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The Impact of the Euro on the Financial-Services Industry Market Review 2003
Key Note Publications Ltd, Aug 2003
The evidence of the impact of the Eurozone on the UK's financial-services industry is still unclear. The City has embraced the euro enthusiastically and a large proportion of London business is devoted to euro products, such as bonds and insurance. London-based investment banks are closely involved in Eurozone financing deals. The expertise of the bank is much more important than the currency of the country in which it is headquartered.
The downturn in 2000 obscures the extent of change, because the mergers and acquisitions industry has been very quiet since the launch of the euro. Similarly, the falls on the stock markets have masked market trends. The mergers of stock markets in Europe point to a future where the currency used is irrelevant to market makers, but market liquidity and low transaction costs will be critical success factors. Trading in a single currency is an obvious way to cut costs. The London market, therefore, is likely to move closer to European markets whether the UK joins the Eurozone or not.
The logic of the long-term trend points in the opposite direction to the views of retail consumers. This report considers the arguments for and against joining the Eurozone. It gives little consideration to the alternative of a North American union, but points out the weaknesses of the European Central Bank (ECB) compared with some of the strengths of the Bank of England.
We analysed the five tests set by the Chancellor of the Exchequer and the obstacles set by the UK flexible rate mortgage and the centralism of the UK system of government. We agree with the Chancellor - and indeed with several experts within the Eurozone - that 2003 is the wrong time for joining the Eurozone, partly because of faulty bank design and partly because of the current economic conditions in Europe.
The reaction of Eurozone consumers to the introduction of the new currency in 2002 are documented, as are the results from our exclusive consumer survey, which found strong views about the acceptability of the euro, its inevitability and its probable impact. While most see joining the euro as inevitable, many do not want to see change.
The birth of the Eurozone has brought opportunities to some financial institutions, which have developed their services to accommodate and profit from the euro.
We project the future economic condition of the Eurozone and likely political, economic, social and technological trends. We do not consider a currency union to be the answer to many problems, but it will be to the advantage of EU members and pull countries together.
We believe that the impact of European Monetary Union (EMU) on the UK financial-services industry will be positive in the long run because it will raise European prosperity. The efficiency and drive of the UK industry will continue to be the main cause of its success.
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