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They say you shouldn't kick a man when he's down. But in politics at least, there's no better time to do it.
Amid the turmoil in the eurozone, David Cameron has promised a referendum on EU membership in 2017 - assuming he gets back into power.
He might be serious. Or he might just be trying to shut up the eurosceptic end of his own party. Whatever his motives, it’s clear that this has gone down badly with other eurozone countries, especially France.
"Tant pis", you might say. And we'd be hard pushed to disagree. But whatever your views on Europe, it's worth remembering that Brussels isn't powerless. It can hit Britain where it hurts - right in our financial district.
In fact, the war on the City has already begun...
Brussels strikes back
Europe's first big assault on the City is through the ‘financial transactions tax’ (or ‘Robin Hood Tax’ as it is also known). This involves levying a small tax on each financial transaction: 0.1% on shares and bonds trades, and 0.01% on derivatives deals.
The thinking behind this is that such a small tax won't matter for ‘buy and hold’ investors. But it will make short-term day trading very expensive.
Supporters claim that this will reduce ‘casino banking’ activity, and re-focus markets on their main tasks: to help firms to raise capital, and governments to raise revenue. They also note that UK investors already have to pay stamp duty on shares, so it's hardly a new idea.
This all sounds nice and simple, so you can see why it appeals to Brussels.
However, when Sweden tried it in the 1980s, trading volumes collapsed and the options market shut down. After reducing the tax, the government ended up scrapping it.
Clifford Chance also points out that the tax is levied at each stage of the transaction (so while you only get charged stamp duty when you buy a share, the 'Robin Hood' tax is charged when you sell too). This means the real rate is likely to be much higher.
In any case, a lot of the City’s wealth comes from the short-term trading activity that the tax is targeting. This is why the UK has refused to let the tax be applied on a EU-wide level.
So if it's just applied to the eurozone, then why should we worry? Here's why.
Plans for a revised version have been leaked to the FT. These are due to be formally announced in February, with agreement all but certain. And while they technically only apply to the eurozone, the tax is structured in such a way that it will hit City institutions and hedge funds too.
For instance, trades involving banks with their headquarters in the euro area will be included. So the London offices of European banks such as BNP Paribas and Deutsche Bank, and those who deal with them, will have to pay.
Trades involving European securities, such as French government bonds, will also be counted, even if they occur on a London exchange and no European parties are involved.
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The City's share of European business is set to fall
The 'Robin Hood' tax isn't the only Brussels power grab.
The European Central Bank (ECB) has been pushing for all trades involving euros to take place in the eurozone. An outright edict is unlikely, because it would be against EU law.
But the ECB is starting to change the rules to make conducting such transactions outside the eurozone much harder. For instance, it is trying to force all clearing houses involved in euro trades to have at least a partial presence in the eurozone.
Also, thanks to agreements signed shortly after the last election, it already has the power to overrule the Bank of England in an ‘emergency’, potentially allowing it to shut down banks, or force the UK government to bail them out.
And don’t think that we can escape all this by quitting the EU. Even if we vote ‘yes’ to leaving in 2017 - assuming the referendum even takes place - Brussels would almost certainly respond by implementing punitive legislation.
As Ambrose Evans-Pritchard pointed out in the Telegraph last week, EU membership “is the UK’s only legal defence” from a total onslaught.
Overall, with the French and Germans all but ordering their banks to move workers back to Paris and Berlin, it looks certain that London’s 75% share of all trades within the EU will be hit. And that will hit profits in turn.
Look to America
We appreciate that your heart may not be bleeding for the investment bankers. We don't blame you. But less business in the City means less tax revenue for our broke government. That'll make getting out of the hole we're in even harder, as my colleague Matthew Lynn pointed out in a recent edition of MoneyWeek magazine.
However, there is a way you can shield your portfolio and profit from all this. Because London’s woes are good news for Chicago and New York.
The size of the US financial sector means that financiers in both cities do less business with European institutions. In turn, they will be hit less hard by the reduction in trading volumes.
Moreover, non-EU companies looking to avoid the tax may look at them more favourably. It’s hard to see Brussels having much luck in trying to get the US authorities to collect the tax for them.
Indeed, America has shown through its stringent FATCA (Foreign Account Tax Compliance Act) requirements (which require non-US institutions to report money laundering and tax avoidance involving US clients) that it is important enough to get other countries to bend to its will, not vice versa.
One company that should do well is CME Group (NASDAQ: CME). It was formed from the merger of the four biggest futures exchanges: Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX).
It does have a small London subsidiary which it recently opened. But its main focus is on expanding in the US, with the recent purchase of the Kansas City Board of Trade. It’s reasonably priced at 13 times trailing earnings, and has a decent yield (for the US market) of 3.1%.
• This article is taken from the free investment email Money Morning.
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