A war of words between central bankers over the City of London’s relevance after Brexit erupted on Wednesday when Mark Carney warned the rest of Europe that it would lose “crucial” financial services if it prevented European companies from doing business in London.
The Bank of England governor’s defence of the City came just days after Mario Draghi, president of the European Central Bank, said it was Britain that would “first and foremost” feel the pain of Brexit, predicting there would be questions of “sovereignty” over where eurozone financial trades take place.
Such megaphone diplomacy is extremely rare in the world of central banking and highlights the tension of the looming negotiations over Britain’s exit from the EU.
Although Mr Carney did not contradict the words of his eurozone counterpart, he made a pitch to European leaders, warning of economic harm if they sought to freeze the City out of European work.
Classifying London as “the investment banker for Europe”, the governor said that over half of the equity and debt raised by eurozone companies was issued “in the UK, by firms based in the UK, quite often to investors in the UK”.
“These activities are crucial for firms in the European real economy and it’s absolutely in the interests of the EU that there is an orderly transition and that there is continual access to those services,” he said.
His comments on an “orderly transition” acknowledge that officials recognise that London is unlikely to retain the freedom to operate across the EU it currently has, but highlight that he wants to minimise the disruption to the City and European companies seeking finance.
These activities are crucial for firms in the European real economy and it’s absolutely in the interests of the EU that there is an orderly transition and that there is continual access to those services
In an effort to persuade EU negotiators to keep as much activity in London as possible, the governor also stressed that costs would rise if they forced activities to take place within the eurozone, which the EU27 can do in a highly regulated market such as financial services.
The customers of London’s financial services “benefit very importantly from the agglomeration benefits, economies of scale, [and] economies of scope that exist because they are part of the world’s leading financial centre that serves not just Europe but Asia, Africa, the Middle East and the rest of the world”, Mr Carney said.
The governor’s defence of the City came after Mr Draghi highlighted the desire from other parts of Europe to bring parts of the financial system into their territories along with abundant tax payments that go with highly paid financial professionals.
Membership of the single market had helped London-based banks, Mr Draghi said, in generating “sizeable savings in terms of capital and liquidity” because they had much better access to pools of investment across Europe.
“Following the outcome of the British referendum, there will certainly be issues of sovereignty in various parts of our payments framework, infrastructure framework, clearing systems and so on,” he added.
While Britain would lose passporting rights to sell financial services across Europe if it left the single market, European leaders would need to legislate to force clearing and settlement to be based inside the eurozone.
The chancellor of the exchequer, Philip Hammond, has noted that if such business moved from London, it was more likely to go to New York than Paris, but BoE officials are concerned that some countries, including Japan and Canada, already have laws that force many clearing and settlement systems to be located domestically.
The prime minister’s spokesperson said on Wednesday that relations between Theresa May and the governor were “as good as they have ever been”, adding that “what matters most for British business is that we get the best possible outcome in negotiations as we leave the EU”.
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