EMU strictures threaten City

Britain fears that London's status as a financial centre could be undermined by plans now being discussed in Frankfurt for European monetary union.

Although Britain has a right to "opt out" of monetary union, due to launch in 1999, the Government is taking a full part in talks on the preparations should it decide to opt in.

In discussions at the European Monetary Institute in Frankfurt, where all European Union central bank governors are drawing up the EMU masterplan, Germany is insisting that all countries which join the single currency adopt German monetary policy instruments, including minimum reserve requirements, regarded by some in the financial community as a quasi tax on banks.

The German system means that each bank must hand over a portion of its deposits, to be held by the central bank without interest, as a means of controlling inflation. Hans Tietmeyer, president of the German Bundesbank, argues that it is the most effective system for keeping prices stable. Britain believes adopting the continental monetary policy tools would be extremely costly and could scare away big commercial banks from London.

The threat to the City is certain to feed British Euro-sceptic fears about monetary union. Under the Maastricht treaty, the masterplan for monetary policy must be agreed by 1996, ahead of the British election, which has to take place by mid-1997.

According to senior banking sources in Frankfurt, Eddie George, governor of the Bank of England, is blocking the plan and discussions have reached an impasse. There are fears in Frankfurt that Britain may veto the masterplan, thereby holding up the move to monetary union. The Bank of England says it strongly opposes the German system, claiming that options are still open. However, in a speech this week Mr Tietmeyer made clear that Germany will insist on a system of minimum reserves. Describing how Germany wants the European Central Bank to operate, he mapped out a vision which closely resembled his country's own central bank.

"It is a fundamental clash of philosophy over monetary policy with Germany at one end and Britain at the other," says Graham Bishop, European affairs adviser at Salomon Brothers in London. "If high minimum reserve requirements are introduced, some banks based in London could move offshore from the EU. It is effectively a tax on banks."

Even EU officials who support monetary union concede that Britain has justified fears. "Many banks have moved to Britain, citing London's favourable regulatory climate. Britain risks losing its status as a financial centre," said a senior economics official in Brussels. "This shows how important it is for Britain to be involved in the heart of discussions on developing monetary union."

The dispute is the most significant split yet between Britain and its European partners over the preparations for monetary union and illustrates how difficult it will be for Britain to agree a European approach to monetary policy, should it decide to join the single currency. The row also illustrates how hard it is becoming for Britain to sit on the fence over joining as preparations get underway. John Major has said there is no urgency for Britain to decide on whether to join EMU, and the Government will wait until the time is right.

It is widely expected that the decision would not be taken until after the next general election. However, although Britain can defer its decision, it is becoming increasingly difficult to put off deciding whether to join in the preparations. In order to be ready - just in case - Britain must start preparing the City, the financial institutions and the public.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: AV Installation Engineer

£27000 - £33000 per annum: Recruitment Genius: Due to business growth, this is...

Recruitment Genius: Digital Account Executive - Midlands

£18000 - £23000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Care Support Workers

£7 - £9 per hour: Recruitment Genius: Due to expansion, this care company base...

Recruitment Genius: Office Manager

£21000 - £26000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent