John Gapper, Associate Editor and Chief Business Commentator, Financial Times
François Pagès of Calyon Securities, right, says that Europe is finally enjoying the fruits of its decision to create a single currency. At left is Graham Clempson of MidOcean Partners UK.
This session discussed recent trends in European financial markets, with a focus on two headline tensions: that between European and U.S. markets, and those within Europe itself.
Moderator John Gapper, a Financial Times editor, began the discussion by asking the panel whether recent U.S. attempts to regulate financial markets, namely the 2002 Sarbanes-Oxley act, had been successful or a "shot in the foot."
Graham Clempson of MidOcean Partners UK, saw an inverse relationship between trends in Europe and the United States. He saw numerous virtues in the European financial system not found in the United States, including: self-regulation; self-policing; light-touch regulation; proportional risk and reward of legal systems. All these policies have come together, along with maturation of markets, to cement Europe as place where innovation and dynamic businesses are rewarded, he said. Although many innovations originated from the United States, Europe has been able to refine these innovations to produce a better model than the US original.
Francois Pages of Calyon Securities, however, argued that Europe, unlike America, was not good at marketing its own success. There was tremendous scepticism in the 1990s about Europe's ability to create a single currency. Yet a decade later, the impact has been fantastic, he said, and Europe is now enjoying the fruits of its monetary innovation. Today the euro's share of global currency is at the same level as the deutschmark's in the 1980s, and it is attracting investment from various central banks.
Although the United States has traditionally produced the innovators of new financial instruments, Europe is now winning market share. For example, the mushrooming of the derivatives market demonstrates European innovation not seen in America. A large driver of this has been the growth of human talent in Europe.
Clempson agreed that there was a genuine two-way flow of innovation between Europe and the United States, illustrated by securitization and sell/lease back, two techniques developed in Europe. A large driver of this innovation is the fact that Europe came of age in a different environment, characterized by the boom of hedge funds and private equity.
John Ong of BNP Paribas said that the euro had accelerated an existing trend of convergence between Europe and the United States in terms of structure and public markets. The story of the next decade is going to be to what extent the United States will fight back. It faces a number of self-imposed limitations, such as the criminalization of inaccurate financial statements, closed borders and restrictions on work visas, all of which detract from its attractiveness and will force it to respond to lighter regulatory environment in Europe.
The strengthening of the pound relative to the dollar is being driven by two factors: the latent pool of European institutional capital that has liberated itself; and the increase in U.S. investors investing in the euro. These factors have created a liquidity wall.
European companies face ongoing difficulties in expanding the United States. The biggest challenge is the initial cost of setting up beach-head businesses, the panellists agreed. Once that is achieved, however, scaling up is easier. The move from the U.S. to Europe is seen as easier. Clean technology is one example of an industry where Europe leads the United States. But in order for Europe to make progress, America has to move beyond rhetoric and make these technologies economically viable. Some element of subsidy is required.
The panel switched to a discussion of intra-European tensions, generally between Eastern and Western Europe. Clempson argued that Europe was still very much one capital market. The euro, he said, has dramatically changed way investors look at the European high-yield market, for example.
But Pages felt that Europe was both a developed and emerging market. When Eastern Europe opened economically in the 1990s, Western Europe had to absorb the shock as well. Further, the deregulation of emerging markets has been very slow, compared to the deregulation in the United States. Meanwhile, the euro zone is still adding states, and there could potentially be a doubling of the number of people using the currency. Companies need to be sensitive about differences between Eastern and Western Europe, Pages noted, and cannot afford to generalise about how whole industries work.
There was a general consensus that London remained the financial capital of Europe. Ong argued that Europe's financial markets have been developed on City of London model. There were threats that if London stayed out of Europe, it would be disaster. Yet London's openness and lack of regulation was a great success. A quarter of a million French citizens now live in London, citizens who could have contributed to Parisian growth. This was seen largely as a protest against heavy European regulation.
That said, financial centres and centers of excellence are taking root developing in other parts of Europe. Switzerland is known to be hub of private banking, and France is considered to lead in innovative derivatives. Clempson pointed out that London faces a constant challenge to find the right balance between light-touch self-regulation and the power to hold poor performers accountable. The cost of living and taxes in London are high, and such factors as these, Pages said, account for the results of a recent survey in which 70 percent of respondents felt Europe did provide an attractive investment environment.
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
