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Will Frankfurt, Paris and Dublin replace the City of London after Brexit?

Alternative EU financial centres are unlikely to supplant the City as Europe’s premier financial hub – but private and public actors within these urban centres are already seeking to ‘capitalise’ on Brexit

Scott Lavery, SPERI Research Fellow

Scott LaveryIt is often claimed that alternative financial centres (AFCs) within the EU are well-placed to benefit from Brexit. However, no comprehensive analysis of the positioning of AFCs in the aftermath of the EU referendum has been conducted.  So in a new SPERI project I, along with three colleagues, reviewed the positioning of private and public actors within three prominent AFCs in the EU – Frankfurt, Paris and Dublin.  We assessed the ways in which actors within these cities have positioned themselves in relation to Brexit between June 2016 (the referendum) and March 2017 (the Article 50 ‘trigger’).  The full findings, which draw on over 150 German, French and English language policy documents, policy papers and press releases, are published in a new SPERI Global Political Economy Brief, Frankfurt, Dublin and Paris: Post-Brexit Rivals to the City of London?

The enduring power of the City

The City of London currently dwarfs – in terms of its size, expertise and technical sophistication – all other AFCs within the EU. In 2014, the City ran a £72 billion trade surplus.  It is home to 35 per cent of the EU’s wholesale market activity and 74 per cent of over-the-counter trading.

 Across the three AFCs we reviewed, there is widespread recognition that the City of London is unlikely to lose its position as Europe’s premier financial hub. For example, David Benamou, managing partner at Paris-based Axiom, has stated that ‘no financial centre is ready to offer a base comparable to London’. Organisations within the German financial sector – such as the Helaba and Delors Instituts – have echoed this sentiment, whilst one Frankfurt-based voice stated that, ‘Germany should not delude itself that it can become in a short time the new financial centre of Europe’. In December 2016, Martin Shanahan, head of Ireland’s Investment and Development Agency (IDA), said ‘without doubt, London will remain a major global financial centre’.

Low Hanging Fruit

Despite the widespread acknowledgement that the City is likely to remain dominant after Brexit, there is a consensus view coming from Frankfurt, Paris and Dublin that opportunities exist for them to attract vulnerable sub-sectors – what we term ‘low hanging fruit’ – away from the UK. A number of these potentially vulnerable sub-sectors recur time and again throughout the reviewed documents.

The vast bulk of euro-denominated clearing, around 70 per cent, takes place within the City and it has been calculated that this activity is associated with 80,000 UK jobs. In 2012, the European Central Bank and key EU member states attempted to move clearing into the Eurozone.  However, this was struck down by the European Court of Justice. Post-Brexit, the issue of clearing is very much ‘live’ once again and this is reflected in the early strategic positioning of the AFCs.

Europlace – a leading Parisian financial lobby group – stated in November 2016 that ‘with Brexit, Paris intends to consolidate its position as a clearing and settlement centre in euros’. French politicians have also been pushing a hard-line on the clearing trade.  Presidential candidate Francois Fillon, for example, has said ‘the Eurozone must recover the clearing of its currency’, whilst Francois Hollande has stated that Eurozone clearing would have to be relocated from the City after Brexit.

Fintech – a broad term which refers to firms which combine new forms of digital technology with financial services, to offer products such as ‘peer-to-peer’ lending – is a second sub-sector which AFCs seek to augment after Brexit. Eoghan Murphy, the Irish Minister of State for Financial Services, identifies fintech as a ‘core pillar’ of the IDA’s strategy in the aftermath of Brexit. A report commissioned by the Frankfurt-based Deutsche Börse in January 2017 states that ‘following the Brexit referendum all fintechs subject to the British regulatory regime will find that access to the European Single Market is more difficult and that having a Continental European branch appears sensible’. Deutsche Bank has taken a particularly pro-active role in this regard, setting-up a ‘digital factory’ in Frankfurt with 400 staff as well as an ‘innovation lab’ in Berlin.

As we outline in the Brief the three AFCs are also seeking to attract EU regulatory bodies – such as the European Banking Authority, credit ratings agencies and asset managers – to relocate in the aftermath of Brexit.

Brexit as ‘bargaining chip’

Interestingly, private actors within Frankfurt, Dublin and Paris do not only seek to benefit directly from Brexit in terms of drawing in vulnerable sub-sectors; they also seek to use Brexit as leverage to secure new tax advantages and regulatory reforms, both domestically and in the EU, which they perceive will benefit business.

For example, Gerard Mestrallet, President of Europlace, called for a ‘competitiveness and attractiveness shock’ to the French economy after Brexit, advocating the lowering of corporation tax from 33% to below 25% and a reduction in tax on salaries particularly for ‘top level’ bankers. He argued that tax places Paris at a comparative disadvantage relative to London.

French policymakers have been receptive to these calls. The French government has extended the tax benefit available to those moving or returning to France to work, the régime des impatriés, from five years to eight years.  The French financial regulator, the Autorité des marchés financiers, launched in September 2016 ‘AGiLITY’, a welcoming programme for financial institutions looking to move to France.  The programme gives organisations access to a ‘2WeekTicket’ to aid pre-authorisation, and then access to English speaking assistants to aid full registration, which can be completed within two months.

‘Sizing up’

The AFCs are all also engaged in a process of assessing their own comparative advantages relative to other AFCs in the EU, the City and non-European financial centres such as New York. For example, in terms of clearing, Frankfurt-based institutions acknowledge that Paris has an advantage insofar as it already hosts a branch of the London clearing house LCH which would allow for easy transfer of activities. In contrast, Paris regularly identifies its higher proportion of non-English speaking workers as a comparative disadvantage relative to other sites.  Arnaud Vaissié, founder of the Cercle d’outre-Manche, an organisation representing French business leaders living in the UK, states ‘our number one problem is English’ in comparison with other AFCs in Frankfurt and Amsterdam.

Dublin’s status as an English speaking centre and its position as the European HQ of major technology firms such as Google are also identified as distinct advantages by other AFCs.

Whilst Frankfurt, Paris and Dublin have been attentive to one another’s strengths and weaknesses, a common fear across these AFCs is that Brexit will not boost European centres but rather that financial services will be drawn to New York. Fear of this has led actors from across AFCs to argue for domestic and European-level action to ensure that European AFCs are the principal beneficiaries of Brexit.

The City: still dominant but vulnerable

Our evidence suggests that Brexit is unlikely to compromise the City’s status as Europe’s premiere financial centre. That said, AFCs within the EU are well-positioned to take advantage of Brexit, insofar as they might be able to secure potentially vulnerable activities such as clearing, fintech and asset management.

Even if a relatively small proportion of the City’s activities are located to the EU’s AFCs, this could have significant implications for the financial centres of the remaining member states. As an October 2016 Deutsche Bank report put it, ‘London’s crumbs could become Frankfurt’s pie’. However, a process of financial market re-composition is already afoot within post-Brexit Europe . Recent news that Lloyds of London, AIG and JP Morgan are in the process of relocating elements of their business to EU AFCs confirm this shift. As our briefs show, this re-composition of finance is likely to continue, aided and abetted by the strategic orientation of public and private actors within Frankfurt, Paris and Dublin.

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The research for the project Understanding EU Business Views on Brexit was carried out by Scott Lavery, Adam Barber, Sean McDaniel and Davide Schmid.

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