Building Europe as a digital financial centre?

One one hand Europe is seen going down the drain. On the other hand, there are hopefuls. Denmark central bank chief said Europe is not doing as badly as it may sound.

Prof. Joachim Wuermeling of Bundesbank has been arguing that Brexit provides Europe an opportunity: to create a digital financial centre. in In a new speech he again makes these points.  

Ladies and gentlemen, as much as we greatly regret the United Kingdom’s decision to leave the EU, we must nonetheless look forward and consider how financial services can be delivered in the European Union in the future.

First, we need to observe the consequences of Brexit from the perspective of each individual bank. Banks have so far avoided making any major changes, not least because they are also busy coping with large-scale acute challenges and their financial implications. So it is easy to lose sight of strategic issues. It’s not just Brexit that’s shifting the tectonic plates under banking – digitalisation and regulation are two other key drivers of change. When traditional structures and markets are broken up this way, the cake will be redivided – some will lose out, but some will get a bigger slice. There is a real danger that adhering at all costs to traditional positions in London risks missing out on new opportunities in the EU – though not by everybody: those who don’t will be the winners. So I would urge you not to lose sight of medium and long-term strategic options.

Second, we also have to consider the repercussions of Brexit in terms of its impact on the EU financial market as a whole. What we are looking at here is nothing less than the financing of the European economy, especially at a time when the global economic and financial order is becoming increasingly shaky. Earlier EU initiatives – the single financial market, the banking union, and the capital markets union – all had an inward focus. And with London, Europe had an international financial centre. This will now change. Hence the question of whether we in the EU 27 should aspire to developing a globally competitive financial centre that is more than the sum of its parts here in Frankfurt, Paris, Amsterdam or Dublin. François Villeroy de Galhau, the governor of the Banque de France, recently spoke of an integrated network with centres specialised in various activities – and I am thinking along the same lines, which include major efforts to harness digital potential as well.

I would like to help kick off a broad, forward-looking debate surrounding the concept of a digital financial centre of Europe.

Hmm..It is quite amazing how Europe continues to compete to have a financial centre on lines of London. This is as historical as it can get.

There are three pillars to this digi financial centre:

It’s an idea based on three pillars.

First, a networking pillar. Today, Europe’s financial services potential is spread over various locations. It does not have a cumulative effect. However, for a fully-fledged financial ecosystem to truly flourish, there needs to be enough providers and users of financial services in the local market. At present, no European financial centre can tick this box. The continental venues could, however, tap into an aggregate potential if they were to form a network in which any financial product can be bought and sold in any quantity at any time, just as you would expect from a globally competitive financial centre.

The second pillar is digitalisation. Financial centres in continental Europe need robust digital market infrastructure that leverages all the state-of-the-art digital capabilities – of which distributed ledger technology (DLT) is but one. Only then can these centres overcome fragmentation and replicate agglomeration effects of physical proximity. The Eurosystem will also be expected to contribute here, seeing as it already provides a key piece of infrastructure for payments in the shape of the TARGET system.

These first two pillars create a digital network across European financial centres. But to make the most of Europe’s potential as a “financial Amazon”, market-driven specialisation will also be needed as a third pillar. Specialisation can help deliver economies of scale, increase the potential for innovation, and achieve excellence. In an environment of “coopetition” – a neologism merging the words cooperation and competition, European financial centres could cooperate, compete and, at the same time, hone their own areas of expertise. But this is a vision for the future.

It’s a picture of the future that is also very much in our own inherent interest as a central bank, because the more that financial flows end up where our system is in force, the more we are able to promote financial and price stability as well as a strong currency.


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