Oh the irony: EU capitals are trying to attract the very institutions that caused some of the worst financial scandals of the last ten years.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In a sign of growing desperation, the City of London Corporation, the enigmatic city within the city that serves as the ultimate bastion of privilege in the UK, is now trying to appeal to brute populist sentiment to defend its position as the world’s most important financial center.
In a memo to the British Treasury, MPs, and financial institutions, the City’s Brexit envoy to the EU, Jeremy Browne, bemoaned that the French are pushing for the most damaging Brexit possible, even if France doesn’t directly benefit. The memo was duly leaked to one of the UK’s most anti-EU newspapers, The Daily Mail:
Browne’s recent meeting at the Banque de France was the worst he had had “anywhere in the EU”. The French, he said, “are crystal clear about their objectives: the weakening of Britain and the ongoing degradation of the City of London” and plotting to “actively disrupt and destroy” the UK’s financial sector when Britain leaves the EU.
France isn’t the only country aggressively trying to poach business from the City of London; so too are Germany, Spain, Luxembourg, the Netherlands and even Italy. But France differs from the rest in one key aspect, says Browne: it “sees Britain and the City of London as adversaries, not partners.” The recent election as president of Emmanuel Macron, a former investment banker at Rothschild & Cie Banque, has merely intensified this dynamic.
Paris has promised to unfurl the red carpet for the City of London’s highest paid bankers by offering low tax rates and bank-friendly legislation, including scrapping a proposed financial transaction tax, while also seeking to grow as a clearing center.
Clearing is a huge business for the City of London. The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day. It’s also home to roughly 90% of US dollar domestic interest-rate swaps. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc.
LCH functions as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. As Bloomberg reports, the role of clearing houses like LCH in global finance has become far more entrenched since the 2008 Financial Crisis and the inexorable expansion of derivatives trading.
For years the French government, together with the European Central Bank, has wanted a piece of the action. Ironically, it was the European Court of Justice (ECJ) — the same court whose jurisdiction the UK government is now determined to elude — that, in 2015, stopped that from happening on the grounds that the ECB cannot discriminate against an EU member. But if the UK leaves the EU, and thus the ECJ’s jurisdiction, that ruling will no longer be applicable.
If the City’s euro-denominated clearing operations are relocated to the continent, there’s a risk that other operations will follow in their wake. That could be a major problem for a country that has grown so dependent on the financial industry. Almost 2.2 million people work in financial and related services such as accounting and law, two-thirds of them outside London. They produce nearly 12% of the UK’s GDP, 11% of its tax take, and a net trade surplus of £72 billion ($104 billion).
One of the glaring ironies of the Brexit debate is the extent to which the UK has benefited from the creation of the euro, despite not being a member. Since the creation of the single currency at the turn of the century, Britain’s share of key financial markets has exploded. London is now home to almost one-half of the entire global interest-rate OTC derivatives market, compared to 35% in 2001. Its share of global forex turnover increased from 33% to 41% between 2001 and 2014. And its share of global hedge fund assets doubled, from 9% to 18%.
A disorderly exit from the EU will at least stall, if not reverse, these trends. Given how much is at stake, it’s no surprise that the City of London Corporation was one of the largest backers of Project Fear, the massive PR campaign aimed at sowing and watering the seeds of dread about the potential consequences of Brexit in the lead-up to last year’s referendum.
So, too, were many of the global banks operating in London’s Square Mile. By having a large base in the City, global financial institutions get the best of both worlds: they get both EU “passporting rights” — that is, the ability to trade across Europe — as well as the ability to engage in activities that would be unimaginable in most other financial jurisdictions, including New York. The banks and other financial institutions would much rather that the status quo remained unchanged, as, too, would the City of London Corporation, Britain’s state-within-a-state. As such, it’s too early to write London off just yet.
