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Analysis
Europe wants its money back

Europe wants its money back

Questions over London's euro role

by Denis MacShane in London

Tue 12 Jul 2016

With Theresa May due to be installed tomorrow as British prime minister, echoes of a favourite phrase – ‘I want my money back’ – of Margaret Thatcher, her famous 1980s forerunner, are echoing around European capitals. Voices in Frankfurt, Paris and Brussels are calling for the euro to be returned from London to the European mainland for trading, derivatives and clearing in the wake of the UK decision to leave the European Union.

Christian Noyer, governor of the Banque de France until last autumn, has been spelling out the message for several months. In an interview in L’Opinion, the French liberal pro-business daily paper, the former governor said, ‘Brexit is the occasion for us to regain control of our money. It is seriously abnormal that an important part of euro-based transactions takes place offshore beyond the control of the European Central Bank and the euro area market authorities. It is vital to ensure that the core of transactions involving our currency takes place under our control. Between one third and half of all euro-related trades take place in London. This would be inconceivable for the dollar.’

The annual volume of euro-related trades and clearing carried out in London is estimated at $120tn. London within the EU has become the Wall Street of Europe. But can it maintain this role post-Brexit?

The UK Treasury, with the backing of the European Court of Justice, saw off a challenge by Brussels and the ECB to move euro trades to the euro area in March 2015.

ECJ judges could reasonably argue that, while the UK was not in the euro area, it was a faithful member of the single market and abided by EU rules and directives – many of which the UK had helped fashion since the 1980s.

That position is now changing. May and her aides have made clear they are not interested in compromise along the lines of European Economic Area membership such as Norway's. This would mean accepting full freedom of movement, as well as all EU laws and directives, and making financial contributions to Brussels.

Angela Merkel, the German chancellor, has stressed that London will not be allowed to ‘cherry-pick’ and that the UK vote to leave Europe is ‘irreversible’.

For Noyer, if Britain rejects full freedom of movement, ‘everything is rejected, including access to the single market. Investment and savings products currently devised in London cannot be sold in the rest of Europe. They will have to be drawn up on the continent, which means transferring this activity inside the EU.’

London finance houses would become ‘unregulated financial sector entities’, to use the jargon. Professional services provider PwC estimates that 100,000 jobs in the City of London may be relocated within the EU following Brexit.

Noyer has produced a report on the consequences for the Isle de France region under its dynamic president, Valérie Pecresse, a former minister under President Nicolas Sarkozy. Manuel Valls, the French prime minister, has promised tax breaks and free international school places for City professionals relocating to Paris. Other EU capitals are making bids for euro trades too.

George Osborne, the UK chancellor of the exchequer, is touring the world to persuade financial centres that nothing will change. City public relations people proclaim all is well and that the City is still the world’s financial capital. Decisions on euro trading and clearing will provide an important indication of whether that remains the case.

Denis MacShane is a former UK Minister of Europe, a Senior Advisor at Avisa Partners, and a member of the OMFIF Advisory Board. He is the author of Brexit: How Britain Will Leave Europe, published by I. B. Tauris in January 2015.

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