Commentary: Square Mile loses its lustre

Is London's pre-eminence as a European Community financial centre in danger of being undermined by wrangling over British commitment to closer union, as Michael Heseltine, President of the Board of Trade, said at the Tory conference? He was speaking on the day plans were confirmed for a central German stock exchange, one of whose key aims is to wrest back the 11 per cent of deals in German equities done in the City.

British isolation from Europe does not have to be a threat to the City. The growth of the financial industry in London over the last 30 years has had little to do with whether Britain is part of a larger market. The real reason is that London has had some of the key characteristics of an offshore financial centre: flexible securities regulation, especially compared with New York and Tokyo, banking markets which deregulated earlier than most, and mild taxation, an advantage extended to staff by the mid-1980s.

But there are ways in which the City is threatened. The European problem is not Maastricht, nor indeed whether some future central bank locates here. Rather, it is the harmonisation of banking and securities regulations that will undermine the relative attractions of the City, although this is proving a slow process.

Another threat is the improving competitiveness of continental markets: look at the technical efficiency of the Frankfurt exchange rather than the centralised bourse plan. Contrast that with the Stock Exchange's Taurus.

Possibly more important than both is the physical infrastructure of London. A compact City such as Frankfurt will become increasingly attractive to footloose financial firms as London snarls up, whatever the cheap rents on offer. Abandonment of the Jubilee Line and the Crossrail project from Liverpool Street to Paddington would confirm those fears.