Blowing up the City of London would be a disaster for the EU

To listen to some of the commentary about Brexit one would imagine that poor little Britain faces a unified and determined bloc of 27 countries, meaning that it will go badly for us and well for them. That is not the reason the negotiations are shaping up to be extremely messy, however. The potential messiness stems more from the possibility that even if a sensible deal can be agreed between Theresa May and German Chancellor Angela Merkel, the supposed powerbroker, it will be difficult to get several other EU countries to agree.

The EU is badly divided on how to respond to Brexit. The recent Bratislava summit, which got minimal coverage in the UK, was a complete shambles. The Hungarians and their allies goaded Germany (in-between threatening the UK) and the leaders refused to share a stage after bickering over the migration crisis and austerity. Although German rationality and British pragmatism should theoretically be capable of combining to arrange a deal that ensures good trading arrangements for the City of London and for German car manufacturers in return, it is not clear Merkel will be there to deliver it next year. Even if she is it is not certain the others will agree.

Against this unpromising backdrop Merkel is dealing with the deeply worrying Deutsche Bank crisis, or not dealing with it. The German government indicated over the weekend that it is not minded to rescue the ailing giant of Germanic finance, sending the shares plunging again. Now there are whispers of a rescue. But if German giants can be rescued why not Italian bad banks that are about to go pop too? You can see how quickly this could get out of hand. And all this before Brexit…

At this point in a high stakes game the modern City of London is let down by its leaders having paid far too little attention to national politics, or politics beyond the stage of Davos, a function of globalisation and the rise of supra-national institutions which are – in the case of the EU – not in good shape. “Turns out this politics business is rather important after all,” said a senior banker of my acquaintance after the EU referendum result. I think he was being sarcastic or self-mocking.

Yet Britain is not a supplicant. The strongest card the City and the UK government has is not being played, or not being deployed with sufficient clarity and force. London is the real capital of the Eurozone, dominating euro-denominated activity. As I make clear in my new book (Crash Bang Wallop: the inside story of London’s Big Bang and a financial revolution that changed the world – available in all good bookshops) the euro was beyond brilliant for London, accelerating its rise to dominance as the European and global hub. But it was good for the Eurozone too, which got access to a global powerhouse in London that Americans and the Japanese, and now the Chinese, like because of its time-zone, law, language, history, experience, concentration of expertise and now technological innovation. If you want to funnel stuff to investors, issue debt, buy debt, sell debt, swap anything, hedge foreign currency risk, buy insurance or do deals, you generally need to be in London. The City’s “passport” to the rest of the EU is often cited but what really matters most in this respect is the arrangement allowing London to clear and settle euro-denominated trades.

And what is the Eurozone really? Forget the nice notes with nice pictures on, at root it is a giant debt machine. What oils the wheels? What makes that giant debt machine go round? London. Considering the state of Deutsche Bank and the Italian banks, does this feel like a good moment to blow up or seriously disrupt the machine, to teach the Brits a lesson? Perhaps in time Frankfurt will become more pivotal (although having been there I doubt it.) But no such transition can be made quickly or cleanly.

In response to such brutal realities, parts of UK and US finance are still blathering on – fiddling while Rome burns – about the threat to move 1000 jobs here or there to some fantasy office in Paris and highlighting marketing trips to London made by the Mayor of Frankfurt.

How can I phrase this politely? Stuff the Mayor of Frankfurt. Populists are on the rise, European politics is turning ugly, a highly significant bank is tottering and there is a leadership vacuum. The financiers and politicians on both sides of the Channel need to get it together or risk a continental explosion that will make Brexit look like a tea party.

Jeremy Warner put it well in his latest column for the Telegraph on a similar theme:

“The EU must be gently persuaded to recognise that it is overwhelmingly to its advantage to maintain the single market in financial services, and to put in place appropriate arrangements to ensure its continuation in the post Brexit world. An unnegotiated, unilateral hard exit would be the surest possible way of producing the opposite outcome.”

Indeed. Trying to blow up the City of London – the capital of the Eurozone – would be an act of monumental stupidity and self-harm. We must hope, for their sake particularly and ours, that the creators of the euro decide to be sensible.