(London Financial) City In Danger

(London Financial) City In Danger Of Falling Victim To EU Wiles And Becoming Another Antwerp

By Ambrose Evans-Pritchard | 4 May 2009

The City of London is on borrowed time. Great banking centres can prosper for 40 years or so after the host country has lost industrial leadership but then some shock or political upset exposes the fragility of it all. "There is an extreme 'stickiness' in financial centres" [[that is, it takes a lot of infrastructure to maintain/support a 'financial center', and it is not easy to move it or reconsitute it somewheres else…: normxxx]], writes Peter Spufford, a Cambridge historian, reviewing the rise and fall of Genoa, Florence, Venice, Bruges, Antwerp, Amsterdam and London over eight centuries.

But the fall can be swift. Antwerp's arcaded "Beurs" was Europe's commercial hub in the 1550s. The tremors hit when the Spanish and French monarchies restricted debt payments to interest only, rolling over the principle. Then the Counter-Reformation queered the pitch, stifling free thought. Persecution of Portuguese Jewish financiers caused their flight from Antwerp to Amsterdam. Within half a century, Antwerps' population had fallen from 100,000 to 40,000. It was hard to sell a house.

Amsterdam's demise was gentler but, by the late 18th century, Alexander Baring was shifting parts of his empire to London. So too was Abraham Ricardo, father of the economic theorist David. The coup de grace came from France. "The reason why Amsterdam eventually succumbed was political, the fear of what would happen to financiers when revolutionary Frenchmen were in charge," Ricardo said.

There was eerie resonance to last week when the EU unleashed its assault on Britain's hedge funds and private equity. Those behind this drive are well aware that hedge funds were no more than bit players in the credit bubble. The real villains were the banks with their 30 to 50 times leverage and we know from the IMF that Europe's banks were the worst with their off-books "conduits".

Given that 80% of Europe's hedge business sits in Mayfair, the latest EU directive is a discriminatory political attack on the City and almost certainly the start of something broader and nastier. Powerful forces in Paris, Berlin, and the EU institutions have long held a repressed urge to break the City's hold on chunks of global finance, from bonds to currencies and metals. Some wish to shut "Le Casino" altogether. They at last have the chance to act on it.

Charlie McCreevy, the Irish Thatcherite in charge of the EU's market machinery, made a valiant effort to defang the hedge code but he will be gone soon. Gone too will be Commission President Jose Manuel Barroso, an Iberian reformer (of sorts), who placed free marketeers in the key posts of economic control in Brussels. As the tide turns against Anglo-Saxon influence, Britain will struggle to maintain its blocking alliance in the voting structures of the EU Council and the European Parliament.

East Europe is no longer in thrall to ultra-market Friedmanites in their 20s, siding eagerly with Britain against the elderly Rheinland corporatists. The violence of economic collapse in parts of the ex-Soviet bloc may tarnish market capitalism for a political generation and it is fair to assume that the centre of ideological gravity will shift in Germany too as the economy contracts at 1931 rates. The Movement for Militant Resistance is already torching Porsches on Berlin's streets.

While it is true that Europe's Left has not been able to capitalise on the window-smashing, boss-napping, backlash against banks, this is chiefly because the Right has beaten them to it. In short, Britain is about to discover that it cannot easily stop the EU apparatus doing "an Antwerp" to London. One sympathizes with Poul Rasmussen, Denmark's ex-premier and head of the European Socialists, in raging at the locust raid on his country by the private equity pack of Apax, Blackstone, KKR, Permira and Providence. Their leveraged buyout of Denmark's telecoms group TDC was textbook provocation. They quickly extracted $7.6bn in 'special' dividends, leaving the company and its workforce saddled with debt obligations going into the downturn.

I do not see why funds should be allowed to distort the market to their advantage in this fashion, nor do I see why any democracy should tolerate it. It seems blindingly obvious that the City should stop this nonsense before it does any more damage to the reputation and interests of this country. That said, British predators did not cause the global financial crisis.

The ultimate villains are the central banks of the US and Europe, which set the price of credit too low for year after year, and Asian governments holding down their currencies for export advantage. The banks, buyout funds and assorted miscreants were mere instruments of destruction, not causal agents. If we fail to see that, we have learnt nothing.