Can Europe build a digital financial centre from scratch?

Interesting speech from Joachim Wuermeling of Bundesbank. It is nice when you read words like Continental Europe being used by central bankers.

He says post Brexit, things are difficult for both Europe and UK. London is poised to lose the several advantages it had pre-Brexit especially in the area of financial services where it was at numero uno position.

In this kind of a setting, can Europe build its own financial centre? History of financial centres suggests one can leapfrog over others:

In a competitive environment, a leading role as a global financial centre is not set in stone. Looking back over the past three centuries, the balance of power has clearly shifted among Europe’s financial centres. For instance, in the 18th century, it was Amsterdam that held the leading position for a long time. As of the 19th century, London began to emerge as a leader driven by Great Britain’s position as a colonial power. Over the past 60 years, the City of London has continued to cement its dominant position, boosted by stringent US regulatory requirements and tax regulations in the 1950s and 1960s, Britain joining the European Community in the 1970s, the Big Bang of the 1980s under Margaret Thatcher and the controversial “light touch” approach adopted by the UK Financial Services Authority around the turn of the millennium.

The Eurodollar and Eurobond markets were born in London, international – especially US – banks relocated, securities trading business expanded and, later, London went on to become a centre for – partly contentious – financial innovations. However, in the period of recovery following the financial crisis, the City of London demonstrated its power of innovation. 

How about a digital one?

 

Digitalisation has unleashed a period of upheaval that is calling into question the way in which established financial centres usually function. New competitors with innovative technologies and business models are challenging the traditional financial system. Digital platforms enable the supply of and demand for financial services to be matched much quicker. The use of digital instruments, such as distributed ledger technology, is changing value chains; automated securities trading is gaining ground.

With old structures becoming less rigid, a new opportunity is opening up for the financial centres on the European continent; they can pool their potential and work together as a single financial centre on the global market – not as a replica of the old systems, but in a new, forward-looking way.

The new digital technologies provide a whole host of ways to overcome the geographical distance between individual locations. Various (financial) locations can connect as if they were all in the same place, coming together to form an agglomeration. Real-time communication, distributed leger technology, platforms and co-working are just a few ways of reducing the importance of physical distance. Digital intermediation helps suppliers find customers, and vice versa. Just as value chains of services can today be forged across continents, the inner-European financial metropolises could work together. Regional markets could be merged on a European financial platform to create a networked economy. With time, it may even be possible to develop or at least maintain strong and stable personal relationships online.

The digital, decentralised market is definitely part of the future, and it is calling traditional financial centres into question. The European continent has an incredible opportunity to set up a technologically first-class, networked financial hub from scratch and to become a highly relevant global player. But what would this require? Let me briefly address five relevant issues.

First, specialisation and cooperation: The utmost challenge is for the financial centres in continental Europe to limit their own range of services, to find a specialisation and – at the same time – to cooperate online with other financial centres despite all the other competitors. However, political competition among financial centres is likely to stand in the way of this approach of specialisation and cooperation. Market-driven specialisation could help to create economies of scale and increase the potential for innovation which would, in turn, optimise cost structures and strengthen competitive positions. Complementary cooperation could ensure the necessary range and quality of the financial services provided decentrally. The principle of cooperation also requires a culture of openness towards other international financial centres and players – which is a prerequisite for successful global competition.

Second, digital infrastructure: Specialisation and cooperation require a digital infrastructure. The financial centres in continental Europe need to be digitally networked in such a way that enables the agglomeration effects I mentioned earlier to be generated. For high frequency trading, a separate cable was installed in the Atlantic to connect London and New York. Nothing similar exists between Paris and Frankfurt.

But we will not be on an equal footing with other global financial centres until digital intermediation on the continent matches supply and demand in a more effective way than traditional trade practices. We need to create digital hubs and platforms that are more effective than in the analogue world. This requires not only future-proof digital infrastructures but also a pooling of all parties’ digital power of innovation, be it financial institutions, infrastructure providers, IT service providers or FinTech. This takes place already, as we could see in the recent past.

Third, a competitive legal framework: The principle of specialisation and cooperation as well as a high-performance digital infrastructure are only two components of a whole range of elements that a “digital finance hub of Europe” requires. In spite of all efforts aimed at harmonisation in the EU, in many areas continental Europe still does not have a joint, internationally applicable legal framework that can compete with English common law.

Hmm..

I don’t fully buy this digital vs physical differences. Basic attributes will still be needed whichever the world..

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