“Fog in Channel – Europe cut off” is the old joke headline, but the fact we laugh in self-recognition is very telling. As a country we like nothing better than being able to ignore what is happening in Europe, but there are times when we simply can’t. This is one of them. The Economist magazine – as pro-EU as they come – has just warned of “Eurogeddon.”  The break-up of the European single currency is becoming increasingly likely, bringing massive financial and political turmoil in its wake.  Governments across the Eurozone are worried their banks will fail. European officials are privately speculating about the return of military rule in Greece, with the generals taking over again as the seat of democracy becomes ungovernable.

We obviously cannot know for sure where this will end, but we know where European leaders – meetings at a Brussels summit this weekend – would like to go. Their solution is more fiscal union in the Eurozone, as well as absurdities such as a financial transaction tax. Whatever your views on whether fiscal integration is in the UK interest, it is clearly something we have to plan for. As I explained last week, and as the government is well aware, it could lead to caucusing among Eurozone members, who would be able to agree a position amongst themselves, and then through the magic of qualified majority voting, impose it on the UK without us even being in the negotiating room.

For some issues that will be a more serious predicament than others. In many policy areas – such as VAT bands – we have similar interests to Eurozone members, so in practical terms the policies they come up with are unlikely to be too disagreeable to us (although clearly as a point of principle we should have a say in how they are formed). But there is one sector in particular where it could be a major problem – financial services.  The trouble here is that we have the industry, but they are making the rules. We have a 60% to 80% market share in financial services, and yet just one vote (the same size as Italy, which is hardly known for its prowess in banking). There is a barrage of legislation about financial services being targeted at the UK, all originating on the other side of the Channel, and all putting us in a defensive position.

This is very uncomfortable for the government, but it is also ridiculous that (yet again) we find ourselves here.   As the EU’s financial capital we should be setting the clear agenda on financial services. It is a consequence of decades of poor engagement with Brussels that we find ourselves fighting a rear guard action trying to minimise damage to a key economic sector. Many people – including British ministers and many in the City – believe that the French have a co-ordinated strategy for using EU regulation to level London down, and to get Paris to replace it in the number one financial slot. Whether or not that is true, it clearly must be a major priority for us to gain the momentum in Europe. I would say regain the momentum, but we never had it in the first place.

There is a great opportunity here for the Treasury to seize the initiative, to develop an agenda which could become a real rallying cry for the government. But we first have to overcome a significant obstacle – that we don’t actually know what we want.  The first thing we have to do as a country – with government and industry working together – is decide what EU legislation we would actually like to see in financial services. Many banks, insurance companies and others have a good idea – largely along the lines of completing a single market in financial services by removing barriers to trade that still exist within the EU. We should distill all these into the UK Agenda for Financial Services, which ministers could then adopt (no doubt some changes) as their programme for reform in the EU. The government should then get other like-minded EU countries on side, and then start pushing this agenda for reform in Brussels.

By all accounts, to do this successfully, the government will need to increase the capacity in the Treasury to understand and lobby on EU financial services legislation. Many will shake their heads in doubt that we can have any impact, but we have succeeded in setting the agenda in other areas, such as enlargement. We certainly won’t succeed in setting the agenda on financial services in Brussels if we don’t try. And even if we only make a little headway, there will be other benefits. By pushing the UK financial services agenda in Brussels, we will force EU officials to spend less time buffing up and pushing through proposals form other EU countries which we don’t want (like the financial transactions tax). Other countries might defeat the British proposals, but they will have expended political capital in doing so, putting the UK in a far stronger position with regards to whatever regulation is left on the table. French diplomats are past masters at playing these negotiating games, but as a country we seem to find it distasteful. I suppose it isn’t cricket, but it is effective. But just as a country we can’t afford to ignore what is happening in the Eurozone, we can’t afford to ignore what is happening in financial services. We need to set the EU agenda, or the EU will set the agenda for us.