French President Francois Hollande, second right, leaves the building with his delegation after an EU summit in Brussels on Friday, Feb. 19, 2016. British Prime Minister David Cameron faces tough new talks with European partners after through-the-night meetings failed to make much progress on his demands for a less intrusive European Union. (AP Photo/Francois Walschaerts)
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It is a vexing, existential problem fit for the pipe of Jean-Paul Sartre.

For more than a fortnight, French and British officials have locked horns over a single word in the draft text of UK’s “new settlement” with the EU. Should the powers of EU financial regulators be referred to as “existing”, or not “existing”?

Unable to find an amicable compromise, the Anglo-French sparring went right to the top of government, forcing David Cameron and President François Hollande to wrestle with the existential conundrum at 4am on Friday morning, only to resume after a short nap.

Beneath the bloody-minded clash over drafting is a fundamental question unlikely to be resolved for many years to come: who runs the City of London?

“These are the esoteric matters that lawyers dream of and get rich on. It would be amusing if there were not so much at stake,” said Cornelius Hurley, a former US regulator now at Boston University.

“What it really boils down to is regulatory arbitrage — for example HSBC not leaving the UK— and the competition among financial regulators to be the either the most credible or the most lenient.

“The UK wants to be in the EU when it suits them and out when it does not and to be the final arbiter of both.”

Indeed Mr Cameron’s draft reforms aim to redraw patches of responsibility between the Bank of England, the eurozone, and the EU’s fledging financial watchdogs. The aim is to stop the further encroachment of EU oversight and authority over the City’s banks, insurers, markets and clearing houses.

While the principles agreed are only legal guidelines for how the EU should approach such matters, the language will be ammunition for regulatory fights in years to come.

Britain’s guiding principle on financial stability issues is: “he who pays, controls”. If British taxpayers are on the line, British authorities should have the whip hand.

For its part Paris — with the support of Berlin and the European Central Bank — wants influence over the City, its main financial centre, and level playing field in Europe for its financial institutions. Mr Hollande said he wanted to “fight against speculation and financial crises everywhere [in Europe], using the same institutions”.

Sam Theodore, head of financial institutions at Scope Ratings, said: “The French don’t want the City of London to be the runaway horse in the future, galloping fast while Europe is being left behind.”

The draft deal attempted to clarify that the implementation of EU-wide rules to oversee and wind-up financial institutions should primarily reside with national or eurozone authorities. The big caveat was this did not impact on powers of “existing” EU watchdogs. France feared the wording set-in-stone regulatory powers within the union, and wanted the word existing deleted. “Negotiations often get hung up on minutiae — particularly where they offer a distraction from dealing with the really hard issues creatively, which is what is needed here,” said Bob Penn, financial regulation lawyer at Allen & Overy.

Stiffening the resolve of Mr Cameron and Mr Hollande are some motivated central bankers. Mark Carney, the Bank of England governor, made clear his views to George Osborne, the UK chancellor. The Bank’s deputy governor Sir Jon Cunliffe, a former ambassador to Brussels adorned with medals from his battles over financial regulation, was in close touch with Mr Cameron’s team last night. Meanwhile, the Banque de France was enthusiastically cheering Mr Hollande on.

For all the energy put into the fight over the language, some EU diplomats say the “existing” matter has little legal consequence. Nothing changes the powers of the treaty, which enables a majority of EU member states to introduce greater financial sector integration were required.

Pierre-Henri Conac, law professor of at the University of Luxembourg, said: “The ‘existing powers’ provision looks like a game changer but could end up being legally empty”. 

Diplomats were working on compromises late on Friday afternoon that rest on constructive ambiguity — basically kicking the issue down the road. Richard Reid, senior research fellow on finance and regulation at the University of Dundee: “Whether or not the word ‘existing’ is in this agreement it seems to me that the arguments and debate about how to carve up regulatory responsibilities across Europe are probably going to continue for very many years ahead.”

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