No, Paris Will Never Be the New London
With Brexit looming, France, Germany, and other European financial centers are rolling out the red carpet for London’s banks and trading houses. It’s a fool’s errand.
As the U.K. referendum on whether to remain in or leave the European Union draws nearer, politicians and bankers from other European cities are circling the prospective carcass of London’s financial center like vultures above a stranded, parched wayfarer.
Back in February, Emmanuel Macron, the French economy minister, said Paris would “roll out the red carpet” for U.K. bankers should the country vote for Brexit — and on Wednesday kicked off a new campaign to tout the French capital as a center of global finance. In May, Martin Shanahan of Ireland’s Industrial Development Agency said Brexit would help his quest to attract 10,000 financial services jobs to Dublin. Not to be outdone, Hubertus Väth, the managing director of Frankfurt Main Finance, has said his city, too, is ready for an influx of bankers from London. And similar noises have been emanating from Luxembourg, Amsterdam, Munich, Stockholm, and other European financial centers in the weeks leading up to the vote.
It’s not surprising that officials in those cities are licking their lips at the thought of becoming “the new City of London.” While the U.K. is only the fifth-largest economy in the world, it is the largest exporter of financial services. London’s net contributions to the country’s balance of trade and the exchequer all can be counted in the tens of billions of dollars. The export of London’s financial services to the EU alone accounts for some $30 billion or so per year, more than 1 percent of Britain’s GDP. If the U.K. were to Brexit and lose full access to EU markets — in particular, the right to provide cross-border services — a fair chunk of this EU business would be up for grabs elsewhere in Europe. So, could a European city such as Paris really become the new London — in financial terms, at least — if the U.K. votes for Brexit?
Time for a reality check: No European city other than London comes close to having the essential characteristics of a truly global financial center. And this will remain the case — Brexit or no Brexit — for the foreseeable future.
My firm, Z/Yen Group, compiles and publishes the Global Financial Centres Index (GFCI), which is the de facto source for ranking financial centers around the world. GFCI aggregates more than 100 competitiveness factors for each center, using thousands of responses from financial services professionals to understand which factors matter the most to them.
Macron can roll out the red carpet all he likes, but no amount of plush scarlet flooring will compensate for the fact that when it comes to factors like institutional and regulatory environment, tax and cost competitiveness, and availability of skilled personnel, Paris is ill-equipped to take the financial world by storm. In fact, Paris is not a star performer in any category; it is currently ranked 32 overall in the GFCI and, in Western Europe alone, sits in seventh place — behind Zurich, Luxembourg, Geneva, Frankfurt, and Munich.
These factors can and do change, but it seems highly unlikely that Brexit alone would lead to any EU nation emerging as an obvious place for global finance to migrate from London. Even if officials eyeing a piece of the action make policy tweaks to try to create a more favorable financial services environment, some of the most basic pieces of the puzzle would still be missing.
For starters, there’s the size issue, which, in turn, affects many of the infrastructure and human capital factors. London’s population is about four times that of Paris’s: 8.5 million to 2.2 million, respectively. London has some 350,000 to 400,000 financial services workers at present; that is close to the entire working population of Frankfurt, a city with only about 700,000 people in total. All of the major financial centers in Europe (other than London) are a suitable size to be strong regional or specialist hubs but not global powerhouses.
It’s not just about size. GFCI groups factors into five spheres of competitiveness: business environment, financial sector development, infrastructure, human capital, and reputational and general factors. London regularly tops all or most of these categories. The most important categories, according to the thousands of professionals surveyed, are business environment (particularly regulation) and human capital (in particular the ability to attract skilled people). New York, Singapore, and Hong Kong are also strong in these factors. Global finance houses are unlikely to choose to move people to centers based in EU countries unless they absolutely need to. These businesses tend to look on the employment laws in countries such as Germany and, especially, France as restrictive — even draconian. Paris in particular is likely to make finance houses nervous, so long as the noises coming from the Élysée Palace keep giving the impression that the French government would happily tax and regulate financial services out of existence if it could.
This is not to say the City — as London’s financial services industry is called — would emerge from Brexit unscathed. (And, for purposes of full disclosure, I should make clear: My personal view is that a vote for Brexit would be a collective act of commercial and geopolitical suicide.) If the U.K. does indeed vote for Brexit, European leaders will subsequently treat London as an external competitor and thus try to hit the City as hard as they can. It is very difficult to imagine EU leaders granting London an exception from the withdrawal of, for example, the right to provide cross-border services, known as passporting rights, if the U.K. leaves the European Economic Area. Why would they? Why should they?
However, it is also likely that the instability and uncertainty that would affect London adversely in the case of Brexit would also affect other EU-based centers, too. It will take years for the details of Britain’s exit to be hashed out. In the meantime, there are likely to be anti-EU insurgency campaigns in other European countries — potential Swexits and Frexits and the like — that gain strength on the back of a Brexit, leading to additional instability. The downsides of this uncertainty, for most if not all European centers, would almost certainly outweigh any scraps of business those cities might pick up from London.
Global finance (and thus the role of the financial centers that support it) is not a zero-sum game. In times of stability and economic strength, most financial centers can thrive. In times of excessive uncertainty and stagnation, most will suffer, some more and some less.
If anyone is poised to take advantage of Brexit, it is the cities that are already well established as London’s looming competition. No, not New York — though it would probably, in the medium term, benefit from the euro’s instability compared with the dollar and London’s relative uncertainties. The cities with the most to gain are the Asian financial centers.
Hong Kong, Singapore, and Tokyo — even Seoul and Shanghai — already have the scale and infrastructure to grow as global financial centers. Indeed, over the 10 years or so that we have produced the GFCI, the most interesting trend has been the rise of Asian financial centers in the rankings (though that rise has plateaued in the last few years). I can envisage experts in a quarter of a century’s time looking back to 2016, opining that Brexit and the resulting political instability in Britain and across Europe were the geopolitical tipping points that finally, truly switched commercial attention in the West toward the Asia Pacific region. Such a shift would, in my opinion, boost the fortunes of American and Asian centers at the expense of European ones, in a way that, again, would far outweigh any modest gains to be had as a result of Britain’s departure from the EU.
So when Parisian politicians are choosing the right red carpet to roll out for the bankers in the event of a vote to leave this summer, they might look to match its color to the red in the flags of China, Japan, South Korea, and Singapore. Those places might find themselves in the market for a new runner, while Paris might find that its rug has welcomed fewer feet than expected. Secondhand red carpet, barely used, anyone?
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