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Brexit threat to London’s Euro role

Benefits of EU membership by top three economies
Christian Noyer, former Governor, Banque de France

Christian Noyer

As Winston Churchill said in his 1946 ‘United States of Europe’ speech, the revival of Europe, and the subsequent development of the European Union, could proceed only as a joint effort of Germany and France. If they disagreed, no progress was possible; if they agreed, many things were within reach.

The UK, joining the then European Community in 1973, has been key in several instances. One was the EU’s eastern enlargement after the fall of the Iron Curtain. In Germany, and even more in France, public opinion and politicians, while supportive in principle, appeared more cautious. This was due to the associated cost and risk of weakening a culture developed over several decades, and protected through very cautious enlargements in terms of the number of countries involved in each step.

A second instance involved the establishment of the European single market in the 1980s and 1990s. The Common Market, as the Community was called, was functoning well for the exchange of goods, but it was less effective for the provision of services, of which financial services was of major interest to the City of London.

In the single market, the free provision of services (directly from one country to the other) is made possible, in fair competition, because of common regulations – banking, insurance, financial services and financial market regulations. The UK was key in defining these principles and pushing in favour of the agreement.

EU and EMU duality
EU membership by Europe’s three major economies has been a factor for overall progress. One major issue lies in the creation of a two-tier system, with Britain outside economic and monetary union. The very low probability of the UK joining the euro transforms a legal exception into a permanent shift, which raises problems.

The UK fears that the EMU majority could ‘dictate’ EU rules. This fear can be addressed; I do not see for the time being any risk that euro members could act as an EU voting bloc. But Britain cannot enjoy a permanent exemption to any rule that is an essential component of the single market. This would destroy its rationale and effectiveness.

For France and Germany, the duality of the geographical areas of the EU and EMU is a complication. In making necessary EMU decisions, the Eurogroup of finance ministers does not have the legal authority of the Council of Ministers. For democratic accountability, there is no EMU parliament. The European Central Bank president holds hearings before a parliament of the whole EU, not just that of EMU.

Refining the institutional setup is probably “inevitable, for matters which are specifically and only relevant for EMU members. The same could be said of the banking union, although in principle it could be a larger area than that of EMU.

Regarding the consequences of Britain’s 23 June referendum, I cannot see any circumstance in which the UK could benefit from the single market without observing its regulations. Nor do I see the possibility of associating the UK in designing these regulations if it is no longer in the EU.

“If Britain left the EU, the euro area authorities could no longer tolerate such a high proportion of financial activities involving their currency taking place abroad”

London and euro trading

I would like to focus on London’s position in euro trading. It is already very difficult for euro members to accept that our currency is largely traded outside the currency area, beyond the control of the ECB and of euro area institutions such as market regulators. When tensions occur and risks materialise, the interests of a foreign financial centre might take priority over those of the currency area itself.

That can be acceptable only if, and as long as, the UK is a member of the EU, and accepts the involvement of, and co-operation with, the European regulatory agencies. If Britain left the EU, the euro area authorities could no longer tolerate such a high proportion of financial activities involving their currency taking place abroad.

Looking at the future more positively, building the EU has been a beneficial undertaking for the three major economies, and for the entire continent. It is an original concept: neither a federation nor a simple free-trade agreement, allowing nations with a large degree of sovereignty to develop specific co-operation.

The EU has considerably changed over the years, in size and in substance. The EU is not a frozen concept. It is not true that we should simply either accept its faults, or reject it as a whole. If there are problems, most likely damaging all our countries, let us fix them.


Christian Noyer was Governor of the Banque de France between 2003 and 2015, Chairman of the Bank for International Settlements between 2010 and 2015, and Vice-President of the European Central Bank between 1998 and 2002. This article is an abridged version of a speech at the OMFIF-German British Forum conference dinner in London on 3 March.

16 April 2016