A Brutal Brexit Is Lose-Lose for the City of London and the EU

London wasn’t always the be-all-and-end-all for European finance. It took a deregulation drive under Margaret Thatcher in the 1980s — known as the Big Bang — and Britain’s contribution to the launch of the European single market in the 1990s to decisively lure the headquarters of U.S., European and Japanese banks to the City. By serving as a magnet for money, talent and office space, U.K. financial services now account for 7% of the country’s economic output and over 1 million jobs. It’s a national cash cow.

While that has meant a lot more prosperity for the U.K., it has also created a lot of disgruntlement on both sides. The 2016 Brexit vote was an obvious wake-up call exposing the capital’s disconnection from the rest of the U.K. when it came to wealth, house prices, culture and politics. Yet even before then, on the continent, regulators were fretting over London’s dominant position in euro trading and the risk to its financial stability. The symbiotic relationship between the two was a “master-slave” dynamic, as one EU official termed it.

As the U.K. and its biggest trading partner begin talks on their future ties after Brexit — which will happen on Friday — they should keep front-and-center the reality that they each have a lot to lose from a sudden break in the cross-border financial-services trade; but equally a lot to gain if they carefully engineer a long-term, gradual drift away from one another.

For policy-makers on the continent, Brexit is a chance to reduce the excessive concentration of euro trading on British soil — London currently accounts for about 86% of euro-denominated interest-rate swaps — and build up local hubs like Paris, Frankfurt and Dublin. For the Brits, Brexit is a chance to diversify trade ties away from the EU: The bloc’s services deficit with the U.K. was about 28 billion pounds ($37 billion) in 2018. These are intertwined markets with very different ambitions.