“Tired of the fog? Try the Frogs!” was one of the cheekier and more public attempts by Europe’s financial centres, in this case Paris, to cash in on the uncertainty caused by the UK voting to leave the European Union and lure finance professionals away from the City of London.
A green frog wearing a Tricolore tie, squatting in front of La Défense’s skyline is unlikely to do the trick on its own. Even though the advert was plastered around La Défense, Heathrow Airport and the St Pancras Eurostar terminal, most London bankers will take a very deep breath before kissing this particular frog.
Investment bankers, even French ones, tend to see Paris as a place of inflexible labour laws, high taxes and a worse quality of life than London — and London’s famous fogs disappeared in the 1950s.
Four years ago, President François Hollande unveiled a 75% super-tax on earnings over €1m as part of his election campaign. The idea was quietly dropped two years later but the damage had been done. Along with France’s labour code, which runs to an improbable 3,806 pages, the 75% tax had painted France as uncompetitive. Some labour reforms were painfully pushed through in July last year, but the joke is still that French banks move staff to London so they can sack them.
Wooing le City
France’s politicians are trying. Days after the Brexit vote, prime minister Manuel Valls announced measures to attract foreign business, including an income tax break of up to 50% and the right to exclude foreign properties and assets from wealth tax for eight years.
Paris can also claim lower rents than London and good transport — and now it can boast that Hollande will not be standing for re-election this year.
Paris, of course, is not alone in trying to seize the Brexit opportunity. Frankfurt, Amsterdam, Luxembourg, Dublin and Madrid have all made official and unofficial marketing forays to London since the end of June to court bankers, investors, lawyers, exchanges, technology platforms and even GlobalCapital editors.
The others have been less publicly aggressive than Paris, claiming at informal drinks, formal seminars or roundtable discussions that they want to work as “partners” or in “co-operation” with London. Offers range from one-off income tax breaks to rent subsidies and mini-special economic zones.
Even Latvian representatives have been in London recently to offer their services. While Riga is an unlikely global financial powerhouse, Latvia’s finance ministry has been quietly pitching for back office functions to move there, not just from London but from other European countries too.
It is a sign of how fluid everything has become since the Brexit vote — and how competitive European centres are, despite years of being in London’s shade, to catch any fleeing business.
Huge sums at stake
Who can blame them? According to Oliver Wyman, the UK-based financial services sector earns around £190bn-£205bn of revenues a year, contributing £120bn-£125bn of gross value added, and, together with the 1.1m people working in financial services up and down the country, generates £60bn-£67bn of taxes for the UK a year. It also contributes a trade surplus of about £58bn to the UK’s balance of payments.
The consultancy believes that at one end of the Brexit spectrum, an exit from the EU that puts the UK outside the European Economic Area, but otherwise delivers passporting and equivalence and allows access to the Single Market on terms similar to those that UK-based firms currently have, will cause some disruption to the current delivery model, but only a modest reduction in UK-based activity.
Oliver Wyman estimates that revenues from EU-related activity would decline by around £2bn (around 2% of total international and wholesale business), that 3,000-4,000 jobs could be at risk, and that tax revenues would fall by less than £500m a year.
At the other end of the spectrum, in a scenario where the UK moves to a third country status with the EU without any regulatory equivalence, the impact could be worse. Severe restrictions could be placed on the EU-related business that can be transacted by UK-based firms.
In this lowest access scenario, where the UK’s relationship with the EU rests largely on World Trade Organisation obligations, 40%-50% of EU-related activity (around £18bn-£20bn in revenue) and up to an estimated 31,000-35,000 jobs could be at risk, along with about £3bn-5bn of tax revenues.
It also warns of the dangers to the wider ecosystem: the knock-on impact could result in the loss from the UK of activities that operate alongside those parts of the business that leave, the shifting of entire business units, or the closure of lines of business due to increased costs. An estimated further £14bn-£18bn of revenue, 34,000-40,000 jobs and around £5bn in tax revenue a year might be at risk.
Trying to make a plan
Yet the British government is still undecided on how best to approach leaving the EU. Negotiations will not start until the UK invokes Article 50 to leave the EU, expected in March.
The City’s fate, and therefore that of Europe’s capital markets centre, hangs in the balance.
What exactly “EU headquarters” means will become clearer as the year goes on. If the UK manages to negotiate a soft Brexit, an EU head office could just mean a brass plaque and some legal and admin staff — the minimum they can get away with. A hard Brexit could mean entire trading floors and origination and structuring teams having to move to be inside the EU.
But the City is full of impatient and pragmatic institutions that hate uncertainty and will want to plan ahead for every outcome. Not surprisingly, they have therefore begun contingency planning, even if many are keeping it secret. If firms decide they need to move, the next question is ‘where to?’
The beginnings of a pattern are visible, though this could still change.
To each its own
Firms whose roots lie in other continental countries have a natural place to move to if they need to — their home base. It is institutions from outside Europe — and from the UK itself — that will have to make harder choices.
So far, some Japanese institutions appear to favour Amsterdam, while Chinese and other Asian firms are looking at Frankfurt and Luxembourg. English-speaking firms such as US and UK banks and asset managers are more likely to turn to Dublin as an EU base.
But despite all the enthusiastic messages from London’s rivals since Brexit, there is likely to be no single winner from London’s decline.
There is probably nowhere else that could accommodate all these people (as well as their families, nannies, cars, sushi bars and clubs) and give them what London has. But the fact that French firms will gravitate to Paris, Germans to Frankfurt and so on is likely to mean that, at least for a considerable time, there is no new single European rival to London.
An allied danger is therefore that international firms scale back in Europe altogether, downscaling their European hubs in London to branches across the continent or even quitting altogether because of costs and instead building up in New York, Singapore and Hong Kong.
Goldman Sachs, a loyal Bremainer but also pragmatic, is building a new European headquarters in Farringdon, London, but the building allows for multi-tenant use, so Goldman could downsize. Is Paris ready for the vampire squid?
