withdrawal from the EU and a new trade relationship in tandem. So far, the EU position is that a withdrawal agreement needs to be negotiated first, before talks can begin on a subsequent trade relationship. Overall, the British position remains one of having one's cake and eating it (as Boris Johnson has said infamously), whereas the UK's European partners are adamant that Britain cannot have a better deal with the "club" once it has left

The negotiations are going to be politically very tough given the vital interests at stake for both parties. They will also be hideously complex. The negotiations on financial services are an important part of the overall process. They will mirror overall issues concerning the relationship between the UK and the EU, notably concerning some sort of continued access to the Single Market. But at the same time, they surely carry greater risks than negotiations in other sectors. Both parties have an interest in reaching an agreement which minimises damage to the real economy, and certainly both Britain's and Europe's financial institutions will want to pursue as much business as usual. There is also a lot to be said for avoiding big shocks to the financial system, while pursuing further reforms. Banking and finance deserve a lot of the criticism they get. But they are central to how our economies work, so change and reform need to be careful. The problem is that it may just be too difficult to reach agreement on finance in particular and on the UK-EU relationship in general, within the deadlines that now exist.