Practically everything that matters about the euro happens in London. The City is the undisputed international centre for euro trading. And euro foreign exchange, international bond trading and research are all mostly based in London. So is non-government euro bond and equity issuance.
This is important because a mounting weight of evidence suggests the euro is now the second most widely used global currency. Some 29% of UK banks’ international business (with non-residents) at the end of the first quarter of 2001 was denominated in euros, second only to the mighty dollar.
Issuance of international (foreign currency) bonds in euros at the end of the first quarter had almost caught up with the dollar (37% to 42%).
And an Economist poll of seven international fund managers in the same period found that 30% of bond portfolio investments were in euros, compared with 50% in dollars, 14% in yen and just 3% in sterling.
“The City of London has played a key role in establishing the euro as a major international currency for trading and investment,” says Duncan McKenzie, director of economics at International Financial Services, London (IFSL), a private sector organisation that promotes the UK financial services industry throughout the world.
“Since the euro was launched all the available evidence indicates that London has fully maintained its market share and has consolidated its position as the premier financial centre in Europe,” he adds.
And the Bank of England’s latest survey of Practical Issues Arising from the Euro sees no immediate threat to euro business. The Old Lady argues that most international market firms base their wholesale markets euro activities in London because of the City’s critical mass of skills in financial services and the legal, accounting and other professional advice already here.
The Bank says: “Critical mass is important for international markets because: key staff add more value if they are concentrated in one location close to colleagues, clients and competitors in other market firms; markets themselves are deeper and more liquid; and the depth and quality of support services is greater.”
But the Bank sounds the gentlest of warnings: “London will continue to be internationally competitive only if the environment it provides for financial business remains attractive and consistent with international ‘best practice’.” If Britain votes to stay outside the eurozone, we may yet find Frankfurt becoming a more important euro centre after all.