By Tom Bergin
LONDON (Reuters) - More than 20 European business associations and companies interviewed by Reuters say they back their governments' position that Britain's banking sector can only enjoy EU market access post-Brexit if the country still follows the bloc's rules.
Britain wants a trade deal that gives London's financial district, known as the City, access to EU clients while allowing the government to restrict migration from the bloc - something at odds with the basic rules of the European Union.
Senior lawmakers in the British government have said they expect European business groups to support their position because they need access to the financial services the City provides.
But interviews with companies and trade bodies across Europe suggest the most important thing for business leaders is maintaining a single market with a single set of rules that includes the four freedoms: free movement of workers, capital, goods and services.
They are less concerned about losing access to the City of London.
Companies including Deutsche Post, Daimler and Fiat Chrysler said they did not see significant disruption if the City loses free access to the EU market.
"We have taken a very clear line that the integrity of the four freedoms must be observed and that there is no cherry picking," said Markus Beyrer, Director General of BusinessEurope, the umbrella body for the biggest EU business federations.
"This is a very clear message we get from our constituency."
The conflict of views gives an early indication of the difficulties facing both Britain and the European Union in the divorce negotiations to come, with both sides having little room for concessions.
Britons chose to leave the EU in a vote driven in part by a desire to curb immigration. The government, which has pledged to respect the people's will, will face an outcry - among both the general public and eurosceptics in its own ranks - if it allows free movement from the bloc.
The EU is also in a tight spot. Continental businesses, despite their opposition to a UK exemption, rely on London to help arrange share sales, bond issuances and M&A deals. But officials fear if Britain is allowed a special deal, then other members states might demand bespoke relationships, putting the single market and the Union itself at risk.
ECONOMIC INTEREST
Britain exports more financial services than any other country and hosts the highest number of headquarters of financial services companies, and firms in related professional services such as law, than anywhere else in the world, according to a report from lobby group TheCityUK last month.
But some analysts said that by taking an overly optimistic perspective of support for its arguments in Europe, the British government risked leaving the EU with no agreement on market access.
A spokesman for the Treasury said: "Our position is absolutely clear, we want the best deal for trade in UK goods and services." He declined to comment on previous government comments about the stance of European corporate leaders.
British lawmakers including finance minister Philip Hammond and Foreign Secretary Boris Johnson have said it is in European companies' interests to allow an exception from normal EU rules for Britain's financial sector - which generates around a tenth of national economic output.
"European confederations of industrial producers, trade bodies and associations and financial sector regulators will be talking with governments about the impacts of possible different outcomes, and I would expect those people ... to be arguing for following rational economic interest," Hammond said in parliament this month.
European business groups say they benefit from barrier-free trade with the City of London, using it for fundraising, repackaging receivables like car loans and mergers advice. They acknowledge shifting to financial services providers in Frankfurt and Paris could push up costs.
"We do not exclude the possibility that funding costs might be more volatile in future," said Silke Walters, a spokeswoman for German carmaker Daimler.
Yet, the impact is seen as manageable. UK-based banks, some of which are subsidiaries of European and U.S. groups, can easily shift trading desks to continental centers, said Anders Ladefoged, deputy director of business lobby Danish Industry.
Some businesses may experience no impact, according to German engineering association VDMA, which said many of its members relied on German banks for borrowing rather than London-issued bonds.
London is the most important center for bond issuance in Europe but, unlike in the United States, European companies largely use banks for financing rather than the bond market.
SPECIAL DEAL
In the days after Britain voted to leave the EU in June, the largest French and German business associations - MEDEF, BDI and BDA - said their governments should be clear with Britain that the decision meant the City would lose access to the EU market.
Business associations in Italy, Sweden, Denmark, Lithuania and fourteen other countries told Reuters they also did not support Britain retaining market access if it restricts the free movement of EU workers.
Reuters contacted over 100 of the biggest continental companies to ask whether they were prepared to lobby for a special deal for Britain.
Most of those who responded said they would not get involved in the debate, at least until after a deal was agreed, but that they were not worried that a deal which cut off City banks would significantly impact their businesses.
However, companies do fear that if Britain was allowed to secure access to the EU market, without following all the four freedoms, it would set a dangerous precedent.
Some countries may seek dispensations to protect certain industries or sidestep competition rules, said Luca Paolazzi, Chief Economist at Italy's Confindustria business confederation. This could see the single market becoming an inefficient patchwork of trading rules, making cross-border business more difficult.
"Cherry-picking would mean you are making the rules a la carte and that creates opportunities for unfair competition so it's not something that is good for a competitive market," he added.
Some business associations and companies said it could even lead to the collapse of the whole Union, and that concern about the stability of the bloc would cause volatility in the Euro.
"It would be tempting to say 'let Britain take three (of the freedoms) but not the fourth'. But if you take that forward, that would create a lot of problems down the road that would be even worse for Swedish industry," said Carola Lemne, Director General of the Confederation of Swedish Enterprise.
Some analysts said the British government's misinterpretation of EU business leaders' thinking reflected a broader misunderstanding about what concessions EU members were prepared to make.
Simon Tilford, deputy director of the Centre for European Reform think-tank, said that if Britain better understood the thinking of EU governments and businesses, it could secure a deal allowing tariff-free trade in goods with Europe.
If it didn't, the two-year period between notifying Brussels of its intention to leave, and membership expiring, could pass without any deal at all, he said.
"If the UK wants controls on labor movement from the EU it will have to concede membership of the EU's single market for services. I think that's obvious."
(Additional reporting by Helena Soderpalm in Stockholm; Editing by Pravin Char)
