The European leaders start an offence against the dominant position of London City in the trade of the Euro.
Written by Nikolay Nikolaev; Originally appeared at A-specto, translated by Valentina Tzoneva exclusively for SouthFront
Thomas Shaffer, the Financial Minister of Hessen – a federal province in Germany with Frankfurt-on-Main as its economic center – announced an initiative for a number of talks with the bankers of London regarding making Frankfurt their new home after the British referendum for leaving the European Union (EU). ”We are campaigning in favor of Hessen as the financial centre, Frankfurt, has a lot to offer,” Shaffer said during a meeting where numerous British flags were displayed. The move of the federal government is not unusual – many German politicians have often publically presented Frankfurt as an alternative centre to London. In the battle for attracting capital between the European capitals, detailed studies and prognosis have been made for a long time now. The Chairman of the Association of the German Banks (BDB), Michael Kemer, recently spoke in a negative tone regarding the offer of the Financial Minister Schoible for the introduction of tax on financial transactions due to fear of outflow of capital in the critical times after Brexit. The German bank federation started discussions on a package of reforms including cancellation of some regulations and liberalisation that should help to attract new companies.
France also got involved in the battle of the capitals. In an interview for a French business newspaper, President Hollande announced that France must adapt its regulations, including tax regulations, in order to make Paris a more attractive destination for investors. Earlier, the President of Paris Europlace, a group stimulating the French finance, met Finance Minister, Michel Sapen, to discuss methods for increasing the ability of the French capital to attract bankers from the City of London. The Director of the Paris Stock Exchange hoped to enforce the position of the stock exchange by attracting international firms willing to develop business in Europe. He said: ”We want Paris to be the leader in the market for financing business.”
In an attempt to avoid the running out of capital after Brexit, London hinted that it could reduce its corporate tax to a level of 15%. Along with this, the government of Her Majesty is prepareing measures for stimulating the economy and to fight the withdrawal of investors. The big battle between the Island and the motors of the European Union – France and Germany – however, is taking place only on a diplomatic front in the process of negotiations regarding Great Britain’s exit, and for now, it is not yet a full-scale financial war. The critical point of conflict of interests is related to the dominant position of London City in the trade of the Euro.
President Hollande recently spoke sharply, saying that London must give up its role in operations with the Euro after leaving the EU. The question about whether the Euro-clearing houses will remain in the British capital will be the most contested in the negotiations. The British are zealously protecting the acquisition and they recently won a case against the European Central Bank. The reason for this was Paris and Frankfurt’s attempt to overtake the trade of huge capital, with demands that the clearing houses must be based in the Euro-zone in case more than 5% of the market of financial products denominated in Euros passes through the houses – a move directed completely against London. The choice of resources demonstrates the importance which the Kingdom allocates to the control of the financial markets, for which the recent British Euro-Commissioner was responsible – financial stability, financial services and capital markets.
French and Germans also hold a strong card in the negotiations. Leaving the European Union has left a question hanging in the air for London regarding access of financial institutions to the common market. The concerns of the banks of the city are related to the so-called ‘Union passport’. According to European legislature, a bank which is registered in one of the member states can offer its services in all the states of the Union. This system allows even the biggest banks to hold small offices in other European capitals and maintain their major centre in London. Brexit might force many suppliers of financial services to move out of the British capital, as they will need a place for business in the Euro-zone in order to follow the rules guaranteed by the passport.
An interesting detail about the behind-the-scenes negotiations between the European capitals, was the intention to merge the major fund stock exchanges in Great Britain and Germany, which was announced in February. The merger of the London Stock Exchange and Deutsche Bourse, which would have had a market value of about US$28 billion, is a serious competitor of the stock exchange leaders from the USA. The agreement anticipates that the London Stock Exchange to become the owner of 45.6% of the group, while the Deutsche Bourse to control 54.4%. The head office of the united community must remain in London. It remains unknown what agreements and mutual compromises regarding the redistribution of financial markets between Berlin and London are related to this move, but the statement that the two banks continue the process of merging regardless of Brexit, is a fact.
