The bankers and fund managers in the City of London have been the perfect scapegoat for politicians wanting to avoid responsibility for the credit crunch and subsequent recession. Never mind that it was the politicians (principally Gordon Brown and Ed Balls) who put in place the tripartite supervisory framework for the City, who let the Bank of England grow the money supply without reaffirming their inflation target, and who ran up a structural Budget deficit which has left the current UK Chancellor having to tread an extremely thin line between restoring fiscal balance and choking back too sharply on public expenditure, and without much room at all to cut tax to promote enterprise.

Having made a scapegoat of the City – and with no willpower to establish a new regulatory framework which would eliminate the moral hazard of banks being too big to fail – the last Labour Government quietly handed over the keys to the City to the European Union. At a crucial summit in June 2009, the UK Government’s sovereignty over the regulation of banking and financial services was removed, as EU Member States agreed to establish three new European supervisory bodies (ESAs) for financial services and markets.

In January the new authorities started operations, and it is only now that many in the City are waking up to the fact that their new masters no longer even reside in London. The Chairmanships of all the new authorities have gone to non- British nationals with little or no experience of the working environment of the City. Although at this point the new agencies are small and fledgling, their governance framework gives equal weight to all EU members, despite almost all the major European financial transactions taking place in London.

The ESAs will be able to investigate any type of financial institution, product or activity to assess what risks they believe they could pose to a financial market. They will be able to impose legally-binding supervisory decisions directly on financial institutions and issue instructions to national banking supervisors. A raft of new legislation is now being passed by the EU giving ESAs the powers to temporarily prohibit or restrict what they deem to be harmful financial activities or products. ESAs will also have the power to ask the Commission to introduce legislative acts to prohibit such activities or products permanently.

I sit on the Economic and Monetary Affairs Committee where much of this new legislation is being debated. From my experience as Shadow Rapporteur on the Hedge Funds Directive last year, I have been left in no doubt that the motivation of the continental legislators is resentment of the success of London. They have no idea what the conditions need to be for a financial marketplace to prosper.

This year we face a barrage of new legislation, justified by the Commission as necessary to ensure pan-European supervision of pan-European economic activity. In the spirit of politicians blaming bankers for their own failings, they are currently pushing through a new regulation on short selling and credit default swaps. The French Green MEP taking the lead on this dossier in Parliament wants a full ban on uncovered sovereign CDS and even wanted to extend this to corporate bonds. Little thought is given to the consequences of such measures – such as fewer cross border investments as investors can no longer cover their positions by short selling sovereign debt.

A raft of further measures, from the regulation of custodial banks to investor compensation schemes, deposit guarantee schemes and insurance guarantee schemes, are being introduced in a cavalier fashion. Their proposals reveal ignorance on the part of the bureaucrats writing the new rules of how different industries work, and their attitudes to risk.

Already a new Directive on market infrastructure – which may turn out to favour the Deutche Bourse damaging the pan European trading platforms of London’s LCH Clearnet – is being rushed through. Further rules on derivatives trading are planned in the new Market Abuse Directive. A review of the Markets in Financial Instruments Directive is also imminent. No-one in the UK is lobbying me on these matters because they probably have not spotted the threats yet. It is almost as if the Commission wants to get all these new laws introduced before London wakes up to what is going on in Brussels.

The powers of the European Supervisory Authorities will grow over time. A provision has been made for their powers to be reviewed every three years. Some might say that these new rules and institutions are too far removed from people’s real lives for them to have any impact. I profoundly disagree. If you do not have right the financial tools to fund a business, a government deficit, or a cross border trade, then you stop wealth creation in its tracks.

It is very easy for continental European politicians to bash finance and tie it up in red tape, but representatives of the UK in EU have a responsibility to defend finance as this a crucial UK industry in the same way German politicians defend its car manufacturing or France defends its farming and agriculture. We must be bold in our defence of the City.

The City is now being heavily regulated by people who do not appear to understand how wealth creation is financed. This is a turning point for capitalism in Europe. Unless we stop this over-regulation, global financial corporations will venture east in search of freer markets.