The London and Frankfurt Stock Exchanges

Part of the debate – in the House of Lords at 4:25 pm on 24th May 2000.

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Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 4:25 pm, 24th May 2000

My Lords, perhaps I may, first, welcome this debate. It is useful to have the opportunity to clarify some of the issues in what is undoubtedly a development of immense practical and symbolic significance. In that respect, I echo what the noble Lord, Lord Lamont, said. I also welcome the fact that we are holding this debate in a cool atmosphere--unlike the debate in another place, where last week Mr Michael Fallon said that the Stock Exchange had not only surrendered the towels round the pool to the Germans but also given up the hotel as well. Indeed, some members of the party opposite increasingly resemble a collection of anoraks festooned with badges saying, "Save this" or "Save that". First, we had "Save the Pound" and now we have "Save the Stock Exchange". Perhaps we shall soon see a badge saying "Save our Foreign Exchange dealers" on the grounds that some of them may need to be redeployed. I still own an anorak, and would be happy to lend it to the noble Lord, Lord Lamont, if he would like to borrow it sometime.

Perhaps I may also congratulate my noble friend Lord Layard on his excellent maiden speech. We were contemporaries at Cambridge, both guinea-pigs of C P Snow's "Two Cultures" experiment to turn us into scientists--with limited success, certainly in my case. So we became economists instead. I look forward to hearing many more contributions from my noble friend.

The wider significance of this debate is that it is bringing into focus--and will do so increasingly--a degree of objectivity in the analysis of our relationship with the rest of Europe. It will bring into focus such questions as the larger size of the German economy and the hugely greater size of the eurozone as a whole than the sterling zone. There will also be the question of the difficulties caused by the volatility of sterling. Today is not the day to debate the crisis facing manufacturing industry, but sterling is now a relatively small currency pushed between the two tectonic plates of the euro and the dollar.

Our exposure to greater foreign exchange risk has been clear ever since the euro project got off the ground; indeed, I would say that it has got off the ground successfully. Of course, time will tell but that is my prediction.

The idea that we are in the "Last Chance Saloon" as regards the role of the London Stock Exchange may now be associated with some of the remarks attributed to various people during the past few days. However, I do not think that this has been said by the incoming chairman, Mr Don Cruickshank. I quote the words of a respected financial journalist, Mr Anthony Hilton, the City Editor of the Evening Standard. He wrote on 18th May,

"People fail to realise that the London Stock Exchange was negotiating with a pistol held to its head. Both it and the German Exchange are shedding their mutual status but the capitalisation of the German market was destined to be two to three times greater than that of the London Exchange--and it was also planning to raise a cash war chest. So in a few months' time the Germans could have mounted a hostile bid that London would have found impossible to resist.

Faced with this option, Casey [the chief executive] has struck easily the best deal available for London--a much better deal than his hand would have suggested. Those who oppose it should stop and think what the alternative is. Casey deserves credit, not brickbats".

I shall concentrate on two points in the substantive part of my remarks: the currency question and the importance, or lack of importance, of that; and the perspective of pension funds, in which, of course, the trade unions have a major interest. We need to be explicit about what will happen as regards the use of sterling or the euro. The structure of the merger gives this question greater significance than my noble friend Lord Desai has acknowledged. However, that debate will continue.

By the end of next year--I am trying to keep my exposition simple--all the continental-owned companies are likely to be quoted uniquely in euros. My expectation is that many British companies will also be quoted uniquely in euros. I say "uniquely" because, although a sterling facility will be available and will be used if a company is quoted in euros, the actual listing on the board will be in only one currency. There will no dual currency listings. Indeed it has been made explicit in the prospectus--if that is the appropriate word for the relevant document--that,

"dual pricing will not be allowed", because that could lead to imbalances and resultant wider spreads. That is the position. I quote from today's Financial Times where Deutsche Bo rse states,

"A company's shares will be traded in only one currency in order to concentrate the liquidity in one order book".

There could be no clearer statement than that.

The fairest statement on the relationship between the merger and the euro must therefore be that, although the issue is not a major one at the present time, it will become one if we stay out of the euro for a long time. One thing we are all clear about is that, whereas we could all foresee circumstances in which all trades were in euros, no one could foresee circumstances in which they would all be in pounds. I would be surprised if that contention were challenged today. I asserted that premise even before I read the article that I have just quoted. I go a stage further and assert that if someone wished to set up a new European fund in the next year, they would in all probability denominate it in euros. Could anyone doubt that?

The Financial Times has been cautious about the merger but its general assessment is worth reminding ourselves of as it is an interesting perspective. It states,

"at least it is a bold attempt to break the deadlocked self-interest that has bedevilled all attempts to create a much needed pan-European market".

That takes us into a slightly broader field which I wish to touch on. If I were a betting man I would say--I would have said this yesterday, but my view is reinforced by today's news from Frankfurt--that the merger will go ahead for the following fundamental reason, which has not been made explicit so far today. We have in the world today three basic time zones: Asia, Europe and America. Given that 24-hour trading will not be followed to the letter with stockbrokers working through the night--that will be the day, or the night!--the relevant trading hours for the large internationally traded stocks will be eight hours in Tokyo, eight hours in this part of the world and eight hours in New York. That is the logic of the matter.

That logic relates to another logic; namely, the integration of European industry is a fact of life which no one, however Eurosceptic, would deny. Therefore there will be three big players around the world in the sense of three time-zone players. That is the typical kind of oligopoly that exists in many industries at the present time. Incidentally, it throws up the need for parallel regulation, which I do not feel that we have.

One does not need to be reminded that at the present time many industries that wish to have a spread of investments--I refer to the motor car industry in this connection--need to look to Europe, America and Japan, not to UK equities. That is the way that pension funds invest. One could give half a dozen examples of such industries. To say that this process incurs an extra cost for pension funds is an optical illusion. At least, it is an illusion to think that extra costs will result from what may become euro-denominated prices in Frankfurt. The exposure and the volatility are no different as regards a non-sterling company. At the present time there are foreign exchange transaction costs. Therefore, a myth has developed with regard to extra currency costs in this area. Pension fund managers will have to ask themselves the same questions, whatever the currency involved. We are told that at present pension funds' exposure to Europe is about 10 per cent. That is a figure of about £40 billion out of a total of £400 billion.

We cannot easily measure trends at the present time because the relevant financial statistics are not satisfactory. Will the Government provide the figure for the European component of pension funds' investments overseas in the financial statistics? There is no such figure in the financial statistics at the present time. The stock of equities in this country in relation to GDP is much larger than that of the Germans. If the Germans go in the Anglo-Saxon direction, I believe that they will soon have a bigger equity stock.

I conclude by saying that I believe that the merger will be in the interests of pension fundholders in this country. I welcome it.