A merger of the London and Frankfurt stock exchanges on the right terms could be immensely beneficial to all concerned.

The vision of a market that covers half the equity trading in Europe is a bold one. But it has to be a deal on the right terms.

Sadly, the proposals give the impression of a deal cobbled together in response to past technology failures and the competitive threat from Nasdaq. It is ironic that the London exchange should announce a merger without providing the sort of details it would require of a company wanting to list its shares. Its behaviour looks all too like the classic response of the threatened monopolist embracing the competitor.

It may be argued that the merger is not a matter for the government or for parliament. But if the government has decided it has a watching brief in the negotiations between BMW and Rover, then it certainly needs to keep an eye on a deal that, on the wrong terms, could mean the demise of London as a financial centre.

One can see that the consolidation of Europe's stock exchanges may make sense and that it is unsatisfactory to have 40 different exchanges serving a single market. A merger could add liquidity, reduce spreads and transaction costs. But how much do exchanges really matter? The real battle may be between traditional exchanges, internet exchanges and ECNs, the orderdriven electronic networks. Many questions the proposed link-up between London and Frankfurt attempts to answer will in fact be decided by the market and the outcomes may be quite different from those wished on us by the executors of the two exchanges.

For example, if growth companies are to be quoted in Frankfurt, what will this mean for London's initial public offering business? What guarantee is there that when small growth companies become the large companies of tomorrow they will migrate to London? In the US, Microsoft has chosen to retain its Nasdaq listing. And if the growth companies of tomorrow are driven to Frankfurt, so too will be the lawyers, deal-makers and traders based in London.

We have in the UK a more fully developed system of regulation than in Germany. German blue chips may baulk at regulation by the Financial Services Authority and the requirement to submit themselves to UK requirements on non-executive directors and remuneration.

At the other end, new British technology start-ups may seek to avoid UK standards of reporting and accounts by having their quotation in Germany. If so, these companies will lose much of their attraction for UK pension funds.

Then there is the question of transparency of trading in the market. There may be more block trades between the large investment houses, which may have a profound effect on the supply and demand for a particular stock and yet may not be reported in the market.

The stock exchange merger is justified in the name of economies of scale; but the real economies come later than the trade. What is worrying is that Euronext, the merged French, Belgian and Dutch exchange, has included clearing systems.

To many people's exasperation, Sets, installed only three years ago, is to be scrapped in favour of the German Xetra.

The change-over is going to be exorbitantly expensive for the smaller brokers.

The suspicion that this deal is driven by the international investment banks with little regard for pension funds and retail investors is increased by the insensitive handling of the question of the euro. Whatever Mr Don Cruickshank, the chairman designate of the merged operation, now says, the London exchange clearly intended that all companies should be quoted in euros.

Assuming Britain remains outside the euro-zone, to quote prices in euros would be to impose an extra cost on retail investors and pension funds. The liabilities of the latter are in sterling and they are obliged by law to match their statutory liabilities with their assets. The question of the euro is another to be determined by market forces; companies, taking into account the views of investors, should decide the matter for themselves. A modern trading platform should be able to accommodate this.

Norman Lamont was chancellor of the exchequer in Britain between 1990 and 1993.