Philip Geddes :
On 24 October 1986, nearly thirty years ago this week, London traders decided that the old world should end with a bang, not a whimper, as they celebrated the sudden deregulation of financial markets.
At the time no one knew what would happen after Big Bang. In fact it was a hugely successful exercise, to the extent that today London vies with New York for world leadership in financial services. My point is that it was just one event in a long City of London tradition of reacting to change in world financial markets.
In 1933, faced with huge upheaval in global markets, the then Governor of the Bank of England, Montagu Norman, warned that that change could not be resisted – in a speech to London bankers he said “the dogs may bark, but the caravan moves on”.
Today the dogs are doing a lot of barking about the future role of the City of London’s markets. The mayors of Frankfurt and Paris rub their hands with glee at all the thought of all the highly paid financial jobs that will be repatriated from London.
The EU demands that, after Brexit, functions now carried out in London, like euro clearing, be transferred back into the Eurozone so that they can be better regulated. But the EU already has in place agreements on euro clearing with ten countries worldwide, including Singapore and South Korea, on grounds of “equivalence” – i.e. similar regulation. Obviously as a current member of the EU, London already has the status of “equivalence”.
Other London markets will be difficult to move for simple reasons of size. London already handles 80% of the European sovereign debt market – a market that depends heavily on volume and liquidity, both of which London can provide better than most Eurozone financial centres.
It’s worth noting that Matteo Renzi, prime minister of Italy (where the next Eurozone banking crisis is about to erupt), visited London twice during his first few months in office to reassure London-based lenders that his reform programme was on track. London is the de facto financial centre of the Eurozone and a massive support for Europe’s businesses as they compete in world markets.
It’s often the outsider in a confused situation who sees it most clearly. This week it was Jamie Dimon, boss of J P Morgan (the world’s biggest bank by capitalisation). He told the IMF in New York that the Brexit crisis wasn’t about Britain, but “was always about the survival of the Eurozone”.
Former ECB Chief Economist Professor Otmar Issing, a key figure in the construction of the Eurozone, goes even further – quoted recently in the Central Banking journal, he says “the (euro) house of cards will collapse… it will be a case of muddling through, struggling from one crisis to the next… it is difficult to forecast how long this will continue for, but it cannot go on endlessly.”
It would help if more politicians made a point of studying history. In the 1960s, the US government erected a formidable regulatory structure designed to repatriate and then exercise some control over the booming overseas earnings of American corporations. This led directly to the creation of Eurdollar market in London, where US corporates could safely re-invest their overseas earnings beyond the control of the US Treasury.
By the time of Big Bang in 1987 around $300 billion was invested in the London Eurodollar market. Today, the international Eurodollar market is the largest capital market in the world.
But nonetheless, many European politicians dream of transaction taxes and other wheezes whereby EU governments will be able to get their hands on a share of the overseas earnings of European corporations. They seem to have forgotten Einstein’s remark that “insanity is doing the same thing over and over again and expecting different results”.
If London were to be cast in outer darkness by EU politicians, how long would it take for smart London bankers to devise a “euro/euro” market to give safe custody to the profits of Eurozone-based companies?
The most probable consequence of a deliberate political attempt to downgrade London’s position as the financial centre of Europe would be to drive trade to New York, giving Europe even less control. The US government is not that keen on extraterritoriality (unless, of course, it is American claims of extraterritoriality).
The skills of London’s numerous ingenious bankers will be needed if Europe is to halt the ongoing reduction in the EU’s share of global trade and ensure a prosperous future for all in Europe. The lesson of history is that may be fun barking like a dog, but it is better to be part of the caravan as it moves on.
(Philip Geddes spent 10 years as a European Correspondent for the Financial Times’s TV News Service and 15 years as an adviser to various parts of the European Commission).
