Eastern Europe is a real threat to the City
Frankfurt has already loosened up its labour laws to attract more 24/7 bankers. The Banque De France has already started publishing its regulatory forms in English to make it easier for London-based firms to re-locate there. Officials from both cities have been spending months touring the banks and brokerages of the Square Mile, and as our departure from the European Union draws closer and closer they will no doubt re-double their efforts with some success – just take a look at Morgan Stanley’s decision to re-locate some jobs to Germany.
But hold on. In fact the real threat might come from elsewhere – from Warsaw, Budapest and Prague. This week Standard Chartered announced that it was setting up a new European hub in Poland, and three of the major Eastern European cities are already starting to emerge as significant financial centres in their own right. One rule in business that always holds good is this: the competition never comes from where you expect it to. Forget Frankfurt and Paris – the real threat to the City will come from the East.
In the two years since we voted to leave the EU, every city across the Continent has come up with a plan for taking some finance jobs. Banking and investment are hugely lucrative industries, creating lots of well-paid jobs, and filling plenty of classy office space. The taxes that flow from all that can be enormous. If London does lose the passporting rights that allow Citybased firms to sell across Europe, there is no question a lot of work will have to move elsewhere. Frankfurt and Paris are London’s two traditional rivals for the European market. They are the finance hubs for the EU’S two biggest economies. Frankfurt already hosts the eurozone’s central bank and, after Brexit, Paris will be home to the EU’S largest banks. If you are going to move out of London, they are the obvious choices for a new location.
But they are not the only players in this game. This week, Standard Charted announced it was setting up a new global business hub in Warsaw creating 750 new jobs. Several European cities had been shortlisted, but it was the Polish capital that won out. A one-off? Not exactly. Goldman Sachs, HSBC, and JP Morgan have all said they plan to increase their presence there. In fact, Warsaw is already emerging as a finance centre of growing significance. More than 50 foreign companies have listed on the Warsaw stock market, which is already the largest in Eastern Europe. And banks have established back office operations there. It is far from alone. Blackrock has opened an innovation centre in Budapest with 500 people. Other firms have moved to Prague.
True, it is still relatively small. But Eastern European cities are starting to become significant. In the latest ranking of global financial services, while London remains on top, Warsaw has climbed to 41st place, putting it ahead of Edinburgh and Brussels and gaining on Paris. Can that keep growing? There is no reason why it shouldn’t. One thing we know for certain about financial services is that it thrives in a low-tax, low-regulation environment. Poland has a corporate tax rate of only 19pc. In Hungary, the rate is only 9pc, and in the Czech Republic the corporate rate is 19pc with lower charges for investment companies, and a flat rate for personal taxes of just 15pc (which is going to look good at bonus time). They have skilled workforces, good language skills, and an entrepreneurial outlook.
In reality, a few minor tweaks to the rules are not going to suddenly make Germany attractive to freewheeling bankers. If it was a real contender, it would have attracted more banks in the last three decades. Nor is Paris with its suffocating taxes and 35-hour weeks, despite President Macron’s reforms. Does any hedge fund really want to be based in a country that makes it illegal to email your staff at the weekend?
But Eastern Europe is different. It has all the advantages of passporting into the whole of the EU. But it does not have the same tax levels as Western Europe – or top-heavy regulation. Both Warsaw and Budapest might well steal an edge on the City. The City does not really need to worry about its old rivals. But it might well need to keep a wary eye on some new ones.
‘Warsaw is already emerging as a finance centre of growing significance’