Almost five years after the Brexit referendum, and five months after Britain's exit from the European Union, the future of London as a global financial center seems secure. But although the City will remain Europe’s largest financial marketplace, its Golden Age as Europe’s financial capital is over.
Nearly five years after the Brexit referendum, and in the five months
since Brexit itself, the debate about the future of the City, the
financial center of London, has remained a dialogue of the deaf. Those
who voted in June 2016 to leave the European Union believe, whatever the
evidence to the contrary, that the impact will be minimal, and that the
warnings of job losses and business relocation are exaggerated. Remain
voters are programmed to think the opposite and, whatever the evidence
to the contrary, forecast gloom and doom. What can we learn from what
has actually happened?
We have to acknowledge, first, that COVID-19
has confused the picture mightily over the last 18 months. People have
not found it easy to change location, even if they wanted to. More
important, there are some temporary regulatory arrangements that blunt
the impact of the United Kingdom’s departure from the single financial
market. There is a Temporary Permissions Regime in London for some
EU-based firms, and the European Commission has allowed euro-denominated
instruments to be cleared in London until 2022, to avoid the disruption
a sudden change on December 31, 2020, might have brought. So what we
are seeing today may not reflect Brexit’s full longer-term impact.Nonetheless,
changes that have occurred so far permit us to start assessing the
future of the City and the financial operations based there. One move
that generated headlines was the abrupt shift of trading in European
equities from London to Amsterdam
at the start of the year. An average of €9.2 billion ($11.2 billion) in
shares was traded daily on the Amsterdam exchange in January, four
times the volume in December 2020, while London’s daily average dropped
sharply, to €8.6 billion. The switch can be traced to regulation: the
European Commission has not granted “equivalence” to UK trading venues,
and is in no rush to do so.That was a crucial early goal by the Remain
team in this match, you might think. But the Leave team hit back
quickly. Very few job moves resulted from this switch, they say: most of
the traders remain in London. And they point out that London continues
to lead Europe as a center for raising new capital. In the first quarter of this year,
€8.3 billion was raised through London IPOs, compared to €5.4 billion
in Frankfurt, €5.6 billion in Amsterdam, and just €0.1 billion in Paris.The
Remain team advances again: Equities are not the only, or even the most
important, instrument. The UK share of euro-denominated interest-rate
swaps fell from 40% to 10%
from July 2020 to January 2021, while the EU share rose from 10% to
25%. New York was the beneficiary of some of the business lost to
London, as many forecasted. And they point to the move of banking assets worth perhaps €1 trillion out of the UK, mainly to Frankfurt.But
both sides acknowledge that from an economic point of view, the city in
which trades are booked is less significant than the city in which
traders pay their taxes. Soon after the Brexit vote, consultants Oliver Wyman
estimated that 75,000 jobs would quickly be relocated to other EU
centers. Others produced even higher estimates. Have those pessimistic
forecasts been borne out?The Leave team can claim another goal. A detailed survey
from consultancy New Financial last month identified 7,400 positions
that had been moved from London to a eurozone financial center – just
10% of the estimates in 2016. The biggest beneficiaries have been
Dublin, Paris, Luxembourg, Frankfurt, and Amsterdam, in that order.But
the study can be interpreted in another way. Two years ago, the same
authors identified 269 firms that had relocated some activity. Now they
find that 440 have done so, and they regard that as an underestimate of
the number that will eventually do so. They expect the relocated jobs
number to rise further.Moreover, there are signs that the property market may be reacting. Over the last two years,
property prices have risen 20% in Paris, almost 40% in Amsterdam, but just 6% in London.
But it will not be one-way traffic. Just as firms based in the UK no
longer have unfettered access to the EU’s markets, so most EU-located
firms will need authorization to conduct business with London-based
clients. So perhaps 300-500, mainly smaller, European firms will need to
set up in London. The net result will be an outflow of jobs from
London, but not on anything like the scale widely expected in 2016.That
is because firms have found ways to work around the regulatory
obstacles. They have also found that moving staff is costly and
difficult. London retains many attractions: schools, cultural life, and
many long-established expatriate social networks. It will take time for
any putative rival in the EU to develop a plausible matching offer.
It seems likely,
therefore, that London will remain Europe’s largest financial
marketplace, by a considerable distance. It will remain plugged into a
global network: transactions with European clients are perhaps a quarter
of its business. But it will no longer be the continent’s de facto
financial center.
For the EU, London will shift from being its
principal onshore financial center, to an important offshore center.
Other cities will pick up business, though the signs are that a
multipolar system will develop, with no single winner. There will still
be a profitable role for London, but the Golden Age of the City as
Europe’s financial capital will recede, as Golden Ages tend to do.
Project Syndicate
© Project Syndicate
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