Chatham House: Independent thinking on international affairs

International Affairs

The City and EMU

Malcolm Levitt, November 2012

This article examines four elements of City of London thinking related to Economic and Monetary Union (EMU) and European financial regulation, and includes previously unpublished material.

City opinion on EMU and prospective UK membership has been divided. Sceptics have rightly stressed the risks facing a monetary union of disparate economies without a robust fiscal framework, but naively believed that threats to the City from EMU members could not arise because of the rules of the single market. Enthusiasts wilfully neglected the economic risks but emphasized the regulatory threats to City competitiveness if the UK were outside. The UK regulatory philosophy stressing freedom for cross-border competition and light regulation of financial markets was never accepted by many continental member states, numerous impediments to competition persisted and potentially damaging attempts were made to exclude the City from key financial and legal provisions on the grounds that the UK was not participating in EMU.

Being at the negotiating table averted those threats, but now goodwill has levelled off and the liberal regulatory philosophy is in retreat. Despite reservations about EMU, City institutions made crucial but little-known contributions to the practical implementation of the euro, stressing the scale and nature of the tasks of converting banking IT systems, the logistics of changing notes and coins and the need for legal certainty. They helped to persuade the European Commission to accept the phased introduction of the euro and the legal framework.

Now EMU faces an existential threat and the financial system faces more regulation at EU and UK levels. The position taken by the UK at the December 2011 European Council, ostensibly defending the City but risking marginalization, dismayed many City figures who would be more willing to compromise to preserve access to the single market—but Eurosceptic hedge funds, the least regulated financial sector, retain considerable lobbying power.

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