If you think that Theresa May’s speech in Florence was enough to stop banks and businesses activating contingency plans to relocate operations in the EU, then think again.
Despite talks for the two-year transition period that Conservatives are still fighting over, big investment banks are forging ahead with plans to create new hubs elsewhere in the EU.
For instance, while Goldman Sachs is actively searching for office space for up to 1,000 staff in Frankfurt, Bank of America is in talks to secure offices in central Paris for an initial move of about 300 employees.
Perhaps, if Theresa May had campaigned for a transition period from the start it would have been more helpful, but given that most banks’ contingency plans are now being executed the speech in Florence looks like a late call.
Indeed, it takes about 18 months to set up a fully-licensed subsidiary inside the EU, and given negotiations have been in a deadlock for months, the Prime Minister’s proposal sounds like too little too late.
If anything, May’s cabinet is already contradicting such conciliatory tone. Brexit Secretary David Davis allegedly said that there won’t be any role for the European Court of Justice after March 2019.
Similarly, The Guardian reported that Foreign Secretary Boris Johnson dismissed the prospect of having the UK subject to the EU’s laws of freedom of movement once it leaves, a well-known red line for the European Union. In such political landscape, it is hard to think that the EU is eager to speed up further negotiations.
Early last week, a top official at the Bank of England warned that the UK has less than three months to agree on a transition deal with the EU before re-locations to the continent accelerate.
Sam Wood, Bank of England deputy governor for prudential regulation, made clear that if a concrete transition deal is not agreed before Christmas, City firms would start activating contingency plans to move staff and business out of the UK.
Truth is, banks are already planning to do so; Royal Bank of Scotland Group Plc Chairman Howard Davies said that if there are no details early next year, the number of moves of people out of London will likely to accelerate.
The clock is ticking, and the evident chaos in the British cabinet is only making things worse. Ironically, even a two-year transition period may not be enough for British businesses to avoid a cliff edge.
As a matter of fact, it is far from clear if any transitional period would make any agreement between the UK and the EU binding.
This just adds further uncertainty for banks and businesses which are already facing the cost of persuading staff to move abroad and reckon with a shortage of experienced staff in places like Paris, Frankfurt, and Dublin.
In this respect, investments to relocate are almost sunk costs, ie once taken they are hard to reverse. This makes the decision to ship jobs and operations in the EU almost unaffected by May’s proposal of a two-year transition after March 2019.
According to the think tank Bruegel London could lose 10,000 banking jobs and about 20,000 roles in financial services due to Brexit.
But the gap with the rest of the EU’s financial centres is so big that London will likely keep its leading role in the financial industry for the foreseeable future.
However, the question is not what London will be like after Brexit, but rather what London would have been without it. I think that banks and businesses are already giving their answer.