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The City of London Is Not Worth Splitting Europe

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What happened last week in Brussels is a division that should not have been tolerated by either party. The summit was supposed to prepare a Treaty that would have introduced fiscal consolidation in the Eurozone. In short, the topic was budgetary discipline including preapprovals and monitoring indebtedness. It was a laudable initiative, even though it failed to address any of the immediate concerns that aroused in the last weeks about the Eurozone debt crisis.

How did the issue of financial regulation invite itself at the negotiation table is one of those mysteries of the opaque and convoluted decision processes of the European Union. IT constantly mixes and opposes common and national interests in an inextricable can of worms. The fact is that everybody knew that financial regulation would be put by Britain on the agenda. What is still unclear is why the European Council allowed mixing two fundamentally different issues. Why did they let the British transform a fundamental debate on the future of European stability into a bargaining shop?

The reaction in Britain was violent. The sensible politicians and business people blamed the British Prime Minister's alignment with the City of London. It was not in the interest of Britain as a whole to create rupture with the rest of Europe. Furthermore, David Cameron told the his Deputy, Nick Clegg, who represents the Liberal Democrats, that he used his veto powers against the Treaty by phone at 4 am. Nick had received assurances that there would not be a "take it or leave it" attitude. Only the British tabloids and the Eurosceptic at the right of the Conservative Party applauded. It revives the worst isolationist instincts of the "perfide Albion" as the French name Britain.

The fact that it was allowed will not increase the respect that the world has for Britain. Washington is upset: US observers attending the meeting could not believe what they saw. David Cameron knew that Barack Obama had called German Chancellor Angela Merkel to stress the importance that the United States were attaching to this fiscal agreement.

But there is also the fundamental question on the regulation of the City of London. Americans do not need to be reminded that AIG Financial Products, the entity that provoked the collapse of the US insurer and needed up to $130 billion cost of taxpayer money, is based in London. It is UK lawyers who delivered the fairness opinion on the (ab)use of accounting tricks by Lehman Brothers.

Behind the raging debate, two forces are in action.

Frankfurt and Paris aspire to become the European global market, and use all possible attempts to undermine the City of London. While they remain unsuccessful, the use of European summits for that cause is not legitimate. It is ill conceived at a moment when the Deutsche Börse is attempting to take over NYSE Euronext, a move that further undermines the role of the London Stock Exchange.

The most worrying force is the fierce resistance of the City of London to accept a common regulation. This resistance is fueled by continental European banks: their operations in London often exceed their teams in their home country in areas such as derivatives, hedge funds, and other activities that they do not want to restrict. They are helped by the same US banks that fight against the application of the Dodd-Frank Act of 2010. They all love the laissez faire policy of the City, who has its own police.

However the City of London is less well regulated than Wall Street. Until the Lehman crisis, it was self-regulated. Government regulation of the fiercely independent square mile is a new world and was decided after the Lehman crisis. Unless the United Kingdom accepts to apply world standards to its financial center, the City will be the first victim of this rupture. Only shortsighted traders do not see the risks for their institutions.

All in, the summit of last week has not made any progress in the solution of the European debt crisis. It is astounding that it would end up on a rupture that was unnecessary. It is the collective responsibility of all the European Member States to have lost sight of the issues at hand.

The 16th Summit will not have achieved more than their fifteen predecessors. After each of them it is a bit more of the shrinking confidence in the European politicians that vanishes.