NEW YORK — The plot of the morality play set in motion by the United Kingdom’s announcement of a 50 percent tax on bankers’ bonuses has now taken form. And it is a play that holds an important lesson about how politicians are managing — or mismanaging — demands for financial reform.

British Prime Minister Gordon Brown and French President Nicolas Sarkozy, once at odds over Sarkozy’s criticism of Anglo-Saxon capitalism, have reconciled: predictably, France followed Britain with a bonus tax of its own. Equally predictably, the U.K. banking community responded by playing the “we’ll take our marbles and go home” card (“home” meaning New York, Honk Kong, Zurich — anywhere but London). A Bank of England executive then responded with the “good riddance” card, saying that, “given the costs of carrying that financial system around, it may be a price worth paying.”

Now that the story is clear, it is useful to take a step back and view the events from a strategic perspective. For, if the players in this drama are not currently acting strategically, they will end up doing so, and it is useful to see where that will lead.

Consider first the structure of the British bonus tax. It is levied on the banks, which are free to pay both bonuses and the resulting tax. Moreover, it is a one-time tax, expiring in April. In essence, the U.K. has imposed less a tax than a fine for the banks’ arrogance in ignoring public anger.

That is not a bad strategy for a Labour government facing an election that everyone expects them to lose. In finance terms, Brown holds a deeply “out of the money” option. In that case, the right strategy is to increase the risk: Maybe the public will be angry enough to back Labour.

So what happens after the U.K. election? Realistically, the Conservatives will win, and David Cameron, the new prime minister, need do nothing. The tax expires on its own, and, the fine having been paid, London becomes as inviting to bankers as it was before. Precisely because all of this can be expected, banks will bristle, but no major shifts away from London will take place.

But what about France? The most likely result is that France will retain the bonus tax, continuing the effort to shift European policy away from Anglo-Saxon-style capital markets. It is hard to imagine Sarkozy following the lead of a Tory prime minister in reducing taxes on large financial institutions.

So, when the smoke clears, London will remain an inviting location for banks, France will still be taxing bankers’ bonuses, and perhaps European Central Bank President Jean-Claude Trichet’s recent tirade against a “bonus culture” will induce other European Union countries to follow. At that point, the plot shifts direction, and bankers threaten to move to, rather than from, London.

And what of Brown? He will most likely be out of office, but, by playing the populist in the runup to the election, he may have spared Labour a larger defeat, while simultaneously improving the competitive position of the City of London. Perhaps this was not what he or Sarkozy had in mind when the curtain went up, but the denouement should favor the U.K.

Ronald J. Gilson is a professor of law and business at Columbia University and Stanford University. © 2009 Project Syndicate

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