How Brexit is exposing bonds that bind markets
Brexit has exposed a lot of home truths about financial services in London and the eurozone. The City's attractiveness as a global finance hub and its share of business have taken a hit before even leaving the European Union, puncturing the myth that London's success outside the single market is easily assured.
Yet neither has the euro area made strides in finding a truly viable alternative to London, whether that's through a single location such as Paris or Frankfurt, or by unifying the bloc's disparate capital markets.
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The drive to streamline regulation, tax and legal frameworks across the EU has moved slowly, and its governments have resisted attempts by Brussels regulators to cut off the UK too rapidly.
This speaks to a pretty unhealthy co-dependency that has developed between London and the continent, probably the one diagnosis on which Brexiteers and EU officials can agree.
Britain plays host to almost half of daily foreign exchange trading in euros and about 75pc of the turnover of euro-denominated interest rate derivatives, a concentration that's risky if it continues and maybe even riskier if it's torpedoed overnight.
In a nod to Hegel, Olivier Guersent, the commission's financial services policy chief, calls this a "master-slave" dynamic that does neither party any favours. Speaking to me recently, he explained both sides have clear long-term objectives: London aims to diversify its trading relationships and boost business with Asia in particular. Europe wants a more self-reliant and integrated capital market.
Yet they can't separate too quickly because of the danger of damaging their interlocked market structures.
This tension is why the dry and technocratic debate around what kind of EU market access should be granted to the UK after Brexit has become so toxic.
Both sides want to preserve ties while still pushing for autonomy in the long run.
The European Securities and Markets Authority (ESMA), a Paris-based watchdog, is talking about more regulation to keep the Brits in check, including the power to force financial business - from stock trading to derivatives clearing - onto EU soil if necessary. Britain's Financial Conduct Authority, meanwhile, is hinting at deregulation, saying in April that British rules would "evolve somewhat differently" if the country were "left to its own devices". It sounds like Fortress Europe versus Singapore-on-Thames.
The compromise option of "equivalence", which would offer limited cross-border access to the UK provided its financial rules were deemed sufficiently close to the EU's, has failed to break the deadlock. The 'Financial Times' reported last week that ESMA chairman Steve Maijoor had warned of the risk of finance firms exploiting regulatory loopholes between the City and Europe after Brexit, even if the rules remained "close to one another".
And for British regulators, equivalence feels like an obvious downgrade, turning Britain into a "taker" of EU rules and Brussels into the final arbiter of its continued access. There's not much evidence of compromise here.
But people should look a little further ahead before settling into entrenched positions.
Instead of seeing equivalence as the regulatory end-game, it would be better looked upon as the starting point of a marathon.
The EU should be willing to grant equivalence as a way of preserving ties with London while it starts pushing for more regulatory powers of its own. That would also allow it time to pursue deeper capital markets integration between its member states and to build up its own financial sector.
And the UK should be willing to accept equivalence as a way of preserving EU access in the early days post-Brexit, while it is still expanding the City's business in other continents.
Whichever side achieves its broader ambitions first might then have more reason - and more power - to change the terms of engagement.
If the City thrives outside of the EU, it could have leverage to change its rules, and then incentivise Brussels to change its own to match. Europe itself might become a "rule-taker" if it thought that was the most efficient way to preserve the financing of its economy, according to Mr Guersent.
Brexit may be in thrall to politics, but the technocrats should keep a cool head.