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.
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