By: Aidan Levi-Minzi
With Britain finally leaving the EU, economic and political policy will no doubt be at the forefront of the discussion between Boris Johnson and the European Commission. London-based firms are preparing for the worst, while other European cities are bulking up.
The United Kingdom has left the European Union. At 11:00 PM GMT, on January 31st, 2020, the UK entered a transition period: an 11-month timeframe that gives both sides a chance to figure out what their future relationship will look like. Meanwhile, the UK will continue to follow EU rules and trading regulations. This new trade agreement is big for London, as it is the world’s largest international financial center, generating over £120B ($152B) annually in output.
Historically, international firms have been able to freely conduct their business in the global epicenter that is London. The possibility of moving forward with a no-trade deal may lead to increased tariffs and quotas, among other trade barriers. A Brexit without an EU trade deal would lead to major ramifications, including major international corporations downsizing or leaving their London-based offices. However, this is only one of many problems that Brexit poses for London as a city. Air safety regulations, supplies of electricity and gas, and even access to fishing waters will need to be discussed, the likes of which will influence London’s international prowess. There is no wonder as to why Prime Minister Boris Johnson insists that the transition period be extended: a timetable that the European Commission warns will be challenging, given its administrative complexity. The European Commission is the EU’s executive body, and the only institution with the authority to initiate legislation in most areas. Although they have the manpower and expertise to carry out the bulk of the negotiations, they must work with the European Council (consisting of the Head of States of member countries) in order to decide who will be on this Commission. One could say that these (seemingly unnecessary) bureaucratic policies are to blame for Britain wanting to leave the Union altogether.
Britain has always championed itself as mavericks of the EU: a bulwark to state control over economic and social matters. They refused the Euro and kept the Pound. British diplomats despised projects that involved the inclusion of all its members, like the common defense policy. According to economist Pete Schrank, “Britain was the noisiest advocate of policies that are commonly (but quietly) held across many member-states.” Now that they are out of the bloc, who will be the new troublemaker?
The answer may be whoever can attract the banks forced to leave London because of their lost banking passports. Markus Demary and Michael Voigtlander of the German Economic Institute note that regulation is a driving force of financial centers’ competitiveness in the past. London, unfortunately, has to answer to global players such as the G20, the Bank for International Settlements (BIS), the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO), meaning it may not have much leeway in terms of its deregulation efforts. Cities like Frankfurt, Paris, and Luxembourg have an economic sector of the EU. Frankfurt houses the European Central Bank, which may attract businesses looking for a closer connection to these regulatory committees. Paris headquarters the Organization for Economic Cooperation and Development. Luxembourg hosts the majority of investment funds due to favorable taxes. Each contender is knocking on the door to become the next financial center.
However, with Bank of America, UBS, Barclays, and HSBC moving some of their resources to other hubs such as Dublin and Frankfurt, it is easy to see why some economists believe London will lose some of her swagger. Even major U.S. investment banks have drafted contingency plans to transfer about $280 billion of balance sheet assets from London to Frankfurt. In order to understand which city will take over, it is important to note what roles are currently in London, what banking licenses are required in Europe, and which banks already have such a license.
Those holding more lucrative positions, such as quantitative analysts, investment bankers, and traders, will most likely stay in London. However, the total number of these roles may diminish over time, as European legislation will no longer hold in the UK. Some firms have already made a move, like RBS setting up shop in Amsterdam, mainly because they hold a Dutch Banking License that will soon be void in London. Given this, firms will most likely move back to the largest city of their motherland. Frankfurt, Paris, Milan, Geneva, and Brussels will all be seeing more action, but none will match London’s £120B international annual output. Frankfurt still plays by the EU’s rules, meaning it is more difficult for companies without EU Passports to relocate. Paris is not as relevant to financial professionals given its proximity (or lack thereof) to other global centers. Luxembourg is ranked higher than both Frankfurt and Paris on the global financial centers ranking in 2016, but is lacking in transportation infrastructure and air traffic. Besides, London can quickly mitigate its new legislative barriers with a relationship manager (and may be more cost effective than a geographic overhaul).
It is important to denote that London will always be London. There will always be a place for London in European markets, no matter what kind of deal is put in place. It is home to 37% of the world’s currency dealing, with special ties to the rest of Europe. European nations are responsible for a little over a quarter of London’s income, and London provides nearly 25% of Europe’s financial services. 11 months from now, it is safe to assume that London will still have a major role in the financial industry. However, London is likely to be home to fewer financial industry jobs, and will attract fewer graduates from around the world. Front office jobs will go to other economically-powerful nations, such as the Netherlands, Germany, and Luxembourg. As a result, tax receipts in the UK will diminish, the British economy will suffer, and the wealthy will be taxed more, and slowly the rich will spread more over Europe than ever before and leave London behind.
However, softer facts may prove to be more important in the long run. According to American HR consulting firm Mercer, London is ranked below Frankfurt, Paris, Dublin, and Milan in terms of quality of living. Obviously these standards of living come with different tastes and preferences (some bankers prefer fish and chips to bratwurst), but it seems as if London will be taking a hit either way.
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BBC News. (2020, January 27). Brexit: All you need to know about the UK leaving the EU. Retrieved from https://www.bbc.com/news/uk-politics-32810887
Demary, Marcus. Voigtlander, Michael. (2016). Will Brexit dwarf London’s competitiveness as a financial centre? German Economic Institute. Retrieved from Kurzberichte.
Institute For Government. (2020, February 12). The EU’s Role in Brexit Negotiations. Retrieved from https://www.instituteforgovernment.org.uk/explainers/eu%E2%80%99s-role-brexit-ne gotiations
Mercer. (2019). Quality of Living City Ranking. Retrieved from https://mobilityexchange.mercer.com/Insights/quality-of-living-rankings
Murphy, Matt. (2020, January 30). Britain After Brexit. The Economist. Retrieved from https://www.economist.com/leaders/2020/01/30/britain-after-brexit
Schrank, Peter. (2020, January 30). After Brexit, who will be the British of the EU? The Economist. Retrieved from https://www.economist.com/europe/2020/01/30/after-brexit-who-will -be-the-british-of-the-eu