The recent row over David Cameron's eurozone veto has exposed two radically different views of financial services and the City of London.

One is that it is a vital national interest: a unique network of innovative firms and workaholic employees who generate shedloads of tax revenue for UK plc. The other is that it is a source of systemic instability, unfettered greed and industrial-scale tax dodging. Antagonists line up on either side of this divide: right versus left, Europhobes versus Europhiles.

The uncomfortable truth is that both of these caricatures are true. A great deal of the apparently high-minded European drive to tax and regulate Britain's enclave of Anglo-Saxon capitalism is prompted by a protectionist desire to have a bigger slice of it. And much of the patriotic flag-waving by the City disguises special pleading on behalf of banks, in particular, whose practices have caused immense damage to Britain's productive economy.

Facts should occasionally be allowed to intrude. The financial services sector, broadly defined, accounts for around 8% of GDP and employs around a million people. But most of this is not "the City", and is largely untouched by the threatened EU regulation which worries the City. Within the City itself there is a complex ecology, much of it uncontroversial. The UK is a world leader in professional business services, for example. The pensions and insurance industry has had its share of problems (pension mis-selling, Equitable Life) but it has a different maturity structure from banks and does not pose the same systemic risks. Even within the banking sector, which has caused so much reputational damage to the City, it is a small number of rogue institutions and the sub-caste of traders in investment banks who have caused most of the damage.

After 2008 no sensible government (and few bankers) believe that the free-wheeling days of the past can continue. The issue is a practical one of how and where to regulate: nationally; globally, as with the Basel capital rules; or at the regional-EU level. The scale of British-based banks (with balance sheets valued around 500% of GDP) and the risk they pose to the UK taxpayer has meant that Britain has had to act ahead of other countries.

That is why the government has moved to ringfence the "traditional" banking functions from "casino" investment banks following the Vickers report: tougher action than either the EU or the US. We led the way with a bank levy, and measures to expose bank top pay to greater transparency are also unilateral and necessarily so. Bank reform is a longstanding Liberal Democrat priority, but also an area that has seen united action from both coalition partners determined on the same goal.

EU financial market rules are also necessary since the concept of a single market must apply to traded services, including finances. The current pipeline of EU proposals includes some areas genuinely in need of reform – like rules for trading in derivatives or to tackle conflicts of interest in rating agencies. They also include more damaging ideas, like proposing restrictive solvency rules for institutional investors that could undermine their ability to invest in UK infrastructure. But in a calm, un-politicised environment, all of these issues could be negotiated through qualified majority voting, as they have been in the past. It is also unavoidable, since the veto hasn't changed the voting system for single-market rules.

Additionally much phoney emotion has been generated by the proposed EU transaction tax. On the EU side, a technically challenging proposal has been wrapped in almost spiritual clothing (indeed, the Vatican has endorsed it). But it is in reality a cynical raid on UK financial services – or, more likely, the consumers of them – to fund the EU budget. A perverse Robin Hood tax levied on the people of Nottingham to pay King John. This tax has however never been a serious threat to the City since taxes are governed by unanimity. There is scope for taxing banks more like the bank levy we have introduced.

The issue of EU financial services regulation is, in any event, a sideshow compared to the much bigger question of averting a catastrophic outcome to the eurozone crisis and a deep European slump. And in the UK we need to put the whingeing of the City to one side and concentrate on delivering our core narrative, to achieve growth by rebalancing the UK economy. Towards advanced manufacturing, creative industries, higher education and professional services – and therefore with less reliance on banking – from London to provincial Britain. The bankers don't speak for Britain; the coalition will not put their interests above the rest of the country.