5 May 2017

Stealing London’s bankers will be harder than Paris thinks


The EU has once again got itself tied up in one of those gloriously French snits concerning economics. Various of the Enarques, politicians and bureaucrats – if there is a meaningful distinction between the three in France – insist that once the UK leaves the EU, euro clearing will have to leave London. Their preference, of course, is for it to take place in Paris instead.

All of which is to insist that markets should accord to what lies inside a clever Frenchman’s head, rather than with the real world. For if eurozone politicians are set on the euro being a world reserve currency, they cannot stop London being a place where euro clearing takes place .

Clearing is the process by which financial trades get settled. It is how it is decided who owes what to whom after all that frantic work on telephones we see on the telly: which trades are real and which were just mistakes after lunch, did you really type that and so on. Making sure the cash moves, the profits and losses go to whoever won that day. So much euro clearing takes place in London because that is where 75 per cent of all derivatives trading happens.

This has put various continental noses out of joint as they see the City making hay with their own currency and thus taking business that should be theirs. They even tried to ban that clearing from London on the grounds that it must happen inside the eurozone. The ECJ beat them back on that. But now, with Brexit, why not try again?

There are estimates of 83,000 jobs being bandied about, a prize for Paris no doubt if they can capture it. Clearing doesn’t require nearly as many people as that. That figure is the number working in the entire market. And the entire market is most unlikely to move.

London’s long-standing success as a financial hub is built on the language we speak, a respected and trusted commercial legal system and a flexibility in law about how a contract may be written. Those things produce the critical mass to create new markets. These are the main reasons why the eurobond market – which started in US dollars don’t forget – grew in London, not Paris or Frankfurt from the 1960s onwards. They are the reasons why Libor is the world benchmark interest rate, why the LME the reference price for non-ferrous metals, and so on.

But, you know, economics should bow to the wishes of the French governing classes. So euro clearing should not be allowed to happen in London. At which point reality comes a-knocking again. There is also the desire that the euro should be an international reserve currency. China, Japan, India perhaps, the growing nations out there, should keep some of their foreign exchange reserves in euros. Trade in other parts of the world should be conducted in euros. In effect, the desire in Paris, Brussels and other eurozone capitals is for the euro become one of the great global currencies, as the pound once was, the dollar most certainly is, and the yuan and the rupee probably will be in time.

But that means that it is necessary to have clearing around the world. There is dollar clearing in London and Hong Kong for example. It’s simply a part and parcel of being a reserve currency. People must be able to trade in it, and settle deals in it, around the clock, which means places in different time zones where that can be done.

Unless there are plans to set up financial centres in New Caledonia and French Guyana that means that euro clearing will have to happen outside the EU anyway in order to gain those time zones. And indeed such clearing already takes place in New York. There isn’t really any way in which it can be said that there can be clearing everywhere except London, is there? Not without using something akin to a Bill of Attainder and the ECJ won’t stand for that.

Markets do what markets want to do. And markets will flow to wherever they want to be. To demand that trading must not take place in London is to fail to learn from King Canute, who proved that even the King had no power over the tides lapping across from France – a lesson for all politicians who would command markets.

Tim Worstall is senior fellow at the Adam Smith Institute