LONDON • Britain's economy may only be the world's fifth largest, yet when it comes to financial services, nobody beats London as a global finance capital.

More US dollars are traded in London each day than in the United States itself, while 40 per cent of all the world's derivatives change hands in the British capital.

London's equity market has the highest capitalisation in relation to gross domestic product in the industrialised world and Britain is the world's biggest exporter of financial services; its US$97 billion (S$140.5 billion) yearly surplus in this sector is double that of the US.

But financial services are more exposed to Britain's plans to leave the European Union (EU) than any other part of the economy. For much of their success depends on Britain's ability to keep its borders open, and in the banking sector a great deal hinges on the so-called "passporting" system enshrined in EU legislation. The system allows banks in Britain to sell services across Europe, and permits banks elsewhere to access all EU markets through London's financial hub. If these were to go, so would financial services; they are more mobile than other sectors of the economy.

British Finance Minister Philip Hammond has pledged to "work tirelessly" to defend London's position. But no one can explain why Europeans should keep London's special status after Brexit.

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And many anti-EU campaigners in Britain do not seem to care. They argue that London's financial interests should not interfere with the objective of making a total break from the EU. "We are in danger of talking ourselves into defeat before negotiations have even begun," warned British Bankers' Association chief executive Anthony Browne.

London's competitors are salivating at the prospect. Paris promises to "roll out the red carpet" to British bankers. Ireland's development agency has unveiled plans to attract 10,000 financial services jobs to Dublin. And managing director Hubertus Vath of Frankfurt Main Finance - a group that promotes the German city as a financial centre - said "the welcome banner is hung and Frankfurt's doors are wide open".

Yet not one of these competitor cities comes even close to having what it takes to challenge London as a global financial centre. France is ruled by politicians who regard bankers as a plague, and inflict on them draconian taxes and labour laws; Paris is ranked 32nd in the Global Financial Centres Index which places London first, New York second and Singapore third.

The size of the city also matters. With 700,000 inhabitants, Frankfurt as a whole is smaller than the one million financial workers in London, so it will need decades to build the necessary ecosystem of consultancies, lawyers, accountants and actuaries, all speaking English and all enjoying the network of housing and international schools required for the armies of expatriates that financial centres attract.

In short, creating a viable financial centre is more than just a matter of hanging a welcome banner, or offering subsidised office space.

The real danger to London lies elsewhere. The first is a messy divorce between the EU and Britain, one which questions all the assumptions about free trade. That would destroy London as a financial centre, but will also destroy other European economies. And the second, sustained real challenge to London comes from Asia's rising financial centres, rather than Europe's.

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