Britain's argument over the euro has started to flare up in the City of London. Although it is widely-and correctly-assumed that most big financial institutions are in favour of Britain joining the euro, there is also an articulate opposition which has begun to make its voice heard.
Its arguments are elegantly presented by David Lascelles in a recent pamphlet, "Confidence in the City Outside the Euro" (New Europe). Lascelles attaches great importance to a comment from Rolf Breuer, head of Deutsche Bank, who says: "London will no doubt remain the leading financial centre in Europe outside the euro." He does not, however, make clear whether Breuer is talking about Britain's temporary or permanent absence from the single currency, and here lies the weakness in his approach.
The creation of the single currency is leading to the formation of an integrated European capital market. The volume of bond issues in euros this year has already overtaken that of dollar-denominated bonds; as the market becomes more liquid and businesses expand, this trend will continue. There is also an increasing trade in equities to satisfy the requirements of European-based pension funds within euroland, and the strongest of the financial centres there, Frankfurt, is set to grow correspondingly. Several foreign banks-including Chase Manhattan-have based their euro-clearing operations in Frankfurt, and some are now thought to be planning to shift their money-market activities there, too.
Lascelles argues that the unique pool of expertise found in the City of London, its light regulatory regime and its spirit of enterprise will safeguard the City's primacy as a financial centre outside euroland. Moreover, he argues, technology makes the physical location of markets of decreasing relevance. Both of these points have some weight, but they have to be set against other factors which could make the position of the City far more precarious in the longer term than he allows.
First, the need to raise capital will come predominantly from companies and institutions within euroland, and where capital is raised, markets tend to gravitate. New York and Tokyo are based on gigantic domestic capital markets; London is already in an anomalous position in this respect.
Second, most of the City's financial institutions are already in foreign hands, whether American, Asian or continental European. The City is, therefore, more vulnerable to changes in sentiment as Europe integrates and Frankfurt grows in importance. Given London's present advantages, the City will continue to be given the benefit of the doubt by international financial institutions on a four- to five-year horizon, but if it became apparent that Britain was to remain outside euroland for the foreseeable future, the judgement of these non-British owners could well shift in favour of Frankfurt. The location of the European Central Bank (ECB) in Frankfurt could also become more significant in that context. Lascelles argues that the location of the Federal Reserve in Washington has not caused US financial houses to abandon New York, but Washington is not the focus of capital raising in the US. Frankfurt is a financial centre in its own right, and international financiers will always value the opportunity to rub shoulders with central bankers.
Lascelles also argues that there are advantages in remaining as far removed as possible from what he sees, rightly, as an over-taxed and over-regulated business environment in continental Europe. But this ignores the wider argument underlying Britain's membership of the EU. If we exclude ourselves from the core element of the EU's financial and economic policies, we will become marginalised by these policies. The signs are already clear in our exclusion from the meetings of euroland finance ministers, in Britain's under-representation at senior levels in the ECB, and, indeed, in our position on the planned withholding tax (as euro members, we could have taken a more front-foot line against the tax).
The anti-euro lobby argues that there is no reason why we should not continue to enjoy the benefits of the single market without tangling ourselves in the euro-or indeed in other policies to which we object-thereby getting the best of both worlds. This ignores the fundamental characteristic of the EU as an organisation whose political and economic objectives are so closely intertwined as to be indistinguishable. If today we decline to join the single currency we will be overturning the logic of our original decision to join the Common Market, and we will find ourselves losing on all counts: stranded between the monetary policies of the ECB and the Fed; excluded from the core economic decisions accompanying the management of the euro; and encouraging Germany and France to remain the driving force of the EU, politically and economically.
It is worth noting that there is an underlying assumption in this country that Britain has only to declare its readiness to join the euro on the back of a positive referendum, and the doors to entry will glide open. This is highly unlikely. Not only will there be a complicated negotiation on the entry rate for sterling, but the French-old hands at power play within the EU-will drive a hard bargain in return for a reduction in their influence over European economic and monetary policy. The longer the decision to apply for entry is delayed, the tougher this negotiation is likely to be.
So, what of the City? There is still a strong perception, widely held internationally, that Britain is on course to join the euro in a few years' time. Were this assumption to be put into question, it would lead to a serious rethink by the foreign owners of many of the City's financial institutions about where their core activities should be located. n
