By Russell Bruce
Speaking at the annual Mackenzie-Stuart Lecture at the University of Cambridge, Viviane Reding, Vice-President of the European Commission and EU Justice Commissioner, warned London that it was moving away from Europe with potentially damaging consequences for the UK banking sector and the City of London.
Acknowledging UK past contributions to Europe Ms Reding said, "As other countries, in particular the members of the Eurozone, have integrated much more strongly, the UK has remained apart. And it is preparing to loosen its ties to the rest of Europe in a number of policy areas."
Speaking about the change in 'British' attitudes in the last two years Ms Reding continued. "All that talk about opt-outs, renegotiations and referenda distracts from the real issue. Finding more solutions like the ones [found for the banking and financial sector] is what we should all be focusing our energy and creativity on."
The Vice-President set out what she described as the hard facts - 4 to 5 per cent of Britain's GDP was a due to its EU membership and half its trade was with the EU. "Every household would be £3,000 a year worse off if the UK leaves the European Union" Ms Reding said.
EU membership provides unfettered access to the single market of over 500 people and around 3.5 million jobs in the UK are linked to the single market. Ms Reding underlined her argument by pointing out one in ten of UK jobs were highly dependent on continuing EU access.
Turning to the UK financial sector and the high level of European transactions that flow through the City of London, Viviane Reding laid out the City's vulnerability to a Britexit and the consequential damage to the City's trade surplus with the EU (£16.6bn in 2012).
The Vice-President warned, "The City would most definitely lose its unhindered access to the single market in the case of an exit. Because EU member states would obviously have no interest in supporting what would then be an offshore financial centre competing with their own financial firms. And companies from third countries would find London a much less attractive location to do business, since it would no longer be a gateway to the EU's single market.
In a passing reference to the Referendum, she quoted David Cameron "The plain fact is we matter more in the world together" and added, "the same is true in the case of the EU.
In time, the EU commission will finally get the message that Scotland thinks it is stronger and matters more in the world with constructive international partnerships and direct membership of the EU rather than being stuck to the coat tails of an increasingly isolationist London.
Returning to the issue of Britain's proposed renegotiations, Viviane Reding stressed the four freedoms enshrined in the EU Treaties come as a package. "You either enjoy all of them – or none. Those who benefit from the free flow of capital, goods and services must also accept that our citizens are free to move in the EU to travel, study and work. And the rules allow Member States to fight abuse of this right."
The Vice-President's lecture was a stark warning to the UK of the danger it faces and the influence it would lose if it chose to leave the EU.
For the moment the EU seems willing to bolster UK arguments over Scottish Independence as a means of encouraging London to be more pragmatic over EU membership, but a time will come when appeasing the awkward squad will be recognised has having little traction, and interest in accommodating Scotland's continuing membership will come to the fore. Perhaps that might bring England to its senses Ms Reding.
Although right to draw attention to the vulnerability of the City of London should Westminster withdraw from the EU that is only half the story.
As Liam Halligan, Economics columnist with the Sunday Telegraph, pointed out in a MoneyWeek interview, "Our [UK] banking sector is five times the size of our GDP and we don't have a reserve currency. America's banking sector is one time its GDP and it does have a reserve currency. The Americans can afford another bail out and maybe one after that – we can't."
UK exposure to a banking sector that is far from sorted makes Scottish Independence a compelling position. We need to get out. It is in the interests of our own financial sector to cooperate on financial regulation both with London and the EU, and to ensure the separation of investment and retail banking and that our banks operate in other countries as a clearly defined separate entity.
Liam Halligan's comment that the UK does not have a reserve currency may surprise some, but Sterling is no longer the power and choice of the world it was in the nineteenth century. The US dominates.
In the third quarter of 2013, the US accounted for 61.4% of the currency composition of official foreign exchange reserves. In second place with 24.2% was the Euro. Tying at third place was the Japanese yen and Pound sterling with a 3.9% share each.
Investment banking's exposure in the Forex markets (Foreign Exchange) is where the next seismic shock looks likely to erupt. The Libor fixing scandal has settled, albeit with some large fines. Forex is waiting in the wings and if fund managers can make a case for being ripped off, 2015 could be the year when the UK's exceptional exposure to investment banking could bring the whole pack of cards tumbling.
The detritus from the 2008 crash is far from washed clean. The waves ripple yet. Forex may be a tsunami gathering strength on the horizon. Ms Reding's estimate of EU exit at a cost of £3,000 for every UK household might just be the first suck of the sea as it draws relentless force against an unprotected UK.
The Mackenzie Stuart Lecture is an annual public lecture in honour of Lord Mackenzie-Stuart, the first British Judge to be President of the Court of Justice. The lecture is hosted at the University of Cambridge Faculty of Law, by the Centre for European Legal Studies (CELS). John Alexander Mackenzie Stuart (1924-2000) was born in Aberdeen where his father was Professor of Scots Law at the University of Aberdeen. He died in Edinburgh aged 75.