David Cameron has left the City more, not less, vulnerable to EU law

There are many puzzles about the British government's tactics at last week's EU summit. One is why it chose to identify the City of London as the "vital national interest" that needed special protection. The City, after all, is the most unpopular "national champion" that the UK possesses. It accounts for a smaller share of UK GDP and employment than the manufacturing sector (yes, you read that right). And the era of "light touch" financial regulation in the UK has in any case drawn to a close: since the global financial crisis, the UK has implemented many reforms before they were adopted at EU level; and in some areas the UK has gone further than other EU countries are prepared to contemplate (unlike the UK, no other EU country has plans to separate the retail and investment and banking operations  of its banks).

Why, then, did the British government believe that the City needed special protection? Part of the answer is to be found in continental Europe. Ever since the global financial crisis, politicians in France, Germany and elsewhere have often presented their task as bringing "unregulated Anglo-Saxon finance" to heel.

President Sarkozy has repeatedly spoken of the death of "unregulated Anglo-Saxon finance", while chancellor Merkel has stated that the EU would no longer be dictated to by the City of London. The eurozone debt crisis has only reinforced continental suspicions of the City: politicians in Berlin, Paris and elsewhere often see it as a nest of speculators whose activities pose a threat to the eurozone's survival. On this view, the City must be tamed if the eurozone is to be saved.

Until last week, Britain, the EU and the City formed what could be called a triangle of suspicion. The British government did not want to drive business out of London, but it did want to reduce the cost that the financial sector potentially inflicts on British taxpayers. The EU proposed a vast programme of reforms – some that the UK had committed itself to in the G20, others (such as regulations targeting hedge funds) reflecting French and German concerns. The City, for its part, tried to water down what it held to be the most egregious aspects of the new rules. Although not an unconditional supporter of the City, the British government was more sensitive to the City's concerns than other EU countries and could use its political influence to amend EU legislation where necessary.

Will the British government's attempts last week to seek special safeguards for the City change the nature of this game? There are two reasons for thinking that it could. The first is that it is likely to change the atmospherics, to the detriment of the UK and the City. Seen from Europe, the UK held the fate of the eurozone hostage to the interests of its financial centre. For many in the EU, the City and British euroscepticism are now associated – a perception that will not help the City persuade the EU to take its interests into account. The second reason is that the UK could be marginalised in the bodies that adopt EU legislation: the risk is that the substance of new EU legislation will be determined by a caucus of other member-states.

Unsurprisingly, many in the City are ambivalent about David Cameron's tactics at the EU summit in Brussels last week. Some have welcomed the prime minister's stance, but others fear it will backfire. Consider the most contentious proposal in the EU's legislative pipeline: a proposed financial transactions tax that would fall disproportionately on the UK and the City. Until last week, it seemed that Britain had a fair chance of thwarting it. But many in the City now worry that other countries will be less inclined to listen to British objections and push the tax through regardless. Britain may also find it harder to challenge requirements that clearing houses for derivatives transactions be located in the eurozone. Paris and Frankfurt are keen to drive business away from London and towards the eurozone.

In short, last week's summit could turn out to be bad for the City. Far from defending the City against ill-conceived initiatives originating in Brussels, the government may actively invite them. The reason is that it has marginalised itself politically, and that it has only increased long-standing suspicions in the rest of Europe that British euroscepticism and the City of London are natural bedfellows.