In little over a year from now – 392 days, to be exact – the United Kingdom will leave the European Union. At the moment, we only know one thing about life after Brexit: The EU will no longer have a global financial center.
If the EU fails to act, key finance channels for the Continent's economies could weaken or wither away. But there is an alternative reality: The financial hubs of Frankfurt, Dublin and Paris could interconnect to work as one. Liquidity, traded products and expertise could be bundled into one platform, keeping the EU's financial markets globally competitive and efficient.
What would we need to build such a digital finance center? We already have a good foundation: The EU, which will remain the world's second-largest economy even post-Brexit. People, goods and services flow swiftly and freely throughout the domestic market, while political conditions and regulatory frameworks are stable and reliable.
The EU has the benefit of the highly stable euro, the second most-trusted reserve currency worldwide. Regulatory conditions are mostly unified, the banking union strengthens our resistance to crisis, and the capital-markets union brings us closer to financial integration. Powerful market infrastructures make simple and speedy cross-border transactions possible.
But the finance centers across the future EU’s 27 member countries are competing for market share, taxes and jobs. All of the bigger cities meet some of the requirements for global financial success, but none ticks all the boxes.
From all of our financial centers, we could create a European financial network that works as a single hub.
Market liquidity is one example. The limited number of actors and financial products in any one location aren’t enough to scale at a global level. Physical distance has prevented regional success from translating into global competitiveness, although this issue is losing importance thanks to the digital revolution.
Financial markets are facing radical changes that call into question the traditional concept of financial centers. Digitization has changed how we quantify success. Agglomeration and geographic proximity made London a success; now technological progress and agile collaboration are more important.
It’s a whole new perspective for the Continent. From all of our financial centers, we could create a European financial network that works as a single hub. Tech innovation makes it possible to overcome any physical distance between suppliers and consumers. But to create a European digital financial hub post-Brexit, we have to face three challenges head-on.
Cooperation and specialization
EU member states and market participants naturally have different and sometimes competing interests and motives. But it’s crucial to view the domestic market not as a zero-sum game, but rather as a place with potential for everyone to benefit.
That might mean banks limit their scope of services and cooperate more with other financial centers. Rather than focus on beating the local competition, we should raise our potential for innovation with market-driven specialization that scales. That will optimize cost structures and build our global competitiveness.
This cooperation needs a digital infrastructure in the form of Europe-wide, internationally accessible platforms.
Connectivity can give the financial centers a virtual advantage through proximity of market actors. But we have some catching up to do when it comes to digital infrastructure. New York and London set up an Atlantic cable just for high-frequency trading; this kind of connection doesn’t exist between Paris and Frankfurt. But creating faster, better and cheaper connections between sellers and buyers is the only way to compete with classic financial centers.
To integrate existing IT infrastructures, we need high-level standardization. Ideally, an investor’s choice of location within the EU should not be affected at all by technical or administrative concerns.
Competitive legal frameworks
Despite all our harmonizing, the EU still lacks a unified treaty regime comparable to British common law. One solution could be the so-called "28th regimes": legal frameworks for EU civil law that don't replace national laws, instead giving Europe-wide options akin to the societas Europaea, a public company registered under EU corporate law.
Parties would themselves decide whether to use the framework and create a level playing field in legal terms. The goal must be to eliminate all cross-border transaction costs within the EU.
The idea of a digital financial hub is a political one, but its success depends on the power of the markets. We need buy-in not only from financial institutions, but IT and fintech companies as well. A digital financial-markets union would be an ambitious new project worth the commitment.
From a central bank's perspective, it would be great to complete the majority of domestic transactions on our territory. We could secure the stability of our financial systems in times of crisis or peace, and not depend on external actors for the transactions we need to keep the real economy going. We could then benefit from open, global financial markets and capital streams as an independent actor in a post-Brexit world.
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