It is well over three years since the UK voted to leave the EU. Yet no one knows what kind of economic relation the UK will have with the 27 countries it leaves behind. (Some of the discussion in London remembers in its insularity the fictitious 1930s headline: “Fog in Channel: continent cut off.”). The most likely result seems to be a more distant relationship than leave sponsors talked about in the referendum battle.
But despite that variation of route, and the inevitable loss of the so-called passport, which would permit financial services to be sold freely over the EU, the feared large-scale departure of firms and financiers from London does not seem to be underway. The French patisseries and German sausage stores are still doing a roaring trade. Why?
Two very new pieces of evidence give a sense of what is occurring on the ground, while politicians continue to argue. The accounting firm EY has monitored firms’ declared plans in reply to Brexit over the latter three years. The newest survey, published in mid-September, shows that 40% of firms intend to move some of their operations and workers out of London. 60% of bigger firms have announced such moves.
But the number of jobs that are to be relocated from London to another European city is only 7,000, far lower than estimated. , the two places that, according to EY, have benefited most are Dublin and Luxembourg. These niche centres and unlikely to emerge as powerful rivals across the full spectrum of financial activities. Therefore it is good news for London. Had Paris and Frankfurt been the principal beneficiaries, the long-term results could be far more alarming. Their marketing operations are so far generating only modest returns.
There is, yet, some more worrying news for London in the survey. Firms confirm that they are likely to move assets out of the UK on a large scale. The latest estimate is that around £1tnof assets under management may move to other centres when the UK leaves the EU. Many employees who are responsible for these assets will remain in London for now but that could change over time.
A second data point intimates London’s status is starting to suffer. A consultancy called Z/Yen has published a Global Financial Centres Index every six months for more than a decade. The latest ranking revealed that while London continues second only to New York, its relative position has been shifting. New York’s leadership has more than doubled in the last six months. London’s comparable decline has been more obvious than any other of the top cities, and Paris has moved up.
The gap between London and Paris has dropped to 45 points from 88 points in March (the top mark is below 800). The European Banking Authority’s relocation to Paris and Bank of America’s choice to move its euro trading there, are the principal agents behind that shift of perception.
Moving from survey to anecdote, managers said they have found it harder than expected to persuade senior staff to move. Even Italians and French who have been asked to move back to Milan or Paris are often reluctant to agree. Their children are settled in school, their spouse or partner has a non-mobile job in London. In some cases, they can’t bear to find themselves so close again to mum and dad!
More significantly, perhaps, a global market is a complex ecosystem. The traders may move but will the IT infrastructure and support be as refined elsewhere as it is in London? Will skilled advisers and lawyers be accessible on-demand, as they are in the Square Mile?
These factors are making firms reluctant about large-scale moves. Several have been looking to overcome the regulative obstacles they will face once the UK leaves the single market.
Moreover, the politics of Brexit stay fraught and complicated. There is a small chance that the UK will hold another referendum and reverse course. The most likely outcome is that the UK stumbles toward the exit without a structural new relationship or a lengthy transition period.
Thereafter, we will see how Europe’s financial markets develop. But the primary expectation must be that Europe will migrate to a multi-polar financial model. Many centres, small and large, exploiting their relative advantages. Dublin and Luxembourg will establish their positions, especially in asset management. The European Central Bank will act as a pole of attraction for Frankfurt. Euro-denominated transactions will take place in the eurozone, while London looks expected to stay, for the foreseeable future, Europe’s window on the wider world.
There will be a price to pay for users of financial services, as a predominant single centre is almost certainly more effective and more competitive. But after Brexit, that solution will no longer be accessible in London. No consent among the other 27 countries on a singular alternative.