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?
Independent Dating
and  

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

iJobs Job Widget
iJobs General

Recruitment Genius: Senior Solution Architect - Contract

£500 - £600 per day: Recruitment Genius: A Senior Solution Architect is requir...

360 Resourcing Solutions: Export Sales Coordinator

£18k - 20k per year: 360 Resourcing Solutions: ROLE: Export Sales Coordinato...

Recruitment Genius: B2B Telesales Executive - OTE £35,000+

£20000 - £35000 per annum: Recruitment Genius: The largest developer of mobile...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue