"Trade in stocks, bonds, derivatives and foreign exchange will be centred in London," admitted Hans-Georg Engel, a director of JP Morgan in Germany. "The positive effect of the euro on turnover and employment in Frankfurt has been small."
Another leading German banker admitted: "The euro will help us outpace Paris, but we will not catch up on London."
Deutsche Bank and Dresdner Bank have enlarged their trading facilities in Frankfurt to cope with the massive new euro-denominated government bond market. It will be 20 per cent larger than the US Treasury market at the outset and rise by a further 20 per cent should the UK, Denmark, Sweden and Greece join.
However, there has been little or no transfer of capacity from London to Frankfurt among the non-domestic banks who dominate the German finance markets. On the contrary, a recent survey of these banks reveals that many had slimmed down in Frankfurt following losses in the Far East and are concentrating trading in London. Many second-tier banks retain only small sales and marketing operations in Frankfurt.
Above all, the leading US investment houses such as Morgan Stanley Dean Witter, Goldman Sachs and Merrill Lynch remain firmly entrenched in London, although they do have a strong presence in Frankfurt.
Amelia Fawcett, managing director of Morgan Stanley Dean Witter, said: "There is no compelling reason why euro business should be transacted in Frankfurt rather than London. The Fed sits in Washington and the T- bill is traded in New York."
Ms Fawcett said various factors would enable London to retain its superiority "unless the UK is out of the euro for a long period". These included the size and liquidity of the London equity market; the size and talent of the labour pool; the full range of specialised skills in fund management and investment banking, backed by the accountancy and legal professions; the pre-eminence of English law in international trade and a favourable corporate and personal tax regimes. It costs approximately twice as much to employ someone in Frankfurt as in London.
The euro will reinforce the trend seen across Europe to free capital markets along Anglo-American lines. Graham Bishop, at Salomon Smith Barney, said the euro would free up $6,000bn (pounds 3,600bn) of savings tied up in European insurance funds, which would seek out the products offering the best returns.
Mr Bishop said: "At a stroke, the euro abolishes the currency matching rules, which lock many countries' long-term savings into domestic assets. Currently, Europe's life insurance companies must match 80 per cent of their assets to the currency of their liabilities."
Euro savings will no longer be organised nationally; German or French insurance funds will be able to invest outside Germany or France. As yields on government bonds decline, insurance funds will be forced to seek higher returns from equities and corporate bonds.Reuse content