Make no mistake about it, if the United Kingdom decides not to join European monetary union, London will suffer as a financial centre.
During the past few months, some senior bankers in the City of London – most notably Stanislas Yassukovich, former head of Merrill Lynch in Europe – have tried to argue that the City’s long tradition as a cross-border financing centre will allow it to thrive regardless.
It is noticeable, however, that these arguments tend to come from bankers who anyway dislike emu for political reasons. To justify their opposition to emu, they need to be able to deny that a British opt-out would harm the country’s important financial services industry.
This magazine has long been sceptical about the benefits of emu and dubious about whether exchange rates can successfully be locked together in the stage prior to the introduction of the single currency without creating unbearable turbulence in financial markets.
But, looked at logically and dispassionately, we believe that the arguments that the City would be worse off outside the currency bloc are unanswerable. It may be, therefore, that even those who, like us, doubt the wisdom of the single currency project, should push for Britain to join.
How would a uk opt-out hurt the City? Take first the bond market. Together, the outstandings of bonds in euros will comprise about one-third of all bonds in the world immediately after emu begins. The euro government bonds issued by Germany and France (and – who knows? – Italy) will be widely held by international institutional investors. The German authorities are sure to enforce a rule that its issues are underwritten and syndicated in Frankfurt. The French will probably have to abandon their determination that French government euro bonds are arranged in Paris – but they will insist that the business takes place in an emu member country.
If the euro government bond primary market is based in Frankfurt, the secondary market will naturally shift there too. It would then make sense for corporate issues and issues by non-European issuers in euros to be arranged from Frankfurt too. Deals in other currencies might then follow. How long would it be before London had lost much of its bond business to Frankfurt?
Or consider the interbank money market. London dominates the European time zone now: even in Deutschmarks, Libor (the London interbank rate) is much more widely used than Fibor (the Frankfurt equivalent). But would this continue after emu? Together the currencies of countries most likely to join comprise about 30% of all international banking transactions, according to the Bank for International Settlements (by contrast, the dollar comprises 40%, the yen 12% – and sterling only 4%). There will be considerable pressure for euro money-market transactions to take place in a member country. This is clear from the debate over Target, the proposed emu settlements systems. The Germans and French are proposing that non-emu members should pay more to use Target and the European central bank’s discount window. They argue, not unreasonably, that other central banks give privileged access to their national banks.
We should not exaggerate the case against London. The City will undoubtedly remain a major financial centre. It is unlikely, for example, that its dominant position in foreign exchange – where it has a market share of 30%, versus 5% for Frankfurt and 4% for Paris – will disappear. In the same way that most Deutschmark/dollar business is conducted through London now, much of the trading in the euro/dollar pair will also be in London. The inertia factor will also help London – for a time. The big us banks (and some continental European ones, such as Deutsche Bank) have spent too much on buildings, hiring employees and systems in the City to want to move away in a hurry. The quality of staff in London, and the prevalence of a trading mentality there (but largely absent in Frankfurt), will also slow the drift away.
London has businesses that will stay. As a rule of thumb, the more structured a business and the less trading-oriented it is, the less likely it is to move. The trading businesses – repos, frns, money markets – will need to be near the euro government bond centre in Frankfurt. But businesses such as project finance, syndicated loans, asset securitization and complex derivative structuring – where quality of staff is key, and the timescale of deals less pressing – will find it easier to stick to London.
But suppose Britain was in emu. The opportunities for London – provided it was not hampered by new rules devised by regulation-loving eu bureaucrats – would be enormous. It is not hard to envisage the euro becoming the world’s leading capital-raising currency, and a reserve currency only slightly smaller than the dollar.
London’s financial business will not disappear if the uk stays out but, at the margin, it will diminish. Even those City senior bankers who deny that London will be harmed, surely would not deny that it would do better if the uk was in emu.
