National egos are growing and political powers drifting apart in Europe. You see it everywhere these days — in the Brexit debate, the building of new border fences and the softening of stability criteria.
How pleasant then, that in such times at least the European financial industry can find common ground – in the shape of two stock-exchange operators in London and Frankfurt that long had the knives out for each other.
While politicians in the European Union still preach deeper integration of capital markets in the club of 28 countries, Deutsche Börse and the London Stock Exchange are creating hard facts with their planned merger.
The two are welding together a European super stock-exchange that will finally be competitive on a global scale. And it’s high time.
This deal is being brokered by two true Europeans — Xavier Rolet, a Frenchman who heads LSE, the venerable British institution dating back 215 years, and German Carsten Kengeter, who heads Deutsche Börse yet chooses to live in London.
The two are welding together a European super stock exchange that will finally be competitive on a global scale. And it’s high time.
While Europe’s stock exchanges tried fruitlessly over two decades to combine into more effective units, the Americans – as so often – created hard facts. With the Chicago-based CME Group and Atlanta-based Intercontinental Exchange — which includes the New York Stock Exchange and hence Euronext in Europe — the Americans threatened to leave their European rivals far behind.
And Asia is seeing the creation of giant stock-exchanges – especially the Shanghai Stock Exchange, whose global role will increase dramatically in the next decade through the internationalization of the Chinese currency.
In competition with these global powers, Deutsche Börse possibly, and the London Stock Exchange definitely, would not have survived in the long term.
This was clearly recognized by Mr. Rolet and Mr. Kengeter. Both are former investment bankers and are analytically brilliant and extremely quick witted. They view the industry from a fresh perspective.
For Mr. Rolet, it was a matter of pure survival. He believes that three to four global stock-exchange operators will control the market in the future. For mid-sized ones – such as the London exchange– there is no more avoiding that fact.
For years, he has fancied a merger with the Germans. The official word is that this combination is a “union of equals,” but in reality it is a takeover by Deutsche Börse, in which Mr. Rolet will be the junior partner.
But it’s not just global competition that is driving the two stock-exchange companies into each other’s arms. There is also a fundamental change in the market.
Trade in stocks might remain in the public eye because of stock-exchange reporters on German and British television. But in economic terms, stock trading has played a subordinate role for a long time.
A mere 10 percent of total revenues come from this sector. Money is earned elsewhere — in the derivatives trade, in the clearing of transactions and, increasingly, also in the index business.
These are all commercial areas in which LSE and Deutsche Börse complement each other perfectly. Both are strong in clearing. Deutsche Börse leads in derivatives trading, and LSE is ahead in the index business since making an acquisition two years ago.
Moreover, strict new regulations for large credit institutions mean that more and more of the classic banking business is shifting to stock-exchange operators. In the clearing of derivatives, that is the explicit aim. And in commercial deals – for example, with foreign currencies – it is instead an unintentional result of regulation.
As two former investment bankers, Mr. Kengeter and Mr. Rolet understand this perfectly.
Mr. Kengeter’s deal thereby would create a strong European financial company with global impact.
Now Europe’s politicians, supervisory bodies and anti-trust monitors must decide whether they want to strengthen the continent, or put up obstacles to the merger.
A few years ago, the European Commission refused to authorize merger plans between Deutsche Börse and the New York Stock Exchange. A decision that short-sighted and provincial now would be fatal for Europe.
Europe must decide: Should capital market unions once again turn out to be simply a new layer of E.U. regulations, laid over national laws like mildew? Or should they become a truly united market for financial services?
In a time of resurgent political nationalism, the success of this merger would be a positive sign for Europe.
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