What If Britain Snubs Monetary Union?

The City might be even better off, say some financiers

As more and more Continental banks put down roots in London, the City's position as Europe's financial hub might seem assured. But a bizarre debate has broken out among industry insiders. Some insist that if Britain refuses to join the European Monetary Union (EMU), scheduled to start in 1999, London's financial preeminence could be undermined. Others say the only way to stay on top is to stay out.

The pro-joiners fear that if Britain remains aloof, the French and Germans will gang up on them, using features of EMU to promote Paris and Frankfurt at London's expense. For example, European authorities might restrict London-based institutions' access to the clearing system they are designing or might ban them from primary dealing in the new, Euro-denominated bonds. Britain's opting out, warned prominent City economist Graham Bishop in a recent parliamentary committee report, could "risk covert discrimination, upset inward investment, and increase Britain's political marginalization in Europe."

That's one view. Others maintain that with EMU an iffy proposition, such worries are paranoia. But the financial industry accounts for 20% of Britain's economy. And those lobbying for membership believe that their counterparts on the Continent are plotting to move in on their turf.

Indeed, Continental officials and bankers mutter that London shouldn't be allowed to cream off fat commissions dealing in the new financial instruments without paying the price of regulation by European authorities. "We have to be asking if it is to our benefit to have a market in Euros" outside the regulation of EMU members, says a senior French official.

There's probably an element of gamesmanship here. Since the success of EMU remains far from guaranteed, the French and Germans are worried about the single currency's prospects. British participation would make it a sounder bet--by bringing one of the world's great financial markets under the EMU umbrella. So the Europeans are pressuring London institutions with hints of restrictions, hoping that they in turn will lean on the British government. Some hardheaded financial practitioners seem to be getting the message. If Britain opts out of EMU, "Paris and Frankfurt will be dominant in Euro futures contracts," says Graham Newall, chief executive of BZW Futures.

AMPLE FIREPOWER. Yet so far, efforts by Paris and Frankfurt to boost themselves as financial centers have met with only modest success. German banks have been transferring trading operations to London, where regulation is less onerous and where highly skilled financial professionals are more abundant. These banks "calculate that the competitive advantage of London will not be negated by the arrival of EMU, whether or not the U.K. is immediately a member," Howard Davies, deputy governor of the Bank of England, said recently.

In fact, some London bankers believe that even if EMU does happen, signing on would be a mistake. Sir John Craven, chairman of Deutsche Morgan Grenfell, warns that going into EMU, with all its likely bureaucratic and regulatory costs, would put the City at "a competitive disadvantage with our real competitors around the world, which are not on the Continent but in New York, Chicago, Hong Kong, Singapore, and so forth." Craven made clear that he was speaking for himself and not for his bank.

The isolationists may well be right. The City of London has a lot of firepower on its own. But with pressure mounting on Britain's politicians, London's financiers still might get burned.

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