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London and Europe: hard-wired advantages

The sterling-dollar exchange rate is termed “cable” in reference to the transatlantic telegraph wires laid in the mid-19th century. Their modern equivalents could help London retain its status as a leading financial centre in the 21st century — provided the UK’s politicians co-operate.

A European Central Bank report this week noted that the subsea fibre optic cables laid from the 1980s onwards gave London an advantage over other financial centres as electronic trading expanded. It estimated that this direct connection to the global internet backbone could have boosted its share of world forex trade by up to a third.

This hints at a wider strength. Laying cables across the sea was a high-risk venture in the 1850s. The risk was deemed worth taking because London was the financial centre of a trading empire. The city’s present-day concentration of expertise in areas like forex, trade finance, risk management, insurance and law is also a function of this mercantile history. Other European financial centres tend to have more specific strengths, such as asset management in Dublin and Luxembourg, or banking in Frankfurt.

More fibre could be installed across Europe, but that alone will not alter much. Europe’s politicians and regulators will find it harder to replicate London’s other strengths, however much they may wish to capitalise on the UK’s departure from the EU or secure regulatory oversight of euro-related clearing.

Their best hope of doing so is ham-fisted policymaking in the UK. There are precedents aplenty. President John Kennedy gifted London the Eurobond market in the 1960s. The Parti Québécois helped Toronto supplant Montreal as Canada’s financial capital in the 1980s. It is much easier to drive business away than it is to attract it — something the UK government, pondering its “red lines” over things like immigration and the remit of the ECJ, should bear in mind.

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