John Stevens is a former member of the European Parliament.
“England’s danger is Ireland’s opportunity” is an old Irish nationalist nostrum. Some see it revived in the pressure which Dublin has exerted upon London over the border in the Brexit negotiations. A few even fear that the unification of Ireland is being pressed, in time for the centenary of partition.
Yet the same parties readily rejoice that “Europe’s danger is Britain’s opportunity”: most recently in the new populist Italian government’s supposed threat to the Eurozone, which they see as allowing London to exert pressure upon Brussels for a better Brexit deal. A few even hope the collapse of the euro could be pressed, on the twentieth anniversary of its creation.
Ireland might be the character witness in Britain’s divorce from the European Union. The euro, however, is surely the co-respondent. Leavers often proclaim that if only the Union had not embarked upon this dangerous liaison, no separation would have become necessary. But since a single currency must, sooner or later, lead to some form of single state, our opt-out was worthless.
They were right, but not really for that reason. Denmark has demonstrated it is quite possible even to be inside the euro for all practical purposes and still retain one’s own currency. However, Denmark does not live by international financial services as we do. Copenhagen is not the City of London.
The post-Brexit regulation of the City has become the subject of a dangerous controversy between the Treasury and the Bank of England. Superficially at stake is London’s dominant position in the lucrative euro-denominated wholesale business. But behind this lies the dominant position of the City in our entire economy.
London-domiciled euro-denominated wholesale business is so large relative to the total that the collapse of any of its principal institutions could constitute a systemic risk. Such institutions therefore need access to emergency euro-liquidity, the sole source of which is the European Central Bank. As is entirely prudent, it will only provide swap facilities to the Bank of England if all such business is conducted under European regulation. And that only until other centres inside the Eurozone develop the necessary capacity.
Without such facilities, the current scale of London-domiciled euro-denominated business is unsustainable. For those who believe the euro will shortly collapse, this is clearly not a concern. But neither the Treasury nor the Bank anticipate that, even eventually. Both recognise the synergy and scale provided by London’s euro-denominated business is critical for attracting and retaining its dollar and other non-sterling-denominated business. So both recognise that Brexit will entail a significant contraction in the contribution to our economy made by financial services and thus a serious threat to our prosperity.
The Europeans want most euro-denominated wholesale business to be done inside the Eurozone as soon as possible to secure the euro’s status as a global reserve currency. Most dollar-denominated wholesale business is conducted within the Dollarzone. Were the renmimbi to ever rival the dollar, a similar situation would surely prevail. Sooner or later therefore, the City would have had to be in the Eurozone: Brexit pre-empted the inevitable moment of truth.
There is no example in history of a dominant financial centre which has not also been the home of a dominant currency. London’s pre-eminence was built upon sterling’s reserve status as surely as was Venice’s upon that of the ducat, or today New York’s is upon that of the dollar. The creation of the euro offered London the opportunity of being, once again, the home of a global reserve currency.
One reason we rejected that opportunity was because London became the epicentre of an American campaign to undermine the euro and impede its emergence as a rival to the dollar. This was clearly in the interest of the United States. Was it, however, in ours?
Some think the “America First” protectionism of DonaldTrump, leading to a prolonged global recession, poses the greatest risk that the Italian fiscal deficits could prove fatal for the Eurozone. Others believe that a Fortress Europe, (and a Fortress China), might be able to withstand a Fortress United States rather better than a Brexit Britain left clinging to the wreckage of the World Trade Organisation, and that the concomitant American abdication of dollar dominance would favour the euro’s (and the renmimbi’s) global status.
A post-Brexit City could have a prosperous future, as a centre for limited, high quality off-shore wholesale business in the dollar, the renmimbi (when it becomes significant) and, to a lesser degree (for we would have no time-zone advantages), the euro. Hence the Bank of England’s desire to reach regulatory freedom from the EU post-Brexit as rapidly as possible.
But it would not be today’s City. Any dreams of its global dominance would be dead. So too, after a period of progressive, radical, relative reduction in revenues, would be its national dominance of our wealth-creation. This development might be generally beneficial in the long-term, but it will inevitably be very disruptive and damaging in the short-to-medium-term. Hence the Treasury’s desire to have regulatory alignment with the EU post-Brexit for as long as possible.
It follows from all this that for London at least, there is little point our seeking to remain in, or directly return to, the EU, without admitting, and indeed advocating, the prospect of our joining the euro: without eschewing our previous semi-detached status and being a full member on precisely the same basis as, say, Germany or France.
Leavers may be comforted by this truth, for they will conclude there is little chance of the British people becoming favourably disposed towards the euro (or indeed the City): and certainly not before the end of any period during which we remained de facto members of the Union and thus technically capable of reversing direction relatively easily.
Yet there is no example in our history of London’s interest being long ignored. The costs of dismantling our City-dominated economy are daunting. Sustained sterling weakness could shift opinion. The ambition of making London a truly global financial centre again, with all that would imply for Britain’s place in the world, could quickly become more attractive than the apathy of decline, however proudly sovereign.
And Europe’s Italian danger might really be Britain’s opportunity, since it demonstrates we could still play the decisive role in determining the future of the euro, and thus of the EU, were we only to find the thirst for power to do so.
Britain has in the past undergone Damascene-style conversions in her politics that have been stepping-stones to greatness. And the Cathedral of the City is dedicated to St Paul.