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 The capital of euro trading prospers outside the euro zone, but
London's dominance of the $5.3 trillion-a-day foreign exchange
market could wane if Britain left the European Union.
While British leaders have long resisted replacing pounds with
euros, traders in the City of London financial center now buy and
sell more than twice as many euros as the whole 19-member euro zone
and more dollars than the United States.
For four decades, London has been the undisputed king of foreign
exchange, but some investors fear that if British voters decide to
leave the EU, the City would eventually lose its top position,
especially in euro trading.
"If the UK left the European Union, London's dominance of foreign
exchange including euro trading would gradually decline and then end
as the flows moved to Asia and other European capitals," U.S.
investor Jim Rogers, who co-founded the Quantum Fund in 1973 with
George Soros, told Reuters.
"London's dominance of the foreign exchange market evolved
historically but evolution will continue in other places if the UK
leaves. It would be foolish to leave the EU, but politicians have
done foolish things since the beginning of time."
Twelve years after Rogers left Quantum in 1980, Soros used the fund
to bet successfully that sterling was overvalued against the
Deutsche Mark, culminating in Britain's biggest financial
humiliation since the sterling crisis of 1976.
On so called 'Black Wednesday', Sept. 16, 1992, Prime Minister John
Major was forced to pull sterling out of the European Exchange Rate
Mechanism (ERM), which had been intended to reduce exchange rate
fluctuations ahead of monetary union.
Fast forward two decades: European efforts to forge an enduring
monetary union are at the center of a debate within the London elite
about post-imperial Britain's place in Europe and whether it might
not be worth striking out alone.
The shadow of the euro falls across Prime Minister David Cameron's
attempt to renegotiate Britain's relationship with Europe, then hold
a referendum on membership by the end of 2017.
'KING OF FOREX'
Sold sedately for centuries at the Royal Exchange opposite the Bank
of England, foreign exchange is now traded at high speed among
mostly foreign banks such as Citi <C.N>, Deutsche Bank <DBKGn.DE>,
Barclays <BARC.L>, JPMorgan <JPM.N> and UBS <UBSG.VX>.
London accounts for 41 percent of global foreign exchange turnover,
more than double the nearest competitor, New York, according to the
Bank for International Settlements. London's closest European
competitors are Switzerland and Paris, which each take about 3
percent of global foreign exchange turnover.
Yet London wasn't always king of forex: The hegemony of the pound
sterling in the British empire meant that before 1914, London played
second fiddle in forex to Paris, Vienna, Berlin and New York.
And London's rise was partly due to good fortune.
As the center for global dollar trading, it benefited from the
greenback's rise. The growth of international banking during the
1950s and 1960s put it in pole position to benefit from the foreign
exchange trading boom when floating exchange rates were adopted in
the early 1970s.
Since UK exchange controls were scrapped in 1979, London has thrived
as a center for everything from foreign exchange and bonds to
derivatives and fund management, making it the largest net exporter
of financial services in the world.
By the end of that decade Britain was top, and its dominance has
strengthened ever since. Though the euro's introduction reduced the
number of currencies traded, London emerged as the global center for
the most traded currency pair, EUR/USD.
"If Britain left the EU, that trade is gone," said one senior
European diplomat, waving his hand. "The first thing Berlin and
Paris would do is to sit down and say: 'How do we bring that
business back?'"
'TREASURE ISLAND'
London offers by far the deepest pool of capital in the time zone
between Asia and the United States, but also a feast for the global
merchant: property rights, a small army of lawyers and accountants,
luxury property and shopping, quality private education and a wider
cultural renaissance unmatched in Europe.
To be sure, London's trading cables and wider pull, combined with
institutional inertia, mean that any shift to the continent after a
so-called "Brexit" would be gradual.
"The wires that make the trading of FX electronic are all in London
and so a quick move from the UK to Europe would require
infrastructure spending," said Robert Savage, the CEO of CC Track
Solutions, a New York-based hedge fund with $100 million under
management.
But over the longer term, he sees foreign exchange trading moving
away from London and Europe if Britain leaves the EU.
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"The volume of business in FX is likely to shift from the EU and UK
to the U.S. and Asia," Savage said. "Big picture, the flow of
capital is the driver of FX markets and the Asian centers are on the
rise."
Britain's allies say leaving the world's biggest trading bloc would
be foolhardy, leaving London's financial powerhouse subject to rules
it would no longer influence and turning it into an insignificant
offshore 'Treasure Island'.
Opponents of the EU say London would thrive outside. They note that
doomsters cried wolf in the 1990s, warning that London would wither
as a financial center if Britain didn't dump sterling and join the
euro. That did not come to pass.
For Eurosceptics, the five-year euro zone debt crisis and Greece's
near bankruptcy are evidence of a flawed monetary union that is
doomed unless it integrates more deeply, a step that would consign
Britain to the sidelines.
"REMORSELESS LOGIC"
Cameron had a front row seat for Black Wednesday as a 25-year-old
adviser to Britain's then finance minister, Norman Lamont. He has
promised to keep Britain out of the euro forever, and few British
voters would countenance dropping sterling.
That leaves Britain firmly outside the increasingly influential
19-nation euro zone core of the broader 28-member EU. Greece's fate
was determined by Germany and France, not Britain, which has refused
to contribute to any fresh bailout.
Cameron is now set on defending the City from what his finance
minister calls the 'remorseless logic' of euro zone integration.
"We, almost alone among the non-euro members, have no commitment to
join the single currency – and no realistic prospect of wanting to
do so," that most powerful minister, George Osborne, told London
financiers last month.
Osborne, who is Cameron's heir apparent, said Britain wants
"fairness between the euro-ins and the euro-outs enshrined, and the
integrity of the single market preserved".
Euro zone rules must not hurt British interests, he said.
The government's worry is that Britain may eventually be one of the
only EU members outside the euro. It can already be outvoted on
regulatory issues by the euro zone if all 19 members vote together
as a bloc, which they rarely do.
The risk was underlined by an attempt by the European Central Bank
to force clearing houses for major euro assets to relocate from
London to the euro zone.
Britain challenged the ECB, and the EU's Luxembourg-based General
Court ruled in March that the central bank did not have the
'competence' to impose such a requirement. Things might look
different if Britain were no longer an EU member.
"LEFT BEHIND"?
Since joining the European Economic Community in 1973, British
leaders have repeatedly underestimated the political will for
European monetary union that led to the birth of the euro on the
stroke of midnight heralding 1999.
When the Berlin Wall fell in 1989, Margaret Thatcher opposed the
French idea that a common currency was the best way to tether a
united Germany to Europe, though she eventually signed Britain up to
the ERM in October 1990.
She was deposed the following month, after her finance minister,
Geoffrey Howe, resigned with a stark warning that Britain risked
being "left behind" on monetary union.
Thatcher's successor, Major, declared "game, set and match for
Britain" after securing the right to opt out of a single currency at
the 1991 Maastricht summit - less than a year before Black
Wednesday.
When Tony Blair won the 1997 election, his finance minister, Gordon
Brown, effectively ruled out euro entry by setting out five economic
tests that had been worked out with his top aide, Ed Balls, in a New
York taxi.
How long Britain can sustain its balancing act of profiting from
euro trading while staying out of the currency may depend on the
outcome of Cameron's referendum.
(Editing by Paul Taylor)
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