Back to Financial Protectionism?
The financial world is constantly occupied with the linkage between nationalism and financial decisions. Can a Frenchwoman run the leading global financial institution, the IMF, without a dominant European view? Can a Canadian stock exchange TMX be sold to a UK stock exchange LSE without threatening Canada’s financial sovereignty? Warnings about financial protectionism following the crisis had been frequent, and it’s time to reflect.
The role of nationality in economic decisions has been controversial for quite some time. It was not until Dubai World tried to purchase U.S. ports in 2006 that the U.S. government redefined its strategic assets and required an extensive review process of any potential take-over of these assets by foreign state-controlled entities. Germany and Canada followed suit with similar moves. Yet, it is quite challenging to compare the effects of foreign ownership on strategic infrastructure and trading platforms. Politicians’ attempts to protect a key energy facility from a foreign ownership can often be justified, while a discussion on financial systems ownership can be a pretext for good old financial protectionism.
The current wave of mergers in the stock exchanges industry has reinforced the importance of this view. The recent London Stock Exchange’s proposal to acquire the Canadian TMX has triggered an internal Canadian debate on the need to keep the Canadian exchange independent. The City of London has seen a similar debate with respect to the current and future status of the London Stock Exchange as a stand-alone entity. Furthermore, earlier this year the Australian authorities blocked a merger between Australian Securities Exchange and Singapore Stock Exchange. Australia’s national interests, including the stability of its financial systems and keeping Australian jobs in the financial services industry, had been mentioned as drivers for the decision.
Is a stock exchange a national strategic asset or simply another local component in the globalization of financial systems? As with many things in life, my answer is it’s a hybrid. The consolidation of cross-border exchange operators allows them to reduce trading and listing fees, increase trading volumes, and provide smooth cross-listing opportunities. It can also create a more integrated exchange by combining, for example, equity trading with derivatives solutions.
However, a stock exchange also has a strong national element. Larger transatlantic stock exchanges may make it difficult for small corporations to gain access to global capital markets. Also, research from recent years shows a strong nexus between national financial systems and economic growth, especially in developing economies. A national stock exchange is more likely to generate jobs in the local financial services industry. The inexistence of a public stock exchange in Yemen, for instance, is an indicator for the lack of development and security in the country. Clearly, then, the specific economic circumstances should be examined carefully.
The next couple of years will change the landscape of stock exchanges and global financial systems. Governments and national regulators should resist local political pressures and avoid the temptation to block consolidations for a financial protectionism reason per se. It is not a coincidence that in many Western countries stock exchange operators are not defined as a protected national industry that requires a special review process for national security purposes. Any review process should instead focus on market failures and consumers protection with the appropriate safeguards. The recent counter-bid by a Canadian financial services providers and pension funds consortium to merge with TMX should not be, and so far has not been, motivated and judged by financial protectionism but by its economic merit, driven by profit maximization.
Investors who follow the potential of global exchanges pay a close attention to the rise of volumes and efficiency and the decline of operating costs. Too often, I am afraid, they ignore the role of economic diplomacy and national governments in shaping the future of this industry. It is the responsibility of international organizations and national governments to better communicate the benefits of global financial systems. Otherwise, post-crisis financial protectionism can come back to haunt us, and this time it would be out of left field.
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