In 2016, only a few hours after the Brexit vote, banner adverts with the slogan “Welcome to the Paris region” were already circulating in the sidebars of large financial journals. This was soon followed by slogans of “Tired of the fog? Try the frogs. Choose Paris La Defense” adorning billboards in Heathrow and St Pancras. It seemed that the vultures were circling over the city. Elsewhere in Tallinn, business continued largely as usual; their greatest concern was focused primarily around who would take over the EU presidency in 2017, given that the UK was no longer able to take this position up as had been scheduled.
It should have been of no surprise that the response to a Brexit vote from Paris in particular would have been so swift and predatory. When Emmanuel Macron, a former investment banker, came to power in France in 2017, this process only accelerated. His focus on establishing a European transfer-union and a separate Eurozone block within the EU highlighted his desire to consolidate power within a fluid and adaptable EU. Furthermore, his animosity towards the separatism of the UK, which a high-ranking French official described as “a phenomenon of political, cultural, social disengagement” and a growing counter-EU sentiment within his own country, made it an economic imperative to demonstrate that a large, European economic power could not survive outside the EU.
When one considers that the financial services sector contributes over £150 billion to the UK economy each year (around 9% of GDP), as immediate neighbours, Paris appeared to be an obvious inheritor of this business. Whilst European national leaders on the eve of the Leave vote spoke of weathering instability, Wolfgang Schäuble, Germany’s finance minister perhaps gave a hint of what was to come, instead choosing to speak of “making the most of the decision of our British friends.” The campaign by Paris and Frankfurt to snap up London’s crown as Europe’s financial capital, post-Brexit, has understandably been a long and deliberate one. However, six years after the vote was formalised and two years after leaving the EU, the campaign’s success appears not to have been so straightforward.
While the market for bankers across the new European Union financial capitals Paris and Frankfurt appears to be, on the face of it, hotting up, the reality is that it is Amsterdam not Paris, the less-heralded of the two headquarters of Euronext, which has been the biggest early winner from Brexit. Similarly, although London has taken a knock, it has not been as large as expected. EY has been forced to downgrade predicted job relocations progressively from 12500 to 7000, whilst 5400 have moved to the UK post-Brexit.
Nevertheless, Amsterdam’s rise as a centre for share-trading has been nothing short of remarkable, especially given concerns (which have since died down) that the Netherlands may leave the European Union. Where daily trading volume was only around 2.5 billion euros in 2020, by January 2021, this figure was closer to 9 billion, making it the largest trading market in Europe. In contrast, two of the three other financial capitals of Europe (London and Frankfurt) saw precipitous drops in trade volume over the same period, with the third, Paris, only seeing modest gains. Since then London has regained its crown as the largest trading capital in Europe, allaying fears of a wholesale move across the channel to some extent. The overwhelming majority of bankers earning more than one million euros a year still remain in the UK, but their lead in traded volume is far more marginal.
This is not to say that there have not been some gains for Paris and Frankfurt. Many firms are out of necessity increasing their European presence, but the numbers are smaller than expected. J.P. Morgan for instance are increasing the size of their office in Frankfurt by about 25%, but this is only around 150 new hires across asset management, investment, private and commercial banking. Paris have also added around 150 new hires. To put this into perspective J.P.Morgan have around 12,000 staff in London alone and hired 200 additional staff in the British capital just between September and December 2021.
Reasons behind this are varied. Some argue that despite attracting the greatest number of UK employees, Paris is unwelcoming to foreign residents, deterring bankers from putting down long-term roots. Frankfurt simply does not have the same cultural draw. Nevertheless, both Paris and Frankfurt top the tables in luring British financiers (2800 and 1800 relocations respectively), indicating that the majority of outflow to Amsterdam may be from within Europe itself.
Amsterdam’s comparative success in luring financiers then is arguably as much to do with its welcoming atmosphere and excellent cultural scene as it is to do with its widespread use of English as an international trading language. The primacy of personal-life over business is hardly surprising given that remote working has become easier than ever. With this in mind it can be of little surprise that Dublin has also been a major winner of Brexit, with over 1200 relocations, offering similar Anglophone credentials and a good quality of life.
