Europe Will Regret Stealing London’s Finance Business

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In quitting the European Union, the U.K. has handed its former partners a golden opportunity: Seize some of the lucrative financial services business that London has long dominated.

It’s a temptation that European officials would do well to resist.

The last-minute Brexit deal struck in December left many important issues unaddressed, including what will replace the unfettered access to EU markets that U.K. financial firms once enjoyed. The two sides now aim to reach some kind of agreement by March. In the meantime, U.K.-based firms can’t provide a number of services to EU customers, including credit ratings and trading in stocks and derivatives. Trading in shares of EU-based companies has already shifted almost entirely to continental venues such as Paris and Amsterdam.

It’s easy to see the U.K.’s loss as fair comeuppance: You wanted out, so bear the consequences. This week, the European Commission effectively said as much, unveiling a blueprint to boost the international role of the euro, reduce reliance on unreliable outsiders and move more financial business within its regulatory purview. Problem is, the balkanization of financial services will likely leave everyone worse off, at least in the near term.

There’s a reason London developed into a global hub: Concentrating activity in one place has a lot of advantages. Trading is cheaper and more efficient. Companies can more easily achieve economies of scale, and have access to deeper pools of talent. Forcing a shift to the continent will gain the EU some jobs, but also harm customers and investors who profit from London’s agglomeration effects. Not to mention that the EU, with its thinly capitalized banks and incomplete financial union, is quite unprepared to step up.

No doubt, with time, the EU will develop comparative advantage in certain areas, especially if it succeeds in forging a deeper political and economic union. But the future winners and losers should be decided by competition, not by needless barriers to trade.

The solution isn’t difficult. The EU and the U.K. should grant each other’s firms full access as long as their regulatory regimes remain roughly equivalent. The two sides have already reached temporary equivalence deals in a couple areas — most notably the clearing and settlement of derivatives trades, where a Brexit-driven shift from the dominant U.K. to the continent could have threatened financial stability. Such agreements should be made permanent, broadened to as many services as possible, and strengthened to ensure the EU won’t revoke access suddenly and unilaterally. In return, the U.K. should offer assurances that it won’t unduly loosen regulations in a bid to attract business.

The goal, in short, should be to keep trade as free as it was when the U.K. was still in the EU. That’s why it would have been better for all concerned if Britain hadn’t left in the first place — but now that it has, there’s no call to compound the damage.

Editorials are written by the Bloomberg Opinion editorial board.

©2021 Bloomberg L.P.

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