But if things have to change, the banks will make sure it’s to their advantage. And France’s government seems determined to lend them a helping hand. “We want Paris to become Europe’s new number one financial hub after Brexit,” French Prime Minister Edouard Philippe said, speaking in English to an audience of financial executives. As Reuters reports, France will have its work cut out trying to convince businesses that these changes are for the long term.
Be that as it may, it is still a sad sight to see the governments of some of Europe’s largest nations bend over backwards to court the attention of the City of London’s biggest patrons — the same institutions that were responsible for many of the worst financial scandals of the last ten years. Rather than seizing this opportunity to stifle the malign role that the City of London plays in the global economy, most European capitals are now determined to emulate it. By Don Quijones.
A surprisingly large number of people still have a strong sense of attachment to physical money, particularly in Europe’s most important economy, Germany. But the IMF has suggestions on how to win the War on Cash. Read… People Not Amused by EU Efforts to “De-Cash” their Lives
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With the EU facing a complete crash in their banking system how would any sane person move their operations there?
Ohhh – bankers are not sane?? Just doing whatever it takes to make money for themselves and their rich bosses??
Yes indeed, so what is the logical outcome, benifiting the banksters allowing to further blunder and rape?
“If the City’s euro-denominated clearing operations are relocated to the continent, there’s a risk that other operations will follow in their wake. That could be a major problem for a country that has grown so dependent on the financial industry. Almost 2.2 million people work in financial and related services such as accounting and law, two-thirds of them outside London. ”
I submit that any country that is reducing its number of bankers, accountants and attorneys is on the right track, should continue on that course and is a country worth doing business with and possibly moving to. But maybe that’s just me …
I agree with that Anonymous. After all, what do bankers actually produce? Farmers grow food. Engineers design products. Assembly line workers make products. Carpenters build homes. OK, I hope I’ve made my point …
You certainly have made your point very clear: that you have absolutely zero understanding of economics and the role that banks play.
I do know that on 31 March 2017, the Office of the Comptroller of the Currency reported that Citigroup held $54.8 TRILLION in notional derivatives. I know that when Congress passed the 2014 CRomnibus Bill on 16 December, the Citigroup lobbyists had part of the Dodd-Frank rule that prevented banks from betting on financial derivatives with federally insured deposits changed.
Now, by holding derivatives inside their depository units, Citigroup benefits from an implicit FDIC guarantee for its counter-parties should those units fail.
I reckon that banks play the role of bribing Congress to get what they want.
Elaborating on the point Dan made nicely sidestepped there.
We all know banking has a purpose ancillary to an economy composed of base activities.
But when banking activities beyond that basic utility become a net burden on society generally, and their only justification for existence is a load of taxes which probably only balance their drag on society to begin with, we’re just looking at cronyism and self interest sustaining it’s existence.
I have no doubt we’d be better with good ancillary banking only.
The casino and the impacts of both good bets (taxes and bonuses) and bad bets (society foots the bill) can go to EU Euro countries as far as I care.
+1. Getting rid of a parasitical financial industry will be the best thing to ever happen to Britain. Now if we can only get Goldman Sachs to relocate to Paris…
That would even be a positive outcome for the uk. Yeah it is possible that mr. Stock.broker has to get a real job and wash his hands at 5 pm, but it won’t kill him.
The problem for Britain is that any other job will not cream off the income that those financial services do, and that without them Britain will be, overall, a much poorer country (perhaps 20% poorer). And, it will have trouble buying food, fertilizer, lubricants, and a whole lot of other critical inputs without the money generated by The City.
Not saying The City is good, or an honest or noble way to earn one’s way in the world. But to gainsay the devastating loss it will be to the economy in the short and middle term is disingenuous and cavalier. Real people, and not just bankers, are going to be hurt, and badly.
The de-financialization of the British economy will improve the lives of average citizens. Without a bunch of grubbers skimming the fruits of the real economy, growth will come from people producing things other than innovative financial products.
