London — In the race to 1992, Western Europe is establishing one big financial market. But little offshore financial havens are growing around Europe's edges, worrying regulators in Brussels. These offshore centers - from Dublin to Cyprus to Gibraltar - are competing with the European Community (EC) in its drive to shape a common framework for all financial institutions by 1992. With low or no taxes, these centers are rapidly attracting foreign investment.
Analysts do not expect a significant diversion of business from traditional money centers like London or Frankfurt. But the offshore phenomenon has prompted cautionary noises from the European Commission.
``We are not encouraging the development of offshore centers,'' says a financial official at the EC's Brussels headquarters. The official says it is essential to ensure coordination of financial services in the EC. But he considers a discussion of offshore activities still some way off.
``This question is being considered by member states. It has not yet been addressed to the commission.''
Over the past few years, Cyprus, Gibraltar, and the Dublin Docklands in the Irish Republic have become new and flourishing offshore centers. Malta, Spain, and Portugal have announced plans for offshore centers. And similar centers already exist in Luxembourg and Britain's Channel Islands and Isle of Man.
``The EC doesn't want to discuss this topic,'' says Tom Albrecht, senior financial analyst UBS Phillips & Drew, a London stock broker. ``But it could be tolerated rather than driving the money out to Bermuda.''
Essentially, European governments are trying to draw up regions that would not be subject to EC financial regulations. This is easier for a country like Spain, whose Canary Islands are an autonomous province under Spanish sovereignty but not subject to EC legislation, a situa-tion comparable to Britain's Channel Islands.
Acting on a two-year-old suggestion from the Canary Islands authorities, the Spanish government has announced plans for an offshore business center in the Canaries. The idea is to act as a bridge between North Africa and Europe on one side, and Latin America and Europe on the other.
Despite reports that EC officials in Brussels were unhappy about Spain's plans, the Canary Islands will not be in competition with other centers in the Mediterranean such as Malta, which also wants to be a link between Europe and North Africa, says Jos'e Juan Ruiz, an official in Spain's economic ministry.
``We have far more powerful trade links with Morocco and Africa than Malta,'' says Mr. Ruiz. But he does admit that the danger of Spanish offshore centers becoming involved in money laundering from Latin American drug barons would be an ``important problem.''
For Ireland, the idea of an offshore center appears to have worked. With permission from the EC, it is developing an international financial center on a 27-acre site of the old Dublin docks.
``Ireland is not on the European mainland, and disadvantaged from that point of view,'' says Marie Bourke of the Industrial Development Authority in Dublin.
The center was established last year, and already some 47 banks, insurance companies, and other businesses are operating at the site. A tax rate of only 10 percent will be levied on companies there until the year 2000.
Europe's traditional financial centers will certainly not be pushed out of the picture by Ireland. ``We will be complementary to the main centers, and we are not going to develop niche areas; it would not be viable,'' says Ms. Bourke. But with lower overhead in Dublin, companies could transfer such things as back office activities, she suggests.
But analysts are articulating at least one reservation about Europe's mushrooming offshore centers, which could also be in the minds of EC officials in Brussels: how these centers are to be supervised.
``What happens,'' asks Christopher Davis, bank analyst at London stockbrokers Barclay de Zoete Wedd, ``if a bank in Spain, subject to EC regulations, has an offshore subsidiary in the Canaries or some other island which goes sour and this subsidiary is not subject to EC regulation?''
Such questions likely to concern members of the European Community as the European-wide financial market and the offshore-financial center grow side by side.