Who gives a forex for the euro when we've got London bankers?

When Eddie George voiced his well-known doubts on Emu at the IMF meeting in Hong Kong in September, the governor of the Bank of England was speaking from a position of strength. It is one of the great folk tales of our day that the likely British decision to not go rushing into Emu will somehow prove harmful to the City of London and its banking industry.

More rationale financial minds have questioned, as Bank of Scotland’s governor Sir Bruce Pattullo puts it, the ability “of one single economic policy to satisfy the economic aspirations, cultures and national pride of 370 million different people”. Pattullo highlights that the timing and, to some extent, the underlying motivation of these moves is driven by a more private political agenda.

A glance at the facts reinforces the reality that not only is London’s position as Europe’s banking centre secure, it is virtually unassailable.

The more than 550 foreign banks based in Britain account for more than half of the country’s #2 trillion-plus banking assets. There is no sane argument for these banks to relocate their operations after Emu – if anything, the trend is to reinforce their presence in London, knowing full well that the government has no plans to participate in monetary union, at least not in the first round.

“The US houses seem to believe London will not be disadvantaged (by Emu) and that they can operate in one large centre from here,” says Matthew Czepliewicz, analyst at Salomon Brothers. “London is generally a more efficient market with fewer restrictions than on the Continent.” In countries such as Germany, for instance, the restrictions have been proverbial, from a minimum number of square feet of workspace per bank employee to rigid limits on weekend working hours.

Roger Brown, director of economics at the British Bankers’ Association claims that London’s more flexible labour market and the ability to increase and decrease staff as factors will help it retain its financial leadership.

It is instructive to recall that City firms slashed some 50,000 jobs in the lean years immediately after the 1987 Crash, while total employment in banking in Britain fell by 93,000 to 357,000 between 1990 and 1996 – and with barely a day lost to industrial action. The mere rumour of job cuts at Paribas a few years ago was enough to send irate staff pouring into the streets.

“London’s strength should endure whether or not Britain joins Emu,” says Brown. “Trading activity takes place in London in currencies other than sterling, so the euro not being our currency is not a clinching factor.

The reasons that make London Europe’s biggest financial centre will still be here.”

Indeed, it is London’s sheer weight in global financial activity that mitigates in its favour: according to a report by lobbyist British Invisibles, London originates 18% of the world’s yearly $8.29 trillion in cross-border international bank lending, it is the second biggest private banking centre in the EU after Luxembourg, and it accounts for 36% of the world’s foreign exchange dealing. It is also a highly de-regulated and thus profitable place to do business. Britain was the first of the (then) Common Market countries to do away with exchange controls, when the Conservative government took power in 1979. A year later the Bank of England’s minimum liquidity ratios and supplementary special deposits were abolished. Within this framework, British banks last year were able to report an average 26% return on equity – German banks were just under the global average with 14.4%, while France and Italy were well below at around 9%.

The there’s the English language, which Britain shares with the US, the world’s largest banking market. English makes London an attractive place to live and work: Japanese bankers as a rule do not speak German or French.

“It is the language, the time zone and it is also the support services, such as the accountancy profession and the dealing environment,” says the BBA’s Brown. The clarity and logic of English law is likely to remain the preferred system of the European capital markets, given the time involved in dismantling post-Emu legal and regulatory barriers.

“There is a belief that under a single market banking spreads and margins will come down from competitive pressure within Europe,” says Salomon’s Czepliewicz. “Whether the UK banks would be partly insulated from that is not clear, but I certainly don’t think they would be in a worse position on spreads and margins from remaining outside.”

Analyst Hugh Pye of Robert Fleming Securities agrees the UK retail banking should not suffer any adverse effects from remaining outside Emu. “There is no threat to domestic banking, which is what provides most of the banks’ profits” he says. “People will all carry on banking at Midland or NatWest, although one cannot discount the possibility of management changes at the top.” Provided the UK banks have reasonable access to funding in euros they should not be disadvantaged in the corporate market.

But there is a question mark over whether they will have full access, and there are certain parties on the Continent who might want to restrict it. The “certain parties”, as one banker termed them, is a euphemism for Germany. For make no mistake, Bonn is determined to drag Emu into being and what it is saying to the larger countries is: climb aboard and you will become grown-ups like us, while the message to the smaller aspirants is: surrender in advance.

“UK non-participation could be used as an excuse by Emu-area countries to take discriminatory action against the City, wither as a trading location or as a base for cross-border activity,” says the BBA report. “On the other hand, constructing barriers to secondary market activity may be difficult and could backfire spurring a Euro-Euro market in the UK.” It would not be at all difficult to envisage the UK banks, drawing on their historical experience as a cartel, closing ranks to oppose a frontal attack from Europe.

Jules Stewart is a freelance journalist.