What can Britain produce with its own inputs that others can’t buy from someone else for equal or lesser cost? How, in a world where industrial capacity has already overshot any potential market, are British products to find buyers? What is Britain going to export in order to import the food and raw materials it would need to survive? And where are the capital and skills going to come from to make all these products? Britain became a financial service economy more than a century ago when it fell behind the USA and Germany industrially in the 1890s. Without massive emigration an small island nation of perhaps 60 millions simply can’t maintain a First World standard of living from a standing start.
The idea that without banking all of a sudden the UK will grow and start “producing things” seems very naïve.
More likely it will just have a much smaller economy– smaller tax revenues, less social services, etc.
James levy, the financialization of the economy, that is the city, is precisely what has made uks economy so uncompetitive. Bubbles, rent extraction and financialization add to the cost of doing business and prices british manufacturing out pf the market.
The death of the city is sine qua non condition for the real economy to revive.
F*ck junk economics and its doublespeak pretending that wealth transfers equal to wealth creation.
The key is that the city has a big trade surplus. You might debate the effect of trickle down economics on the common man, but in the choice between being more like Germany or more like Greece, I know what I would choose.
With regard to FIRE industries that only depends on the domestic market, I would say good riddance.
Good point James Levy, but if it turns out to be true that the country becomes 20% poorer, you also have to consider that rents etc. have gone up 100’s of % because of the bankers. True?
Yes, but so have the earnings of estate agents, restaurant owners, shop keepers, and the many people who aren’t bankers but happened to own a house in the Southeast. Taxing the rich with their high marginal propensity to save is one thing. It gets the money circulating at home. Taking their jobs and moving them overseas is something entirely different. That is a net impoverishment of the country, as anyone who visits Cleveland, Youngstown, Buffalo, Erie, or Gary can tell you.
This isn’t true. Any non-neoliberal government could pay and, therefore,deal with any issues that arise. But, at present, the UK does not have such a government. I’m not saying it will be easy, but getting rid of what are essentially parasites could be beneficial to the country.
Excessive financialization of an economy has been found in several studies to be a net negative to economic growth. This doesn’t include the fact that whatever wealth London’s finance industry produced for the UK was more than wiped out by the massive bailouts the UK taxpayer had to undertake during the financial crisis.
Indeed, taking into account the periodic financial crises that require massive public bailouts every decade or so, the profit / loss of the global financial industry has been a large net loss to the public over the past 50 years (and perhaps longer).
The only caveat with London is that much of the parasitical finance industry there feeds off the rest of Europe and the world, so to the extent that the blood being sucked isn’t British, it may be less of a drag on its host country than say New York is to the U.S. But it’s still a drag. Drastically shrinking it has a good chance of improving the lot of the average Brit.
I say, if France wants the privilege of putting up the hundreds of billions of euros that will be needed to bail out the next financial crisis, Britain should happily give it to them.
London pays almost a third of UK taxes
…which – if true – only serves to demonstrate how skewed the UK’s economy is towards casino finance, and how little it now manufactures and exports.
The takers have replaced the makers, and the former have saturated the country with their debt and usurious lending. The death knell for a society.
And of course this neat (regularly regurgitated) little tax statistic sidesteps the enormous ongoing cost to society of quantative easing and the other social capital that has been necessary for the past 9 years in order to support the banks’ malinvestment and malfeasance.
Corporate socialism for the wealthy.
But we don’t talk about that. do we!? Too much of an inconvenient truth.
As long as it only hurts the rich, why not?
Actually I don’t have any problems with “the rich” who have gotten there through honest methods It’s the parasitical group that I truly despise i.e. Bankers, brokers ,lawyers ,politicians and all the other miscellaneous grifters but that’s just me
Is it still soft Brexit or hard Brexit? Whatever the case maybe, it is better to be independent not taking orders from tyrant troika from Brussels.
Compared to the rest of the UK, London is another country in itself. In 2008 the UK as a whole had to subsidise and rescue massively the Banking Sector and if the European Countries want to take an element of that please do so.
Sometimes a country needs a kick up the backside to start doing more for itself, i.e producing more of what it requires rather than importing all the time. Hopefully Brexit will do just that.
