EUROSCOPE. Is the City of London losing its sheen?

Earlier this week a government memo leaked to the Daily Mail tabloid triggered an outcry in Britain. It revealed concerns in the City, London’s financial centre, about the eagerness of France in particular to see “outcomes detrimental to the City of London even if Paris is not the beneficiary”.

“What we are witnessing is a whole-of-France collective endeavour, made both more giddy and more assertive by the election of [President Emmanuel] Macron,” wrote Jeremy Browne, the City’s special representative to the EU. “They are crystal clear about their underlying objective, the weakening of Britain, the on-going degradation of the City of London.” Alongside feeding into the tabloid obsession with conspiracy theories how the rest of Europe was determined to “punish” Britain for Brexit, the memo also returned to the spotlight an issue that surfaced in the earliest days after last year’s referendum: Will the City of London retain its position as Europe’s — and the world’s — leading financial centre in the wake of Brexit, set to take place in March 2019?

Right from June 24 last year, even before the shape of the Brexit that the government would be pushing for became known, there was great disquiet in the city of London. Thanks to a unique combination of factors — a conducive regulatory environment, easy access to skilled professionals, the cluster effect, and London’s wider charms to name a few — have enabled London to hold onto its lead position globally, despite stiff competition, particularly in Asia. According to the latest Global Financial Centres Index by the China Development Institute and Z/Yen Partners published in March, London retained its lead position, ahead of New York, Singapore, Hong Kong and Tokyo, based on the survey which takes into account business environment, human capital, infrastructure, sector developments and reputation. The rest of Europe remains strikingly behind Britain on the index: the highest ranked European centre, Zurich, is not in the EU, whereas the only other EU locations to make it to the top 30 are Luxembourg, Frankfurt, Munich and Paris (which comes in at 29).

However, the report is also a reminder that London can’t rest on its laurels any time soon: the city’s score fell sharply along with New York, in developments the authors of the report attributed to the concerns around Brexit and the US election. Dublin and Luxembourg were among 15 global centres that made it into the list of those perceived by the survey’s respondents to become the most significant going forward.

Europe’s eagerness to go after the spoils that Brexit-related uncertainty has thrown up is hardly surprising: London’s status at the top of the global hierarchy isn’t something that always sits comfortably with its neighbours, sometimes engendering a feeling that it has gained more than it has shared around. London, for example, is the leading centre for euro-denominated derivatives while not even lying within the Euro Zone. (Efforts to change this were blocked by the European Court of Justice). It has also aggressively courted other markets globally, as an RMB financial centre, or for Masala bonds from India (a particularly fast growing sector in the past couple of years). Much of Europe’s top talent has drifted to London. Britain has, over the years, had few qualms flexing its muscles: when former French president Francoise Hollande raised the top rate of tax to 75 per cent former prime minister David Cameron quipped that he’d roll out the red carpet for French bankers who wanted to move to Britain. (It’s a joke that’s come to haunt Britain as various senior French politicians have thrown back the same threat at Britain’s banking sector since Brexit, to the indignation of the British tabloid press!)

From Europe’s perspective little seemed to satisfy Britain too: even the exemptions won by David Cameron to future tightening of regulations in the EU ahead of the referendum, did not convince committed Brexiteers within the city — and they do exist in significant numbers — that Britain unhindered by European regulation, and able to lower tax rates, could become a “Singapore-upon-Thames”. These City-backers, of course, rarely come from the large global institutions that have counted on the passporting rights into Europe that Britain’s membership of the EU has given it but are prominent voices nevertheless, with financial clout.

Going forward much remains uncertain for London’s financial sector: What kind of passporting rights will emerge as a result of EU negotiations remains to be seen — as will the kind of transitional arrangement for the sector to avoid a cliff-edge situation when Britain exits. Absolutely crucial will be how the two sides resolve the issue of ensuring the smooth movement of skilled personnel: Britain has made clear that it’s keen to end the freedom of movement (willing to give up single market membership, alongside membership of the customs union as a result), but doing so will be no small task. Europe has made it clear that single market membership is not divisible, and a sector-by-sector deal is simply not on the cards.

Will leaving the EU lead to a dramatic shift towards one European capital? It’s highly unlikely: none have the cross-sectoral strength to match London, and a dramatically bad deal aside, London will likely retain attractions in many financial sectors. Still, a steady drip can in all likelihood not be avoided.

How much does this matter to Britain? Quite a lot: thanks to deregulation financial services have become an increasingly important contributor to the British economy, accounting for around 10 per cent of GDP. With other sectors (such as the auto sector) expecting to be hit by the impact on their supply chain in the wake of Brexit, Britain will need all the financial and economic might it can muster as it contends with life outside the EU.

With so much preoccupation on the terms of Brexit, there’s been little focus on what the wider industrial strategy of post-Brexit Britain could be.

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