David Cameron must persuade the French and other EU members that London's financial centre is their asset too
Next month's Franco-British collôque will provide much-needed group therapy for a relationship in crisis. The easy part will be where UK delegates reiterate their commitment to an open and competitive Europe, highlighting the vital national interest in the single market, destination for half of all British exports. This gathering of politicians, business leaders, civil servants and opinion formers will be able to agree that London's position as a top destination for inward investment owes much to EU membership, and that Britain would be taking a big risk if it signalled it was on a glide path out of the EU.
The much more difficult part will be to persuade the French, if not to love the City, at least to recognise how much it has changed since 2008. The scale of British-based banks (with balance sheets five times UK GDP) and the risk they posed to UK taxpayers left the British government no choice but to take early unilateral action. By adopting measures such as the bank levy and now the Vickers report – which demands higher levels of bank capital and ring-fencing of retail banks from their investment banks – Britain is already implementing more radical reforms than those demanded by European regulators.
Restoring confidence in UK regulation will be essential if Britain is to have an influential voice in the debate over how and where to regulate, (whether nationally; at the EU regional level; or globally, as with the Basel rules) and if it is to limit the damage a welter of ill-adapted EU regulations could soon do to the UK financial services industry. London feels frustrated by the way Paris continues to deride the City as a virulent breeding ground of systemic crises and, perhaps deliberately, ignores the fact that successive British governments have put an end to light-touch regulation.
Generating buy-in for the City's pre-eminent place in European finance, however, involves more than just providing assurances over the quality of UK regulation. A critical part of the defence of this national interest must involve a concerted diplomatic effort to persuade France and other member states to recognise that the City – a global centre of excellence with a critical mass of people and technology implanted in the EU – is a precious European asset. Many of the 400,000 French nationals residing in London work in finance. Like the German car industry or the French aerospace sector, it is a rare European success story that should be celebrated and cherished.
Populist pressure on David Cameron to drape the City in a union flag is counterproductive. What happens in London affects the world. Financial stability in the UK is a global public good in which the EU has an interest. Since much financial regulation is now made in Brussels and exported to the UK, the City can only remain the EU's global financial centre through the enlightened self-interest of other member states. Britain has in the past won regulatory arguments on their merits. Evidence of politically motivated regulation being rammed through by countries voting as a bloc has been scant.
But the European commission's daft proposal for a financial transactions tax was an important warning against complacency in this respect, and the coming months will be critical, not least because of the forthcoming review of the market in financial instruments directive. Britain must therefore remind France that history is rich with examples of apparently trivial regulatory tweaks generating inter-continental shifts in financial markets business; and that while handicapping London might be satisfying, it will not necessarily see business move to Paris or Frankfurt.
Competition between EU financial centres is fading, just as the rivalries between London and regional UK stock markets once waned. The future is a struggle between New York, a European hub in London, and centres in Asia. This is not to say the City should be Europe's only financial centre – that would be as absurd as saying the French should be the only winemakers. However, while Paris, Frankfurt and Milan will remain central for their domestic economies, only London has critical mass as an EU-located global financial centre. UK commercial diplomacy must ensure that Paris and other EU governments see the folly of undermining a great European success story.