In the short term yes the UK will take a hit, in the long term it will benefit.
As Jim C put what’s come out over the last year is how undemocratic the EU has become.
City of London is a clearing house for funds moving into tax haven British dependencies. A lot harder to do from the inside of the EU which tends to frown upon that sort of thing……
Gibraltar?
Gibraltar Soon to be Spanish territory? Or perhaps a Chinese/Russian naval base
Meanwhile, Draghi became the latest central bank fraudster to drop all pretense at hawkishness and confirm that the unlimited flow of financial crack cocaine to the ECB-BoE-BoJ-Federal Reserve Ponzi markets and asset bubbles will continue apace. Because when the printing-press “stimulus” and ultra-cheap credit stops, it’s game over these pump & dump markets.
Which financial institution should cast the first stone?
Goldie? Deutsche? Citi? The Italian Banks?
Aren’t the World Bank and (shudder) the IMF more evil with the former ensnaring unsuspecting third world countries into building dams and the enforcing austerity all the time?
Apart from being bigger, because money doesn’t get stolen there very often, why pick on London?
As for Paris becoming a world hub of finance, the culture won’t work. No doubt the speech extolling Paris was in English, but the closest thing we have to a universal language is English. Spanish is more widely spoken than French. Throughout Asia, India, South America, etc. English language schools are a big business.
But it’s not just the language. The presence of so many foreign car companies in the UK but not in France is a reflection of the former’s more welcoming culture.
Weak labor unions, labor laws and enviromental rules, that are the main reasons for etablishing a factory in the UK
On the bright side, London housing should become more affordable for locals as bankers flee to the Continent, like rats on a sinking ship.
On basis of the latest brexit negotiations, it seems like the Brits have lost their marbles and seem to be completely clueless regarding brexit. Interesting times. A fun fact, a possible brexit agreement has to be accepted by all EU27 governments in addition to the British parliament. And brexit means that London can not any longer be the seat for the European banking authority, neither the seat for the European medical authority nor be the main marketplace for trade in euro-denominated deriatives and other stuff. All of this mean that the UK will loose a lot of business and highly skilled and paid personel. Interesting times indeed, especially if Britan will be reducing the number of EU citizens allowed. Where will the UK get the needed skilled labor and experts ? India maybe ;)
Let me sum it up in a nutshell via Monty Python:
Be sure and watch Part 2! https://www.youtube.com/watch?v=aSO9OFJNMBA
https://en.wikipedia.org/wiki/The_Crimson_Permanent_Assurance
Parasites Lost – TBTF is a huge burden on global mankind, as a wealth transfer machine and this has resulted in corrupting everything.
It’s not a human trait for a species reproducing via a cloud of spores.
http://www.imsdb.com/transcripts/Futurama-Parasites-Lost.html
My main warning to the French that are courting the banks of London: Don’t be so sure that you want your wish to be granted.
You may like the numbers up front, but you will become slaves to the bankers in ways you never thought of in the future. And all you have to do is look at Project Fear. If a panic ever hits the finance “industry” again, you will not want to be at the center. Right now, Europe is facing problems from importing people from foreign lands. And France wants to import people from London to rebuild its tax base.
They should keep in mind that many of the rules of finance were not developed by them, and that the bankers will have more control over their national direction than they do now.
Divide and rule …
The Romans invaded Brtain for our raw materials and minerals. Britain evolved as a teading natiion. We import, assemble and add value, and export. Were it not for our language, English, our education system, our former Empire and the modern Commonwealth which is the 5th largest economy in the world, our inventivess, our banking and transparent legal system, and our propensity for being a property-oriented democratic monarchy, we should not have kept our place on the world stage.
Post Brexit we shall continue to manage as best we can.
In 1973 we joined the Common Market as the EU was. We did not join what rhe EU has since become and wants to be.
As I understand it you kept the Pound Sterling as your official currency instead of going to the Euro.
I have always thought that was a wise choice.