Panic in the streets of London is reaching fever pitch. Despite banks and insurance firms threatening to move jobs out of London and the obvious economic turmoil that would ensue the government is still on track for leaving the single market and customs union when Brexit hits.
Hence, reports this week of the City sending its own delegation to Brussels to negotiate its own market of “mutual access” between the UK and the remaining 27 members of the EU – a market of half a billion people, the biggest in the world.
And yet, the competition to replace London as Europe’s financial hub has become so intense, that the wide range of cities wooing companies could leave the UK’s capital untouched as the pre-eminent location for finance on the continent.
Initially, Dublin was expected to be the big winner because it is English-speaking and has a legal system like that used in the UK. But the rush to Dublin has failed to materialise. Instead, other locations such as Frankfurt, Paris, Amsterdam, Berlin, Milan, Luxembourg, Munich and Warsaw look increasingly attractive.
For instance, Lloyds Banking Group has reportedly chosen Berlin as the location for its European hub5, while major insurance companies such as Hiscox, RSA, and AIG are picking Luxembourg for their EU operations and Lloyd’s and QBE are heading to Brussels. Goldman Sachs reportedly plans to start moving London-based staff and operations to new or expanded offices inside the EU in 2018.
UBS chairman Axel Weber has openly admitted that about 1,000 of the bank’s jobs in London were directly linked to the single market membership and the possibility to freely do business in the EU; therefore the Swiss bank may not wait until the end of negotiations to move these jobs out of London.
The size of the relocation is also a matter of discussion. If anything, a lot depends on the new trade agreement between the EU and the UK after Brexit is finalised. As of now, this is all far from certain.
Re-locating will, after all, be horrendously expensive for firms and they will be uprooting from a city full of people with expertise with no guarantee that knowledge will follow them. Plus, the UK has one of the most trusted legal systems in the world – something else no firm wants to leave behind.
This combined with the single market has helped the world’s biggest banks build a vast economic empire in London that is now under severe threat thanks to Brexit – these companies are desperate to stop it falling apart, by whatever means.
Take the asset management industry for example; the EU-regulated investment funds known as UCITS (Undertakings for the Collective Investment in Transferable Securities), is worth a staggering €8 trillion. Similarly, London is the global centre for euro-clearing, which involves processing transactions of Euro-denominated derivatives worth about €1 trillion a day.
These are huge markets under threat. This is why this delegation – independent of government – is such an interesting move. Threats to the UK government don’t seem to be working, and numerous cities and countries are circling.
Just looking at the numbers reveals why. Over the past decade, the surplus from Britain’s trade in financial services has more than doubled to £72 billion, which helped to substantially offset the trade deficits run by other sectors.
While the financial sector represents the largest tax paying sector for the UK and the biggest exporting industry, employing more than 7% of the country’s workforce. Half the world’s financial firms have chosen to base their European headquarters in the UK, generating about 25% of financial services income in the EU.
But the huge pie on offer looks like it will be cut into numerous pieces as the rest of Europe squabbles over London’s crumbling empire. The battle among European capitals to lure UK financial services makes it less likely that any of them will emerge as a serious challenger for London’s crown.
There is no place in Europe that can replicate London’s unique mixture of expertise, openness, flexible labour markets and deep rooted institutions. All its rival cities will have access to the single market, but without the whole package of virtues London may still stumble on as Europe’s dominant financial force after Brexit – whatever shape that takes.