A decade ago, the common assumption was that Europe was on the fast track to economic integration, and that this most orderly of cities would be its financial capital.

After all, Frankfurt was home to some of the largest banks in the world, along with the busiest stock exchange on the continent. And it would soon be the site of a new European Central Bank that everyone thought would make the euro a rival to the dollar as the world's reserve currency. Local boosters called it "Mainhattan," after the name of the river that runs through the city.

It never happened. Today, despite Britain's refusal to adopt the euro, London has emerged as Europe's financial hub, with Frankfurt an ever-distant second. There are now more German investment bankers in London than in Frankfurt, while foreign investment houses that rushed to establish a beachhead here have dramatically scaled back, or left town entirely. As for keeping tabs on the ECB, that turns out to be as interesting as watching a mug of lager go flat, and not a whole lot more important.

"Let us say that nobody is betting on Frankfurt overtaking London anymore," said Ulrich Ramm, chief economist at Commerzbank, sitting atop one of many new skyscrapers meant to express Frankfurt's global ambitions.

Frankfurt's story is something of a metaphor for Germany's lagging economic performance.

Some of the blame can be laid to outdated laws and traditions that have kept German banking fragmented and unprofitable. The four largest "private" banks control only 20 percent of the market, with the rest held by cooperatives and savings banks controlled by local governments. And while those four are among the world's largest when measured by deposits, they fall far down the rankings when measured by profitability or market capitalization.

In the end, the only way Frankfurt was ever to realize its ambitions was if its financial institutions were allowed to engage in cross-border mergers and acquisitions. Yet despite all the brave talk of integration, Europe remains stubbornly nationalistic when it comes to banks and financial markets.

But probably the biggest reason Frankfurt lost out to London was the Germans' lack of interest in capital markets, and the distaste for the culture that goes with them.

This is a rich country in which less than 5 percent of households owns any stocks, preferring to keep savings in bank accounts and insurance policies. There was a burst of interest during the telecom boom, when Deutsche Telekom went private and sold shares to the public. But that quickly faded.

Even now, there is no market here for instruments like mortgage-backed securities or derivatives, and loan syndication is in its infancy. Hedge funds were legalized only this spring, just as their long winning streak was ending. Relative to the economy's size, the amount of private equity and venture capital in Germany is half that in Britain, a quarter of what is in France.

What really offends the German sensibility, however, are the salaries commanded by superstars of finance. That's one big reason all the big German banks moved their investment bankers and trading desks to London. Another is the tax rate on those salaries, at least twice what it is in England.

Recently, this same distaste for million-euro bonuses drove German prosecutors to bring criminal charges against the chief executive of Deutsche Bank for his role as a director in approving "golden parachutes" for executives at industrial giant Mannesmann who lost their jobs in a recent takeover. A judge said the scheme wasn't illegal, but won huzzahs for declaring that it was immoral.

Germans often say they'd rather preserve their "social market" than accept the excesses and inequality that go with being a financial center. That choice, however, has a cost. It comes in the form of lost jobs, incomes, prestige, tax revenue. But maybe even more important, it includes the loss of discipline that robust financial markets provide to the rest of the economy. As Germany has discovered, the alternative is a cozy and less demanding financial system that, in the long run, is less likely to produce growing industries and world-beating companies.