Financial workers enjoy their lunch breaks in the City of London on 16 March 2017. Picture credit: Tolga Akmen
Brexit may make it easier for the EU to fragment the City of London © Tolga Akmen/FT

It is a widely held belief among European officials that it’s unnatural that the eurozone does not have its own large financial centre, but is forced to trade instead with the one next door.

The argument goes something along these lines. Imagine for a moment that the EU were the US, muse the Eurocrats. Would the Americans have allowed a smaller neighbouring country such as Canada to dominate their wholesale financial markets in the way Brussels has allowed the UK to dominate Europe’s?

Put that way, the answer seems obvious. And it is the one that tumbles almost without exception from the mouths of eurozone officials — a resounding “non”.

The latest individual to make this case is Christian Noyer, the former governor of the French central bank. Writing last week in the Financial Times he lamented the bloc’s dependence on foreign-based bankers (as they will become after Britain leaves the EU). “No other sovereign or monetary zone would allow itself to rely on an offshore centre,” he said, one eye implicitly on the US case.

One can sense the frustration that Frankfurt or Paris is not a bigger financial venue. But it is worth stepping back and unpicking what Mr Noyer thinks the eurozone is missing out on. It is not, after all, a given that every country has its own global financial centre (even setting aside the far from irrelevant fact that neither the EU nor the eurozone are countries). There are only a handful of these hubs, far fewer than there are sovereign states.

Part of it seems to be a sense of entitlement to a greater share of the world’s financial activities, given the eurozone’s heft as a monetary area. It is an understandable sentiment and, of course, the EU is not alone in craving a bigger financial sector. It is the equivalent of keeping up with the Joneses in the globalised economy, albeit an aspiration that has proved vanishingly hard to fulfil.

Take, for instance, the Gulf monarchies, many of whom hanker after banking as a way of diversifying their outsized hydrocarbon economies, and have spent years assembling the building blocks. Yet as Arab princes have discovered, global finance is not to be summoned by royal fiat. Capital gravitates to where the skilled individuals and know-how are located.

Just as other sectors of the globalised economy naturally cluster around local specialisms, so does finance. Its flip side is, of necessity, the dependence of others. The UK may “do” money but it relies on other countries for much of its consumption. So seven out of every 10 cars sold in Britain is from the EU, as is almost two-thirds of the wine that Britons consume.

But in any case, Mr Noyer’s business grab is only part of the argument. His bigger point revolves around control of markets, albeit cloaked in the pious language of financial stability. And here he betrays his truer motives — ones that ironically make finance much less likely to flock to EU territory as he desires. Mr Noyer argues that European politicians and regulators must exert control over activities that touch their financial sectors. That is because “by definition, the remit of non-EU authorities is not aligned with the financial stability interests of the EU”.

Yet it is hard to argue that the eurozone authorities do not already have full control of their banks in the sense of being able to regulate their activities and set capital requirements. The City’s existence does not prevent them exerting their authority. It is only when Mr Noyer turns to the eurozone crisis that we finally touch on the deeper reason. He rails at how the stability risks that undoubtedly materialised at that time “stemmed . . . from decisions taken [in London]”.

The “decisions” he has in mind are those habitually taken by international financial markets — namely, judgments on currencies, sovereigns and corporate creditworthiness. The wish to stifle them is the same impulse that has led European politicians and regulators to impose short selling bans, and to seek to constrain the activities of credit rating agencies. It is the desire to box in markets, thus restricting them from reaching conclusions that are inconvenient to those higher up.

Brexit may make it easier for the EU to fragment the City of London, pulling business on to its territory and imposing higher costs on consumers of financial services.

But global financial hubs only flourish where participants are free to make inconvenient judgments. If Brussels tries to control these as Mr Noyer wishes, whatever happens to London, the EU will not gain much.

jonathan.ford@ft.com

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