On the face of it, Wolfgang Schaeuble, Germany’s finance minister, and Christian Noyer, a former governor of the Banque de France, disagree about the future of the City of London after Brexit. In a recent speech, Schaeuble said: “it’s in our interests to have a strong financial centre in London”. Writing in the Financial Times, Noyer said: “Maintaining the hyper-concentration of EU financial activity in London would be a permanent threat to our financial stability.”
The difference is not as great as it appears, however. Schaeuble and Noyer share an interest in luring jobs away from the City. Goldman Sachs has confirmed that hundreds of its jobs will move to Frankfurt and Paris. A hard Brexit could well mean the City losing thousands of jobs to continental rivals.
More importantly, Noyer’s concern was a fundamental point about the stability of the European Economic Area and within it, the Eurozone. He wrote: “No other major sovereign or monetary zone would allow itself to rely as predominantly on an offshore centre.” He went on to claim that the Eurozone crisis of 2011 partly stemmed from “clearing activities in London and decisions taken there”.
This is the crux of the issue. Schaeuble’s argument seems to support Mark Carney, governor of the Bank of England, who has claimed that the EU will continue to need London’s deep and liquid markets. But Noyer is saying that the Eurozone could not allow clearing in euro-denominated instruments to continue in London should the UK find itself outside the jurisdiction of the European Court of Justice and the single market – which is the government’s policy.
The clearing business is huge, running into trillions. According to the FT, London-headquartered LCH, the world’s largest interest rate swaps clearer, processed a notional $577 trillion by November 2016, of which $150 trillion was in euro-denominated trades.
Euro-denominated trading is mostly in derivatives – financial instruments based on other instruments to manage currency, interest rate and other risks. Unregulated trading in derivatives was a major cause of the 2008 financial crisis. Regulators have tried to get a grip on the market since then, but in Noyer’s view London did not do enough in 2011.
Eurozone financial stability is so crucial to Eurozone policy makers and regulators that it is viewed by many as a matter of sovereignty. For instance, at times of market turmoil the clearing houses that handle euro-denominated trades – most of them based in London – could need large Euro injections from the European Central Bank. Gerard Rameix, chairman of France’s AMF markets watchdog, told a conference yesterday the clearing of euro-denominated trades plays “a systemic role… [and] should come under the supervision of EU regulators.”
So, just as Brexiters claim they are restoring the UK’s sovereignty, elsewhere in the EU many hold the view that London cannot be outside the EU while exerting possibly decisive influence over its financial stability.
Losing the euro-denominated clearing business would be a blow to London – a study by E&Y quoted by the FT last year put the number of London jobs that would be lost if this business moved abroad at 83,000. Losses of revenue and jobs aside, derivatives in one of the world’s reserve currencies are a keystone of the City’s’ financial architecture. The depth, liquidity and profitability of markets other than in the euro would be affected, weakening London’s global position.
But it would not be the end of the City. In this sense, Schaeuble is right. Business that is best done in other European centres may well move there, but a lot of international business is likely to stay in London. As Rameix put it: ”There is not a shadow of a doubt that the City of London will remain a key player in financial services.’
How to achieve this balance between the sovereignty of the Eurozone and the continuing advantages for Europe of London as a global financial centre will be critical in the Brexit negotiations.
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Edited by Geert Linnebank
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