Yet this is not to say that the move won’t happen eventually. EU regulators have put pressure on financial institutions to choose between Europe and the UK, threatening to implement a system of penalties for those that fail to relocate. Trackers from EY have found that despite lockdowns delaying banker departures to some extent, 44% of financial institutions are still reconsidering relocation. Omar Ali, Managing Partner for EMEIA Financial Services at EY, notes that “for many financial services firms, we are still far from being fully post-Brexit.” The consequences of any temporary equivalence deal (or lack of) beyond the June 2022 extension are yet to be felt.
In the meantime London has been trying its hardest to hold onto these jobs, agreeing a successful trading deal with Switzerland after an EU-wide ban since 2019. Alongside this, a forward-thinking focus on Fintech has helped achieve substantial investment in British start-ups such as Monzo, Revolut and Starling, taking over half of all European Fintech investment.
There is also the curious case of contrasting approaches in regulation acting as a catalyst for innovation. The UK government’s rush to regulate crypto industries ahead of the EU is designed to enable the UK’s cryptoasset market to become the most trusted, whilst at the same time discontinuing its participation in Securities Financing Transactions Regulation . Despite leaving the EU, the UK was also quick to take up its PSD2 (Payment Services Directive 2) regulation.
Other moves such as easier listings for Special Purpose Acquisition Companies (SPACs) have not proved so successful, with 22 Euronext listings compared with just one in London. Furthermore, the disastrous IPOs of Deliveroo and THG are perhaps indicative of a creeping reputational damage that may lead tech-firms in particular to be cautious of London-based listings.
The Surprising Winners of Brexit
Where it appears that the calculated large-scale move on London’s financial institutions by major European Capitals is meeting resistance, it is curious then that the early winners of Brexit seem to have not been initially quite as direct in their campaign to take British business.
One particular local winner has been Estonia who have claimed to have attracted over 4000 British companies in the space of the two years since Britain’s departure from the EU was formalised. Much of this has to do with the swelling ranks of Digital Nomads (remote web-based business owners who are not tied to any one location in particular) which have been bolstered by lax visa regulations for “E-Residents,” a flat tax rate of 20% and internet speeds that are faster than those found in the UK. Similarly, like the UK, Estonia has recently tightened crypto regulation (which includes a pilot of new anti-money laundering software), so as to protect its economy from dirty money and offer a safer regulatory environment. It is this which might indicate a broader move where consumers prefer safer jurisdictions.
This Brexit boost is arguably a happy accident; the e-Estonia tech programme reached its most recent iteration long-before the Brexit vote in 2014 and has existed in some form or another since 1996. Tech-startups in particular have done well. As of 2022, seven tech unicorns (privately owned companies with value over $1 billion) including Bolt, Gelato, Veriff and Glia are all based in Talinn. Where in previous years, they may have left far sooner, they now no longer feel the need, due to easy access talent thanks to e-Residency and a growing pool of pioneering companies to poach them from.
As a result of this influx of new e-commerce, Estonian tax revenues are up 60% when compared with 2020. Similar gains have been seen in the Tallinn Stock Market over the same period. For a country with just over 1.3 million residents, it is arguable that a comparatively tiny proportion of total UK business needs to move over for them to see large gains on all metrics, but this perhaps asks a broader question: while no capital has particular primacy over the European financial market anymore, can companies from smaller markets make do with staying put in their country of origin for longer?
With no singular city providing the magnetic draw of pre-Brexit London and increasingly expansive digitised access to major markets, will the real winners be the smaller economies of Europe? Ireland, Czechia, Portugal, Latvia and Denmark are amongst those from smaller European economies who have seen substantial market gains since 2020; in part attributed to Brexit.
However, whether this will be a positive development is debatable. In the same report in which Brexit job-losses were downgraded, Omar Ali goes on to remark that “with such ongoing uncertainty, the risk of fragmented markets remains, which is inefficient, costly for all participants, and could ultimately harm the global competitiveness of both market.” It is this building up of localised centres of finance that perhaps might be forbearers of this more fragmentary post-Brexit European economy. If this occurs, it is arguable that in the long-term, none of these cities will be true winners.
Author: Alex Joseph
#Brexit #EU #London #Paris #Amsterdam #Tallinn #InvestmentBanking #Fintech
