Financial Trades

Euro Profits, Pound for Pound

boris johnson oped distortion please source reuters
The United Kingdom isn't part of the euro, but London and its mayor Boris Johnson are big beneficiaries.
  • Why it matters

    Why it matters

    If the euro fails, London’s financial center will lose billions in lost trade.

  • Facts

    Facts

    • London bankers fear that an end of the euro would entail substantial disruptions in financial markets.
    • British banks and international banks headquartered in London have benefited hugely from the euro.
    • Some 1.4 million people work in the financial sector in the City of London.
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    Audio

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Germany isn’t earning particularly good press at the moment. Nobel laureates like Paul Krugman and Joseph Stiglitz, as well as opinion leaders such as Ambrose Evans-Pritchard of the Daily Telegraph and Martin Wolf of the Financial Times are loudly calling for policy changes in Europe.

They argue that Germany, in particular, should finally stop demanding more and more austerity and, instead, live up to its role and assume the costs of the euro rescue.

But what is behind this attack on Germany’s position? It almost seems that those who criticize Germany’s position believe the country to be weakened, economically and politically. This would be the inevitable consequence of the high transfer payments so beloved of these critics, who believe redistributing money could solve the euro’s problems.

The current strength of the German economy is identified as the main source of the problems in Europe’s crisis-ridden countries. But what critics deliberately overlook is that Germany’s recovery is primarily due to exports outside the euro zone.

Little attention is paid to the much more interesting issue: As Europe’s financial center, what is the United Kingdom’s position on the euro? Although London bankers know that the euro cannot function in its current form, they also fear the end of the common currency, which would entail substantial disruptions in financial markets.

Considerable losses of assets are very likely. The end of the euro, or a substantially smaller euro zone, also signifies the end of the integrated capital market. It would result in financial transactions becoming much more expensive once again.

The euro offers a large market and substantial profit opportunities for the financial elite.

These developments would directly affect the City of London, where 1.4 million people work in the financial sector. That’s almost twice as many people as in the entire German automobile industry.

London bankers and politicians have worked very hard to solidify London’s position as the financial capital of Europe, even though the United Kingdom is not a member of the euro – or perhaps precisely because it is not a member of the euro.

British banks, as well as international banks headquartered in London, were indisputably the primary beneficiaries of the euro, and they still are today. They initially profited from the “convergence trade” in 1990, when interest rates increasingly converged in Europe in anticipation of the coming euro introduction.

The ensuing borrowing boom, which began when the euro was introduced and covered large parts of Europe, also created ample opportunities for London banks to make money. This included the aid provided to the Greek government so that it could be admitted to the euro with falsified figures – a truly outstanding feat of consulting.

Even after the euro crisis, business continued to boom. In fact, when the European Central Bank promised to “do everything possible” to save the euro, it reintroduced the possibility of risk-free deals with extremely attractive returns.

And while the euro countries are more and more desperately searching for a solution, bankers and the media in London are not entirely altruistic when they comment on developments. As long as anyone can remember, uncertainty has created opportunities for trade. And the longer the party lasts, the better it is for all financial market players.

This is why we should also see the advice coming from the Anglo-Saxon world in this context. The euro offers a large market and substantial profit opportunities for the financial elite. The desperate attempt to save the euro will likely be good for business in London for years to come, a true gift from the European Central Bank and euro-zone politicians to bankers and speculators.

The best thing, from the London perspective, is that this is a party paid for by others, people who can also be blamed when the unavoidable hangover arrives. Those people are the supposedly stubborn Germans who, as their critics say, know nothing about economics in the first place.

It comes as no surprise that the City is pro the euro while England itself is not part of it. After all, a truly effective trading nation doesn’t have to be a member of the club. As is fitting for outsiders, the British repeatedly stress that they do not wish to make any financial contribution to solving the euro crisis. But profiting from the desperate fight for the euro? No problem.

 

To contact the author: gastautor@handelsblatt.com

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