LONDON – When the people of Britain voted to leave the European Union 10 years ago, most economic experts predicted the demise of the City of London as the continent’s top financial centre.
And eager to protect their European business, all major banks and financial institutions headquartered in London started planning to move their operations to another key EU country.
Plenty of European countries were eager to embrace them. “In five to 10 years, Paris will be the leading financial centre in continental Europe,” predicted Benjamin Griveaux, then one of France’s top economy ministers.
None of this, however, has come to pass. The British economy suffered as a result of Brexit – as the process of Britain’s separation from the EU is popularly known – but London continues to reign supreme as Europe’s financial centre. Meanwhile, Griveaux, who was one of President Emmanuel Macron’s closest allies, has had to quit French politics following a scandal involving a sex video.
Whatever Brexit did to the City of London, it did not dethrone it. The question is why the transfer of business that Brexit undeniably triggered never created a new European centre of gravity.
François Villeroy de Galhau, the outgoing Governor of the Bank of France, claimed in a speech on May 21 that “around 2,500” new banking jobs were created in his country by banks relocating their activities from London. Of the “hundreds” of financial institutions that had to relocate to the EU following Brexit, “around 60 chose France,” he added. Overall, the boss of France’s national bank claims that around €220 billion (S$295 billion) worth of assets were transferred to Paris as a result of Brexit.
These are not small amounts. Yet in reality, international banks based in London merely constructed EU-facing legal shells to preserve market access to Europe and staffed them to the minimum EU financial regulators would tolerate. Meanwhile, the substance of their business — the traders, the deal teams, the decision-makers — remains in London. London, therefore, did not haemorrhage; it merely franchised some of its activities.
Other European cities competed fiercely for this business. Frankfurt, the seat of the European Central Bank, claimed pride of place. Paris bent over backwards to offer quick work permits to bankers, plenty of tax-free incentives and English-speaking schools for their children. Meanwhile, Amsterdam claimed to have a global outlook and Dublin, the Irish capital, touted the fact that it spoke English, but was not England.
Up to a point, all these European cities grabbed a slice of the London pie. Dublin took the largest share of asset management funds relocating out of Britain. Frankfurt drew banking assets, and Paris captured the largest share of jobs. And Amsterdam briefly overtook London as Europe’s largest equities venue.
But while each EU rival carved out a niche, none succeeded in rivalling London’s concentration of all the talents required for a global financial centre, nor the supporting and legal services required to sustain it. Brexit scattered Europe’s financial functions across EU cities, and in doing so, it guaranteed that no single one could inherit London’s crown.
The great prize was the euro-denominated derivatives clearing market, with a notional value exceeding €90 trillion. This remains almost entirely under the control of the London Stock Exchange Group’s LCH (SwapClear) outfit.
The EU now obliges its firms to hold and use accounts at European clearing houses, but the financial needle has barely moved.
The explanation is that London possesses a set of structural rather than political advantages. English common law governs the majority of the world’s cross-border financial contracts, and the English language is the operating system of global finance. London’s position on the meridian allows it to trade with Asian markets in the morning and American markets in the afternoon, a geographical accident that matters.
But above all, London’s ecosystem was developed over three centuries of drawing together the deepest concentration of financial and professional talent in Europe.
Despite all its political influence in the EU, Frankfurt could not offer the depth of markets, the density of associated financial services, or the sheer human capital of London, and bankers proved reluctant to relocate their families there.
Paris had its undeniable charms, but France’s labour restrictions and instinct for state intervention remained a deterrent. The financial inducements offered to bankers coming to Paris—a tax rate of only 30 per cent on their income compared with 45 per cent in the UK – will expire over the next two years, which also promise to be the most politically turbulent in France’s modern history.
Past performance is no guarantee of future success, and London does face serious competition. However, this comes from New York, Singapore and other financial centres in Asia, rather than Brexit.
The London Stock Exchange, for one thing, has endured a prolonged fall in publicly traded equities. Over the past decade, the total number of listed companies has plummeted by about a third, leaving fewer than 1,600 firms on the exchange.
Wise, a money transfer company, completed its shift to New York in May, and AstraZeneca, the pharmaceutical giant, has openly weighed a similar move. This is a genuine structural problem, made worse by the managers of British pension funds, who keep on retreating from investments in British equities.
However, this is a transatlantic contest between London and New York over where the world’s growth companies choose to raise equity, and not one likely to benefit Paris, Frankfurt, or Amsterdam. When a British fintech company quits the London Stock Exchange, it lists in Manhattan, not on Euronext, the pan-European market infrastructure.
So, at least in the financial markets, the lessons for the European Union are stark. EU regulators in Brussels can pass decrees compelling banks to keep their transactions under Union jurisdiction and away from Britain.
But they still cannot pass a regulation that gives Frankfurt or Paris anything resembling London’s financial ecosystem.
That requires much more work, and just when the centre of economic gravity is moving even further away from Europe.