In Search of the Next London

London risks losing its position as Europe’s financial centre if Britain does not secure EU passporting rights for its financial services after the Brexit vote. “I don’t see how anyone can say with any certainty that passporting will continue. Switzerland doesn’t have passporting, neither does the US, so we cannot assume we will,” Jonathan Lewis, CEO of Nomura International, an investment bank, commented on the situation. Capital Economics, an economic research consultancy, estimated that the loss of passporting rights could reduce British exports of financial services to the EU by half, i.e. by about £10 billion (about €12 billion). Negotiating a passporting deal with the EU could take years, but clients already want banks’ reassurance that they will continue providing their services without any disruption, observed Simon Gleeson, a partner at law firm Clifford Chance.

In the meantime, competition over taking over London’s position as Europe’s financial centre has already started. IDA Ireland, an agency which is in charge of attracting foreign direct investment (FDI), is going to reach out to “its 1,200-plus client companies and potential investors” to discuss the implications of the Brexit vote and to encourage them to invest in Ireland. Paris EUROPLACE, an organization which promotes and develops the Paris financial market, is going to travel to London to convince local financial firms and professionals to transfer their operations to Paris. Frankfurt officials have already set up a hotline for British banks which are considering relocation.

James B. Stewart, a columnist for The New York Times, interviewed several top executives of major financial firms based in London. Although none of them are going to relocate anytime soon, they all admitted they would eventually transfer “a significant number” of highly-paid employees to EU cities. One executive admitted that his firm might need to relocate 10 to 40% of its staff. “Multiply that throughout the industry and it’s tens of thousands of people,” he estimated.

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Stewart also examined the potential of several EU cities for becoming the next financial centre according to criteria mentioned by some relocation experts and Mark Yeandle, the lead author of the Global Financial Centers Index: (1) competence in English, (2) a favourable regulatory environment, (3) well-developed infrastructure of transport and communications, (4) the availability of office space and luxury housing, (5) access to good schools, (6) good restaurants and cultural offerings and, finally, (7) openness to an influx of highly-paid financial professionals. He ranked the cities on a 60-point scale in the following order: Amsterdam (55 points), Frankfurt (54), Vienna (51), Dublin (50), Paris (43), Luxembourg (40), Warsaw (24), Milan (24) and Barcelona (23). This is how he explained the choice of the top 3 candidates:

No. 1: Amsterdam

One of the biggest strengths of Amsterdam is competence in English. According to the 2012 European Commission (EC) report Europeans and Their Languages, 90% of Dutch people speak English. Stewart noted that “[..] many speak it better than the English themselves”. Amsterdam also has top-ranked schools, “beautiful architecture and housing options”, excellent restaurants and cultural offerings, a cosmopolitan and tolerant society as well as well-developed transport infrastructure. In addition, it has one of the best airports in Europe and excellent rail connections with other European capitals. Its only weakness is strict business regulations. For example, bankers’ bonuses have been capped at 20% of their annual salaries.

No. 2: Frankfurt

Stewart believes there are many reasons why Frankfurt should become Europe’s next financial centre. First, there are the headquarters of the European Central Bank (ECB). Second, it is the financial capital of Germany, Europe’s largest economy. In addition, the country ranks high on the ease of doing business index despite its strict labour laws. Moreover, Frankfurt has well-developed transport infrastructure: it has the second-best airport in Europe after Heathrow Airport in Hillingdon, London, and excellent rail connections to other European cities. Finally, it could easily absorb an influx of financial professionals.

In Stewart’s opinion, Frankfurt’s biggest drawbacks could be poor cultural offerings, a lack of good restaurants and schooling options as well as weak competence in English – only 56% of Germans admitted that they can communicate in English.   

No. 3: Vienna

In contrast to Frankfurt, one of the biggest strengths of Vienna is fluency in English: 73% of Austrians are able to speak English. According to Mercer Consulting’s Quality of Living Survey, it is a city with the best quality of life in the world. It has internationally recognized restaurants. However, it is no longer “a major financial capital”. None of the top executives Stewart spoke to are going to move or expand their operations there in the near future. Still, they do not rule out this option completely: if needed, they are willing to reconsider it.

References:  [1] Martin Arnold and Laura Noonan, Financial Times / [2] Jonathan Boyd, InvestmentEurope / [3] Max Colchester, Sam Schechner and William Wilkes, The Wall Street Journal / [4] Joe Brennan and Mark Paul, The Irish Times / [5] James B. Stewart, The New York Times / [6] European Commission, Europeans and Their Languages