Financial centres in the European Union are often seen as competitors engaged in a zero-sum game of snatching business away from each other. In the aftermath of the British referendum on leaving the EU, much attention was dedicated to commenting on how individual centres fared in the battle for the Brexit spoils.
However, Frankfurt, Luxembourg and Amsterdam have many things in common in the post-Brexit period: the honest regret of losing a world-class financial centre at its side, the clear goal of making the Brexit mild and the continued intention to build new bridges to London.
These different centres certainly are competitors, which is largely beneficial to the financial industry and their clients – businesses that drive economies. But Europe’s financial services landscape is much more sophisticated than the simple one-upmanship between cities that some like to portray.
The many relocations after Brexit since 2016 have underlined this, and they provide a useful insight into what really makes Europe’s financial markets tick.
Firstly, financial institutions have in most cases chosen to relocate to where the best local ecosystem existed to support a particular activity, not necessarily the entire company. These relocations were decided by evaluating the relative strengths of the different options each city offered to these activities, based on a complex set of facts including regulation, human resources, (market) infrastructure, labor unit costs and labor laws.
The upshot of this evaluation process, five years on, explains how Frankfurt and Paris got the bulk of the banking activities, why Luxembourg and Dublin are the preferred option for the asset management industry, and Amsterdam has scored well with market liquidity providers and trading platforms. Brussels, Budapest, Cracow Madrid, Milan and a few other cities also saw relocations decided in their favor. Other developments are still forthcoming, such as the gradual shift of clearing business for euro-denominated derivatives from London to the continent.
Rather than a sudden fragmentation of the power previously concentrated in London, this should be viewed as a welcome multi-polarisation of specialised financial centres in the EU.
Secondly, EU financial centres are in fact more integrated and complementary to each other than they are competitors. The reason why the financial industry has split up their relocations between different cities is that each offers a different specialism and a unique added value whilst being seamlessly interconnected with each other.
By the way, this is not entirely new. The integration of the skills of different financial centres has a long tradition. Major financial players have always aligned their value chain by leveraging the advantages of specialised financial locations. Continental European asset managers or Deutsche Boerse are good examples of firms having leveraged this complementarity of various centres.
By tapping into the skills of competing financial centres, firms from across the EU can grow their activities in segments that are better served by skills, including regulatory skills, available in one place or another. In essence, they are able to put the central tenets of both Adam Smith, the proponent of free markets, and comparative advantage advocate David Ricardo into practice.
Going forward, there is a need to nurture and leverage the expertise available in each of Europe’s financial centres.
Promoting sustainable finance is a good example of how competition does not prevent Europe from working together in a meaningful way, as national interests are aligned.
The same now applies to financing our pandemic recovery and building back better. Free flowing capital should connect global investors with investable projects. This is where the expertise and power of financial centres is critical. This is our trade. There is a European market of EURO 4 trl of Financing available in need of getting employed.
Thirdly, the EU single market remains a powerful force to attract business to sustain growth and create jobs. To help make it even more powerful and allow EU players to face their US and Asian competitors, the EU should intensify its work on deepening the single market for financial services through the different angles of the Banking Union, the Capital Markets Union, the Green Deal and the Digital Single Market.
This is the opposite of creating a Fortress Europe; it is to allow fair competition to strengthen competitiveness thanks to specialisation and scale that comes with it.
The EU has always led by openness in trade. EU financial centres certainly should continue to work together with their European peers in London and Switzerland as they should with other global centres. There is thus of course a clear role for London in this new collective effort as finance is and hopefully will remain in essence a truly global business.
By Nicolas Mackel CEO of Luxembourg for Finance, Hubertus Väth, Managing Director of Frankfurt Main Finance and Joost van der Does de Willebois, Chairman of Capital Amsterdam