The hopes of Frankfurt and Paris to replace London as a financial centre might turn empty. At first glance, the biggest transnational bank corporations do not have a reason to rush before the negotiations for exiting of Great Britain from the EU are concluded and the question for the common market passport are cleared. The CEO of JP Morgan, Jaimie Damon, recently warned about the removal of 4 000 employees from the territory of the Island which, however, would cost the American bank £200 million. Goldman Sacks is one of the 20 biggest financial institutions, which is building new offices for its centres in London. In this number are included the French giant, Societe Generale, Bloomberg LP and Royal Bank of Canada, announcing that they will remain in London.
At first glance, Frankfurt offers a number of strategic advantages supportive of its turn into a financial capital of the European Union. The city is an important communication and information centre with a convenient geographic position. Frankfurt is a massive railway and auto transport junction with well-developed, strong digital communication. The airport on its own is one of the biggest air-transport centres in Europe and the world, and the German legislature guarantees security. The relocation of the head office of the European Central Bank to the city and a number of regulatory organs and financial institutions together with the powerful support of the Brussels administration, is another important advantage. After the reforms related to improving the quality of services, Frankfurt overtook London in terms of volume of electronic trade and the market of derivatives and became the leading centre in Europe in these areas.
The analysis of historic dynamics shows that London does not intend to give up first place as the biggest exporter of financial services in the world, the home of 250 international banks generating 10% of the British GDP and 12% of tax income of the Ministry of Finance. The major regional economic powers in the world maintain the view of London City as a financial conduit between Europe, America and Asia. The British capital has established its leading position as the world’s financial centre for 200 years thanks to factors such as the English language, the heart of the British Empire and due to the financial liberalisation of the 80s of the last century. In this period, the English gold standard was a cornerstone in the world’s monetary system and the investment in British pounds in foreign countries dominated world trade and finance before World War I.
Primarily, London traded physical goods, but from the middle of the 19th century, the major object of activity had been redirected to trade of capital. Italian and Jewish financial families, the French Huguenots, and at the end of the 20th century, American and Japanese bankers arrived in London due to the conditions offered by the British Empire. The British capital at the time was the only unlimited and free market of gold: all demands for payment in gold were freely convertible. In this way, the banks of the Island concentrated a great part of their deposits. The industrial and trade enterprises, the shipping industry, railway transport, bank activities, income from loans and colonial payments were the channels through which capital flowed into London.
A period of crisis took place only in the 50s of the last century, related to a huge leak of capital from the English capital. To relieve the runout of capital, in 1957 the government of the United Kingdom introduced control over the currency market. The participants of money exchange, who were using the British pound for financing their international trade, had to use the dollar. The increased demand for dollars in London led to the increase in its value. The adaptation of the British financial system to the leading position of the dollar again placed them in an excellent position. From the 60s, London became the centre for the international exchange of European currencies as 75% to 80% of it was exchanged in dollars. In the beginning of this century, London held 70% of the world’s obligations; 32% of the turnover of the world’s currency market (this is more than New York, Frankfurt and Tokyo put together), 36% of the trade with derivatives; about 50% of trade in shares of international companies; 20% of the market for bank credit; and about 90% of trade in base metals. In each of these parameters, London takes first place.
Today, we are witnessing a fast change in the world’s financial order related to the rise of East Asia and the Chinese Yuan. A number of indicators point to the strategic orientation of the British financial interests in this direction and the considerable strategic advantages of London against its European competitors. Regardless of the stormy times after Brexit and the silent war with Germany and France, we can conclude that on the horizon, there is no sign for the near-replacement of the financial centre of London to Paris or Frankfurt.
Wall Street will decide.
Don’t bet on that. Wall Street and a major portion of the European banking establishment are on opposite ends of a quiet feud about global policies.