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The UK ((LDN)) proudly boasted the world’s highest OECD-recorded level of foreign direct investment in 2006. But seeing this number as an indicator of development in the real economy is a misinterpretation.

UK economic growth since Wilson has more or less come from the financial services sector in London. The commensurate commercial boom in consultancy; accountancy; solicitor corporate law; property values ((LON:IRET)); consumer debt levels; insurance; and, myriad, luxury lifestyle and retail businesses are merely logical consequences. Without booming financial services, these businesses would be hurt.

Today, UK politicians are eager to raise taxes and impose new restrictions on financiers in the wake of 2008. Yet the UK’s comparatively lesser financial regulation was a key reason its financial services boomed to begin with. Lesser regulation effectively leveraged the UK’s financial sector – and therefore much of its real economy – to the booming global capital flows of the last decade, especially from Middle Eastern petrodollars and Asian export-led growth.

Yes, the UK is an age-old merchant hub and is geographically well situated between time zones of global markets. But it is undeniable that FSA regulators required far less in the way of disclosure, retail investor protection, insider trading avoidance, and other “bright line” securities laws than their U.S. counterparts.

Indeed, banking regulations throughout Europe, particularly Basel II, also allowed far more leverage and far more lenient banking metrics, especially in the use of “risk-weighted assets” in assessing solvency. Many of these countries, particularly the UK, have subsidized their financial sector – and robbed their taxpayers – by facilitating the leveraged buyout of their national transportation infrastructure, such as in the case of the UK’s now publicly traded rails (LON:NEX, LON:ARI, LON:SCG, LON:GOG) and publicly traded (LON:SUH) and privately-held (BAA Airports, The Manchester Group) airports .

Observers shocked by the reliance of Greek politicians on “financial magic” to solve their fiscal woes should consider that this has been in some sense the general response of European politicians to all other internal economic concerns as well.

Indeed, when looking at the countries of origin and sources of wealth of some of the UK’s most famous, newly minted billionaires – whether Mohammed Al-Fayed or Boris Berezovsky – we are left with the distinct impression that these individuals would have a much harder meeting the legal requirements to store their money in the U.S. financial system. Moreoever, they are not exactly “long term” investors or Warren Buffett. When things turn bad for such actors, their hot money is gone money.

Furthering the point anecdotally, London investment banks have not been required to keep China Walls between underwriting, sales and trading, and proprietary trading nearly the way they are in New York after Spitzer’s Global Settlement. UK hedge funds such as Marshall Wace (NASDAQ:TOPS) openly brag to clients that their trading systems drive special relationships and offer special rewards for unusually good advice from sell-side brokers.

A higher disclosure, higher regulation securities market like that of America’s is certainly much harder to fill with liquidity than what the UK devised. It is not nearly as attractive to Russians or Chinese expatriates. But, as myopic as U.S. investors may have become, the nation's stronger securities laws may still encourage a comparatively longer-term outlook and higher degree of trust and ethical behavior among its investors base.

In anticipation of a shifting regulatory attitude, many institutional investors are beginning to exit the U.K. If the buy-side leaves, the sell-side may not be far behind, and, in the U.K., that means many ordinary citizens lose jobs.

To the extent David Cameron is able to recast the political emphasis away from financial castigation and toward the rollback of cradle-to-grave entitlements, it is not unhelpful.

But it is undeniable political reality that citizens across the UK and Europe are justifiably seeking blood from financial hands that “fed” them. They are doing so at a time in history when the cost of moving for these institutions is lower than ever.

Pundits who speak of unsustainable consumption and fiscal deficits understand that today’s eurozone has come to expect a lifestyle that exceeded its income. Especially in the case of the UK, they are not fully weighting how much of that income is itself a financially engineered illusion.

In the final section, I delve into the performance Europe’s of real economy to date and trends that may accelerate its future decline.

Disclosure: No positions