Last week, the governor of Banque du France, Christian Noyer, told the Financial Times that there was "no rational reason" why London's financial services sector should control nearly 40% of the euro's foreign exchange trade. According to Mr. Noyer, such a financial hub ought to be located within the economic jurisdiction of the EU proper, for the sake of "control" over the currency. Unfortunately, given the paucity of detail attributed to Mr. Noyer's assertions, it's a matter of speculation as to which rational reasons would justify moving the euro trade from the City to the continent. Further speculation surrounds whether this spectacular upheaval would be achieved by market forces or by legislative fiat, as well as where the new financial heart of the EU might be located, with Paris an obvious if unstated choice. Perhaps Mr. Noyer, the head of the France's central bank, has some suggestions if this issue gains traction in the European Parliament at the EU commission and in member state capitals. That said, why does the EU have any interest in where its currency is traded? Does foreign exchange on the continent offer economic benefits for the EU? Is this just another skirmish in Europe's game of thrones? Or does it, as I believe, hint at new instruments of economic policy that will help define and protect an invigorated European sovereignty in the wake of Europe's sovereign debt crisis?

If Christian Noyer's suggestion was about improving the value of the euro, or about improving the economy of the union or particular nations within the union, then it's hard to see how it would help. A freely competing currency is one of the hallmark signs of economic liberalism, and is a proactive step towards trading on global markets. Allowing the European Central Bank, or any other entity, the degree of control implicit in conducting the majority of euro forex within the EU raises immediate accountability questions. Furthermore, trading the euro in the City lends legitimacy to the currency through the perceived independence of private trading in a non-EU jurisdiction. The state of the primary market for European government bonds is telling of the information asymmetries between investors and EU member states that precipated the EU sovereign debt crisis. Investors have so discounted the value of European sovereign debt that, in response, it is the ECB that has been forced to buy these bonds. To avoid a crisis of confidence in the euro itself, more perceived independence in valuing the currency is better than less, and this is just one thing that the City can offer the EU. At any rate, improving the strength of the economies that underpin the euro seems a safer bet to improve the financial situation of the EU than spending time and resources fighting the extremely difficult fight to assume control of how and where the euro is traded. Without clearer information about how controlling the trade in euro (if moving the financial sector to the continent would indeed achieve such an aim) would make a difference, Europe's leaders have more important things to do.

So were Mr. Noyer's comments just an incendiary geopolitical snipe? After all, he did justify his claims partly upon the basis that the UK cannot be allowed to "control" the euro to the degree that it does if it refuses to integrate fully into the Union. It stands to reason that, on Mr. Noyer's argument, it would be equally unacceptable for New York or Tokyo to "control" foreign exchange markets for the euro. It's not as though the City benefits from a regulatory license or other state intervention to achieve its position of market power - quite the opposite, it has previously litigated to prevent European legislation mandating that clearing houses for euro forex be located on EU soil. The only "rational reason" required for trade to occur in the City is that firms choose to trade there, and so it could be argued that Noyer's stated reasons betray a desire to pressure or punish the UK for their political stance to the EU. This "sour grapes" argument takes on the unfortunate tenor of much of the debate surrounding Greek sovereign debt and other issues in the Union, and is, therefore, hardly without precedent.Neither explanation makes any sense. So long as one frames this debate as between the French national interest and the City of London, it cannot possibly make any sense at all, and the consequent discourse degenerates into a cacophonous din about who has the most inferior understanding of finance. Fortunately, this is not the only way to frame Mr Noyer's comments. It is more helpful to broaden the scope, by considering issues of sovereignty, economic security, and banking reform in the European Union.

In truth, who controls the trade in euros is part of a much greater project to secure macroeconomic instruments, and thereby improve (or even create) the foundations of EU prudential policy. What is left out of the Financial Times interview are the steps which a brave new European Union might take to consolidate a banking union between its member nations. Such a banking union requires prudential oversight, and in turn, that requires a principal, agents, and instruments to give effect to banking policy across the EU. The principal is clear (the ECB), the agents are clear (the central banks of each member nation), and all that remains is for the ECB to assume central command of various instruments of control. These instruments have recently been on the French central bank governor's mind, and help a reader understand the context of the interview.

This isn't such a strange way to think about financial regulation, given that similar issues are frequently addressed here in Australia by the Treasury, the RBA, and the FIRB. These debates are part of the ordinary struggle to balance private right against the public interest. This is particularly true where it concerns foundational aspects of a state's economic system. In Australia, the proposed sale of the ASX to Singapore Exchange Ltd brought similar concerns and arguments about the regulatory instruments and safeguards required to make such a sale acceptable. When we frame those arguments, the primary emphasis remains upon the prudential regulation required to preserve the economic foundations of national sovereignty.

Alienating foundational assets, such as a major national stock exchange, poses real questions - will the selling of those assets increase agency costs and decrease the efficiency of regulation? Does it weaken the state to surrender control of the transaction costs regarding foundational assets to foreign and/or private will? Similar questions could be asked about the location of foreign exchanges and clearing houses with significant power over a nation's currency. Discussion about where the euro should be traded should be framed in a similar way to any other debate on the limits of sovereignty and private right, and about which economic instruments would best suit the particular needs of the European Union.

The RBA's head of financial stability department, Dr Luci Ellis, has recently offered an excellent example of how to think about prudential instruments. Of course, the instruments and matters discussed by the RBA, and those of Christian Noyer regarding the European Union, are vastly different. It is something in the tenor of Dr. Ellis's speech that should set the terms for discussion about control of the euro. After the dust has settled, the stakeholders in that debate should come to a decision about whether moving the financial hub of the EU to the continent would improve its financial stability. This decision is open to interpretation, and indeed might be criticised for the appearance of nationalism, or upon its merits as a transaction. However, it is a decision that must incorporate a synthesis of political and economic thought, and thus properly prudential in nature.

It would be too easy to dismiss Christian Noyer's comments as political posturing, or to assume that he seeks only the profitability of increasing the EU's (and France's) power over the euro. As long as we are speculating as to the motivation behind his proposal, we should investigate the radical possibility that Mr Noyer contemplates a nobler purpose than simply divesting the City's interest in trading the euro. Rather than hiding nationalist concerns behind a veneer of EU solidarity, Mr Noyer might be shrouding an ambition to reform the structure of the European Union behind the rhetoric of national politics. If so, he contemplates that foreign exchange, and the financial services structure which supports it, would become one of the myriad tools available to the European Union, and particularly the European Central Bank, in trying to manage the disparate economies that comprise the EU. If so, this is a clear sign that a new European Union is stirring from the ruins of the old, and whilst the Union that collapsed under the weight of poor banking regulation and supervision might have earned international contempt, the real EU will soon stand up.