Preparing for ‘business as usual’

Date: 10/10/1996

LIKE most highly-charged debates, the discussion about the impact of the introduction of economic and monetary union on London's global pre-eminence as a commercial centre has generated more heat than light.

The debate is being made considerably more difficult by the politically-charged issue of whether the UK joins EMU, or exercises its opt-out by remaining a fully committed member of the European Union without belonging to the monetary union due to commence in three years' time.

Over the past few months, representatives of both Germany and France have recognised that London has an unassailable position as a global trading centre, which complements the very special skills and resources available in the continental centres of Frankfurt, Paris, Amsterdam and Vienna.

London's position has been built up over many years and is confirmed by a wide variety of measures - foreign exchange market trading volume, foreign equity trades, futures and options, ship-brokering and the location of foreign law firms.

The current discussion in London's international financial community is not about whether the UK government will exercise its opt-out from the single currency, but about how to ensure that London remains Europe's representative among the primary trading centres of the world.

London now holds the leading European position in most markets. The value of foreign stocks traded in London is bigger than the value of stock traded in both France and Germany combined. London is also a high-volume trading centre, with 55&percent; of world-wide turnover in foreign equities trading through the UK capital.

Much of the recent media debate has centred around access to the new EU payments system TARGET. It is the terms and conditions under which countries will have access to TARGET which are currently under discussion.

The potential impact of these issues on London's banking community is now being examined. It would be an extraordinary irony if the consequence of restricted access to TARGET being proposed by certain EU countries were to create a second offshore 'Euromarket' - 20 years after US government regulation created what we know as the Eurodollar market.

Whether the UK joins EMU or not, the euro will be a major world currency. The UK, as a primary trading centre, will have to be able to offer all services denominated in this currency and to process the resulting transactions locally to take advantage of its traditional cost benefits.

Such has been the power of the emotion surrounding this argument that the UK banks and financial institutions are only just beginning to take this aspect seriously. But there is ample evidence of activity at last.

Europe is going through a particularly interesting time, with the many trading benefits of creating a wider economic market beginning to be seen. For some of these countries, that will now include a currency union.

London is in the unique position (in Europe certainly) of being host to a wide range of international players - all of the top banks in the world operate in London, and the top 25 includes eight Japanese banks, four from the US and three from Switzerland. Of the 390 non-UK banking institutions active in London, two-thirds are from outside the EU, many from the fast growing markets of the Pacific Rim and South America.

This is the trade which will be lost to Europe (as well as London) if the euro issue is not settled to allow international banking in all currencies (including the euro) to take place without constraint in the world's international financial capital.

London does business which is not done elsewhere in the world, primarily due to its inventiveness and the wide range of activities which take place in a very small area. You would have to merge the business communities of Chicago, Washington and New York to match the range of business occurring in London's City.

The threat to London's position as the primary international trading centre depends on the recognition by all parties that to discriminate against it in international business is against Europe's self-interest. While we feel for the French government in their attempts to keep a portion of their primary bond dealing in Paris by threatening to discriminate against companies who do not have Paris bases, they will end up by harming themselves.

Bonds are best sold where the market is deep and liquid. To sell in Paris against the market will only mean that the French government will have to pay an extra premium for their funds, in addition to the premium over the German-euro rate which will always be exacted for a lower credit standing.

The multinational marketplace which is the City of London will have to find ways of ensuring that it can be 'business as usual' irrespective of the UK government's decision on membership of EMU, and Europe's other financial centres must recognise that working to maximise Europe's share of the global market in collaboration with London is in their own long-term self-interest.

In broad terms, the interests of the City of London as Europe's leading financial centre will clearly be an issue in forthcoming political discussions about progress towards monetary union.

Financial services are the UK's fastest growing business and now contribute as much as manufacturing to the British economy.

If the opportunities offered by a single market for financial services were to be totally free of political interference, then there is no doubt that the City of London would continue to thrive, building on the recent trend - as mentioned earlier - of global banks focusing their operations in London.

The unknown factor is whether politics in Europe will favour or hinder this process.

The governor of the Bank of England has correctly assessed that monetary union is an opportunity and not a risk to the City of London. This will remain true even if the UK elects to remain outside the first wave of countries who look to establish the euro in accordance with the Maastricht timetable.

There is also an increased feeling of confidence that the wholesale markets in London will have made sufficient technical preparations to be in a position to transact business in the new European currency in parallel with the old currencies that remain outside the system.

But in addition to being technically prepared, City institutions need to do more.

They need to speak out in support of the governor's position that any attempt to discriminate against London in the formulation of the detailed rules of monetary union would not only violate single market principles, but also operate against Europe's interest as a whole.

Put simply, the future European Central Bank will need London's unique capabilities and international reach in order to operate effectively in world-wide markets.

The risk of attempted discriminatory measures should not be underestimated as those within the euro currency club look to strengthen their competitive position and claw back business from London for the benefit of their own local economies.

Hence Sir Leon Brittan's recent timely warning that distancing the UK from the preparations for a single currency risks wholesale rejection of British arguments at the technical level, thereby disadvantaging London in the battle for world business and potentially undermining the UK's position should there be a positive vote in favour of monetary union in future years.

Michael Cassidy is chairman of the policy & resources committee of the Corporation of London.