LONDON IS FALLING
City stands to lose its status as a first-tier global financial capital due to Brexit,
London is poised to lose its status as one of the world’s two financial capitals, roughly tied with New York. Britain’s influence on the world stage will decline as a result.
The British and London-based operations of offshore financial giants are expected to lose their preferential access to the vast European Union (EU) market. The special treatment for the U.K. in the EU ends abruptly once U.K.-EU divorce negotiations conclude at the end of March 2019. For the business-minded, that’s just around the corner.
Much is at stake. Britain’s financial sector, concentrated in London, accounts for about 12 per cent of the U.K. economy, and 7 per cent of total British employment. The City, London’s financial district, generates a $128-billion trade surplus for Britain.
London currently handles about three-quarters of European trading in foreign exchange and interest rate futures. It is Europe’s dominant clearing centre for financial transactions. London accounts for about half of European fund-management business. Imagine the impact on the Canadian economy of the southern Ontario auto industry, then add several multiples.
How financially dominant is preBrexit London? Pre-Brexit, New York-based Goldman Sachs Group Inc., the world’s second-largest investment bank, had more than 6,000 employees in London. It had just 200 people in Frankfurt, and about 100 in Paris.
“Brexit,” the U.K.’s withdrawal from the EU, resulting from a 2016 referendum, could see an estimated $2.6 trillion in financial assets move from Britain to cities in the vastly larger, $26-trillion EU economy — a process already underway.
And that is not the worst-case scenario. That estimate assumes that the U.K.’s divorce negotiators succeed in retaining at least some of Britain’s favoured access to the EU financial market.
But that relatively “soft landing” is highly unlikely. The “EU27” (the new term for the EU minus Britain) is united in demanding a so-called “hard Brexit.” A hard Brexit sees Britain lose all but a few of the privileges of its current EU membership.
In that case, estimates of London financial job loss soar to 232,000, or two-thirds of London’s financialsector jobs. That warning comes from Xavier Rolet, CEO of London Stock Exchange Group PLC (LSC).
EU negotiators have every incentive to impose a “hard Brexit.” They seek to discourage more EU defections. And EU financial centres stand to gain from London’s losses.
London’s best argument for con- tinued favoured access to EU financial markets is that EU borrowers need London’s enormous pool of capital. But the argument doesn’t work. Already the London capital pool is diminishing as funds migrate to EU centres. And for the financial demands, New York is London’s equal in the depth of its capital market.
Indeed, Bank of England officials expect London to lose more financial business to Gotham than any one city in the EU. Apart from physical proximity to the EU, Wall Street has everything London does: a massive financial-services infrastructure; political stability; English, the language of global commerce; and the wealth of talent multiculturalism brings.
One of the chief and noisiest goals of Theresa May, the tenderfoot U.K. prime minister, is to slash immigration levels and restrict the issuance of work permits to non-Brits. It’s a populist measure May clings to no matter how fiercely the City argues it needs non-British talent. In the U.K.’s parliamentary system, May is more able to get her way than is Donald Trump with his similarly retrograde ambitions.
Far ahead of 2019, global financial giants have shelved pre-Brexit expansion plans for London. They have opened and expanded EU27 offices. And they’ve begun to relocate London jobs to EU cities. And EU cities are rolling out the red carpet for them.
Frankfurt, already the financial capital of the Continent, would seem to be the natural beneficiary of London’s financial-sector losses. But Paris, Dublin, Amsterdam, Madrid and Milan are also making a play for London’s business. So are the smaller centres of Luxembourg City; Vilnius, the Lithuanian capital; the Latvian capital, Riga; and Valetta, capital of Malta. It’s almost a freefor-all. The smaller centres are bidding for the financial industry’s “back-office” functions, including transaction processing and information-technology support.
Wary of losing U.K. business, financiers have been reticent about their EU plans. Which means the deterioration of London’s financial prowess is insidious. Londoners won’t wake up to it until what’s often called “the jewel of the British economy” is largely gone.
The most that Lloyd Blankfein would say to the U.K. Guardian on the topic, earlier this month, is that London’s growth “will stall. I don’t think it will totally reverse.”
If Blankfein, CEO of Goldman Sachs, actually believed that, Goldman would not have been revealed in March to have already relocated hundreds of jobs out of London.
The short list of financial giants that have relocated some of their London business to EU cities includes New York-based JP Morgan Chase & Co., Morgan Stanley Co. and Citigroup Inc.; Switzerland’s UBS AG and Credit Suisse AG; Germany’s Deutsche Bank AG; Japan’s Nomura Holdings Inc. and Daiwa Securities Group Inc.; and even British lenders Barclays PLC, Lloyds Banking Group PLC, HSBC PLC and Standard Chartered PLC.
Earlier this year, Lloyd’s of London relocated its EU headquarters from London to Brussels. Other global insurers such as American International Group Inc. (AIG) have plans to bulk up EU operations, since they cannot issue insurance contracts unless they have a physical presence in the EU. And the London Stock Exchange is bracing for the loss of its $2.6 trillion (U.S.) in daily euroclearing, a lucrative activity that Brussels, the EU’s administrative headquarters, has announced it plans to take control of.
The LSE has already lost market share to Paris’ formidable Euronext exchange, and further, post-Brexit losses are likely. Shareholders in Toronto’s TMX Group Ltd., who resisted the LSE merger blandishments of 2011, must be thinking themselves prescient today.
The decline of British Empire and industry in the 20th century saw New York eclipse London as the world’s financial capital. It took more than three decades of British EU membership, and the 1991 collapse of the Soviet Union and the opening of Eastern European markets, to enable London to climb back to parity with Wall Street — a remarkable feat.
But London is now flirting with a return to second-tier status. All due to a non-binding Brexit referendum that May’s government could have simply taken under advisement. Instead, May said “Brexit means Brexit,” which may be Britain’s death knell if the country breaks apart as a result.
In the annals of human folly, Brexit will loom large as one of the greatest acts of self-inflicted loss in history. You can take that forecast to the bank.
Financiers have been reticent about their EU plans, which means the deterioration of London’s financial prowess is insidious