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The race to succeed London as the next European financial capital is on. “We know that groups based in the City are planning to leave for Dublin, Amsterdam, Frankfurt, and Paris,” French Prime Minister Manuel Valls told journalists on July 2. Other EU countries are also intent on stealing financial services jobs from the United Kingdom post-Brexit. Even the economic minister of Bulgaria, the European Union’s poorest country, invited City of London escapees. In reality, however, London will remain Europe’s main financial center for years to come.
There are three reasons London is likely to continue to dominate European financial services. The first reason is that the British court system has upheld the rule of law, including the protection of creditor and shareholder rights, for centuries. The second is the superior education in economics and finance at UK universities over that of its continental counterparts. The third is conducive tax and employment regulation.
Protecting the interests of creditors and shareholders from rapacious behavior of competitors or the state is obviously important for attracting financial services. On this score, the United Kingdom is ahead of the rest of Europe. The World Bank’s Doing Business project ranks the United Kingdom fourth in the world in shareholder protection behind only Hong Kong, New Zealand, and Singapore. France is 29th in the strength of laws protecting shareholders, and Germany is 49th. In terms of protecting creditor rights, the United Kingdom ranks 19th in the world, France 79th, and Germany 28th. Of course, the rule of law may improve in Europe, and financial investors may feel more protected in Paris or Berlin. But this process will take years, perhaps decades.
Second, markets increasingly require a sophisticated understanding of economics and finance, as well as indepth knowledge of the legal architecture underlying the smooth functioning of financial services. Here, too, British universities lead Europe in offering quality education. In the latest Shanghai global ranking on economics, there are six UK universities among the top 50 and only three continental European universities (one in the Netherlands; two in France). Four of the top five Masters of finance programs in Europe are based in London (the only exception being INSEAD near Paris).
Third, the financial services sector in the United Kingdom benefits from lower corporate tax rates and more flexible employment laws than Germany and France. In the Doing Business ranking on paying taxes, the United Kingdom is ranked 15th in the world, well ahead of Germany (ranked 72nd) and France (ranked 87th). The United Kingdom’s lead is even wider in terms of flexible labor regulation. The latter is especially important in the highly cyclical sector that annually hires and fires tens of thousands of white-collar professionals.
Some parts of the financial sector in London are viewed as more vulnerable to Brexit, for example, foreign exchange trading in euros—a $2 trillion-a-day market. Currently, over 70 percent of euro trading takes place in London, compared with 11 percent in Paris and 7 percent in Frankfurt, according to data from the Bank for International Settlements. The European Central Bank already tried banning clearing houses outside the Euro area from trading the euro. In 2015, the European Union’s highest court disagreed. Yet Brexit does not significantly alter the status quo: The United Kingdom has never been a member of the euro area. Insurance is another sector whose European activity is highly concentrated in London. But the United Kingdom’s main competitors are in Asia (Singapore and Tokyo) and the United States. The access that London has to European money is based on proximity and historic relationships, not on being part of the European Union. In short, even in these markets it is hard to see a rapid shift away from the City of London.
Where Brexit may have a negative effect is on London’s position as the world’s best regulated financial center. Following the uncertainty around Brexit, Asian and American markets could take some business away from the City of London. The knee-jerk reaction may be to erode some of the financial regulation in the United Kingdom in an effort to attract more investment. This would be unfortunate.
