To:mikesloan who wrote (528) From: mikesloan Tuesday, Jul 15, 1997 1:37 AM Respond to of 82910
Additional signs of the new world order? Don't mention the euro as Germany prepares for E-Day to dawn in City
The Times July 15/97
For bankers, an affirmative answer to the question Sprechen Sie Deutsch could become vital to their careers. Speaking German may soon be essential for working in the City.
For years, the growing number of Germans in the City have been subjected to the time-honoured taunt of "don't mention ze war". Their employers had either bought old British houses such as Kleinwort Benson or established new head offices in London. During induction weeks, the German bankers were told to humour the Brits and their hang-ups. The jibes were met with well-practised smiles and the peace was kept in City wine bars.
But the balance of power seems to be dipping the other way. The war that currently dominates wine bar talk is the war between Frankfurt and London as financial centres. And this time, the Germans could be on the winning side.
Frankfurt has ambitions to match London's position as the best place in Europe to take large amounts of money. Of course, this is not the first time they have said this. So far, the usual response from the British has been a belly laugh. No more. Now, it is British bankers who smile politely with a hint of embarrassment and try to recall a few German O-level phrases. What has happened?
Frankfurt has assembled an impressive set of levers to propel itself towards pole position. And it has recruited the Paris exchanges as partners. For the first time in its history, the City is facing a serious threat.
Germany began its assault on London's market position with a total reform of the way the equity and futures markets operate. In 1994, insider dealing was made illegal to counter accusations that the German markets could not be trusted because of the lack of effective supervisory control.
Reserve requirements imposed on all banks by the Bundesbank were also gradually lifted to improve Frankfurt's attractiveness. And German companies were encouraged to break with tradition and seek listings rather than be owned privately by large institutions.
The Frankfurt stock index, the Dax, has doubled in little more than two years, closing at an all-time high yesterday. Last year's flotation of Deutsche Telekom was Europe's biggest.
But getting the local trading environment right was never going to be enough to challenge London's position. Frankfurt's trump card is the single European currency, which is only about 350 working days away.
It is on the euro that Germany is pinning its hopes. What impact the single currency - and Britain's absence from it - could have on the flows of money is particularly obvious to businessmen operating and banking on both sides of the Channel. Bernd Pischetsrieder, the chief executive of BMW, which owns Rover, recently said: "If Britain should stay out for a long time at the beginning [of Emu] the financial capital of Europe will be Frankfurt, not London."
European companies such as BMW or Unilever would be likely to see Frankfurt as the best place to see their shares listed after a re-denomination of the shares into euros. Not only would the need for currency conversions be greatly reduced but Frankfurt would also be the home of the European Central Bank, which will set euro interest rates.
Furthermore, if Britain stayed out of Emu, British-based banks run the risk of not being admitted fully to Target, the new pan-European payments system. The Bundesbank and the Bank of England have for months been locked in talks over the system.
Under the thin disguise of academic debate between central bankers, the two institutions have been battling for their respective interests. Frankfurt is trying to keep non-Emu members out of Target by arguing that it needs to retain the fullest possible control. London has taken up the familiar theme of a multiple-speed Europe in which an independent British financial centre would have priority links with the Continent.
The ferosity with which the Target debate is being pursued in Frankfurt has surprised the Bank. The Bundesbank is a recent convert to Frankfurt's cause. Only now that it is about to lose power to the European Central Bank, has it shed its studied indifference.
London's strong point over the last decades had always been the unrivalled liquidity of its markets. Pension fund money, Arab money, small savers' money - a vast amount of it was available in London while continental exchanges suffered at times from a lack of buyers and sellers.
Frankfurt has had to acknowledge that it is unlikely to match London's liquidity overnight. At least on its own. The heads of the bourse and the futures market came up with a plan to combine their operations with the next biggest financial centre in Europe - Paris.
The French connection has now reached an advanced stage. The two stock exchanges say they will start trading on single joint computer screen from the middle of next year.
The futures exchanges are aiming to do the same but at the momemt Paris still operates an open-outcry system. However, J”rg Franke, a board member of the Terminb”rse in Frankfurt, said that a link-up was likely after an expected move to screen-trading in Paris.
Only last week, Liffe, the London futures exchange, reaffirmed its commitment to open-outcry trading as the most efficient system, guaranteeing the highest degree of liquidity.
Herr Franke retorted that screen-trading reduced market participants' cost by half.
The argument over trading systems is really a metaphor for the different cultures of banking on respective sides of the Channel. London is staking its future on the traditional techniques that generated fortunes over decades, while Frankfurt is copying the more technically advanced methods of the highly successful American banks, which are now just as dominant in Frankfurt as they are in London.
In Frankfurt, the British low-tech option is considered as redundant as the House of Lords. German bankers see themselves winning in the race with London because they pay more attention to new methods that can boost profits.
Ulrich Schr”der, a policy analyst at Deutsche Bank, said: "Due to a new consciousness, Continental centres such as Paris and Frankfurt will improve their performance and close the gap to London."
The official City's reaction to Frankfurt's ambition has been marked by complacency. When The Times first contacted the London Stock Exchange regarding the alliance between Frankfurt and London, the exchange knew nothing about it. Gavin Casey, the LSE chief executive, remarked that the Continental exchanges have tried to co-operate before and failed. He delighted in recalling that 35 per cent of top European companies are listed in London. But even Mr Casey had to admit that Emu is a threat.
The City's favourite statistic with regards to Frankfurt is a survey of the number of banks situated by the River Main. Some 7 per cent of Frankfurt's banks left the city last year. But the Frankfurt Chamber of Commerce said the closures were mainly by less prominent banks that had not been doing business in the city.
The large investment banks are all increasing staff levels in Germany at the moment. For British bankers, this is no time to discard old German textbooks and O-level notes. The arrival in massed ranks is expected in Frankfurt on E-Day, the day the euro becomes legal tender, most likely to be January 1, 1999.
Until such times, their German colleagues will tell each other in the wine bars of the City: "Don't mention the euro."
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