The big stockmarket merger is a result of London's hi-tech failure

So the London Stock Exchange is to be taken over by the Frankfurt one, and that means that British shares will eventually be quoted in euros. What does that say about the supposed supremacy of the City as Europe's premier financial centre?

Put that way, things look pretty dire. The London Stock Exchange is twice the size of the Frankfurt one. Yet the two are being merged as equals. Worse than that from national point of view, the new chief executive, Walter Seifert, is German and the technical system of the merged exchange will be based on the German one. And while, initially, shares will be quoted in both euros and sterling, there is a at least a possibility that some large UK companies will find that the main market in their shares is in euros rather than pounds. Thanks to this capitulation by the London Stock Exchange, the euro would creep into Britain by the back door.

So a German coup to counter-balance the takeover of Mannesmann by Vodafone? Another BMW/Rover saga in the making: Germans take over British institution, muck it up, shut it down? The truth, as usual, is more complicated.

It is also more interesting, for while there are elements of the story that fit the caricature sketched above, what we are seeing is not really a story about UK-German rivalry, but more about the way globalisation rewards success and punishes failure.

The story goes back to 1986 and the reforms dubbed Big Bang. London made something of a Faustian bargain. It liberalised its financial markets, allowing foreign companies to take over UK stockbrokers and jobbers, and switching its trading system to the global standard. It was never stated explicitly, but the deal for foreign financial institutions was: "you may come here to London and take over our companies, but in exchange you must make London the centre of international securities trading."

The result, 14 years later, is that London has indeed increased its market share of global financial services, a business which in any case has boomed. But hardly any of the significant players are still British. Nearly all the main merchant banks have been taken over; the former jobbers have lost their identity, and most of the stockbrokers are now foreign-owned.

There is some truth in the view that it is these foreign-owned companies that have pushed the London exchange into a merger with Frankfurt, for they want the efficiency of a single European market for share trading, rather than separate national entities. But it is not true that Frankfurt is getting more than its fair share of the deal because the investment banks are either German-owned (and want German dominance) or American-owned (and don't care).

Frankfurt is getting parity in the deal because, though it is smaller, it has three advantages over London. Its technology is better; it owns the largest market in financial futures trading; and it has been better at encouraging trading in shares in the new economy, founding a special market for these called the Neuer Markt.

The plan seems to be that trading in established companies will be centred on London, while trading in new economy companies will be based in Frankfurt. Legally the thing will be based in London, called iX (ugh - why can't people use capitals and lower case in the established form, rather than think they are clever by mixing them up?) and Mr Seifert will move over to Britain.

The deal has two other important aspects. Nasdaq, the on-line US exchange that has specialised in the shares of high-tech companies, is joining in a 50/50 venture with iX to set up a pan-European high-tech exchange for high-tech shares. And expect in the coming weeks several other European exchanges, such as Milan and Madrid to join in. Eventually we could see a merger with the main European rival to iX, the joint venture of Paris, Brussels and Amsterdam, called euroNEXT (see what I mean? Ugh again).

So the big story here is one of global consolidation. Share trading in the European time zone will end up as a single entity. In this first round of consolidation, London has been rewarded for its critical mass, but punished for its technical weakness and its tardiness in setting up its own high-tech equity market.

But it is still an open game. The next stage will turn on where the buyers and sellers of shares actually want to trade. If the UK high-tech sector gains ground vis-Ã -vis the continental one, and British investors want to trade in these securities, the market will drift to London.

If Germany creates more new economy companies, the market will be there. Electronic markets can be anywhere. What matters is where those who analyse and trade shares want to be.

And that business about British companies having to be quoted in euros? Don't take it too seriously yet. A lot of trading in British company shares is now in dollars - through devices called American Depository Receipts, which are bought by US investors and traded in America. British pension funds, with the liability to pay British residents in sterling, have to hold most of their assets in sterling too. Provided we want to keep the pound, there is no reason why we should not do so.

The key development in the renaissance of the City in the post-war period was the invention of the eurodollar in the early Sixties. Learning to trade in other people's currencies was the trick that enabled London to build up its entire international business. It's a trick that London needs to relearn with some urgency.