international analysis and commentary

Amid the uncertainty, London shrugs off Brexit


Regardless of the chaos at Westminster over Brexit and the continued uncertainty about whether Prime Minister Theresa May can secure a parliamentary approval of her Brexit deal, London seems to have weathered the worst of Brexit before Britain has even left the European Union. The initial impact of the June 2016 “in or out” referendum was bad: The pound suffered its worst depreciation since WWII. Since then business investment has slowed down, with investors having withdrawn more than a trillion US dollar from UK-focused equity funds.

Brexit has probably dragged the UK economy down by anywhere from 1% of GDP to 2% per year, depending on the forecast model used. An average of several models used by The Financial Times suggests that by April 2018, the UK economy was 1.2% smaller than it would have been without Brexit. That represents a 24 billion pound loss to the UK economy, or a “Brexit cost” of 450 million pound per week. All told, according to the International Monetary Fund, since June 2016 Britain went from being one of the best performing economies of the West, to being the slowest growing economy in the European Union, except Italy.

But that is probably the worst of it. London is regaining momentum and is likely to soon drive the UK economy back into faster growth, once the fog of Brexit is lifted. To understand the importance of London to the UK economy, one should bear in mind that trade in goods makes up only about 20% of the British economy, while 80% consists of services – that is financial and related professional services for which London is a global hub.

A view of London


There are more domestic and foreign banks in London than anywhere else in the world. The UK hosts the world’s largest commercial insurance market and about 1.5 trillion pound of European assets are managed from London. Moreover, London is the largest global market for foreign exchange and international bond trading. As the governor of the Bank of England, Mark Carney, put it in November 2016,  “the city is Europe’s investment banker.” According to the global management consulting group Oliver Wyman, in 2017, the UK financial and related professional services sector employed 2.2 million people, generated 200 billion pound in revenue and contributed 66 billion pound in taxes. This provides perspective when there is talk about the approximately 5,000 jobs that may, possibly, migrate from London to other financial capitals in Europe. Not many jobs have actually moved. Among the global finance giants, Deutsche Bank originally considered moving 4,000 jobs, now it is shifting less than 200, UBS planned to move 1,500 staff, now it is looking at a mere 200.

London’s four “Ls”: Language, Longitude, Law and Liquidity are at the core of this resilience. English continues to assert itself as the dominant language globally; the world still measures time from the Greenwich meridian of zero degrees longitude; British rule of law and parliamentary democracy are still the global golden standard; and finally, the sheer amount of money (liquidity) pivoted around London is without peers.

None of London’s potential competitors have emerged as a possible new hub for financial and related professional services. Frankfurt has attracted 25 foreign banks away from London; Paris lured another eight, while a further fifteen will spread among Dublin, Amsterdam or Luxembourg. This fragmentation among its competitors consolidates London’s prominence and ensures that there is no credible alternative to London in Europe.

The second underlying reason for London’s resilience is its awareness of its strength and assets and the fact that it has protected its prominence. The City and its financial industry have not left it to the UK government to negotiate a good deal for them in Brussels. London lobbied, with support from European businesses, to keep its financial standing post-Brexit. European businesses and industries of the remaining 27 member states provided their support to London because they have a vested interest in keeping a large, liquid market for financial products – from derivatives to corporate loans – that only London can provide in Europe. Powerful lobby groups, such as the City of London Corporation or TheCityUK, took matters into their own hands and are likely to ultimately succeed in securing their vision of Brexit. That vision is fully reflected in the “Political Declaration” attached to the Brexit agreement reached in Brussels in late November.

In the event of the UK leaving the EU’s single market, what the EU originally offered to the City was “equivalence”, a mechanism whereby the European Union allows non-EU companies in certain sectors to sell products or services across the EU. Equivalence is unilateral; it would have been up to the EU to decide whether UK rules and regulations were adequate for continued access to the single market. What London sought instead was something closer to “mutual recognition”. In other words, a system under which both parties independently set their own rules and regulations but share a mechanism for reciprocal recognition of those rules and regulations as equals. This is why the agreement on how the UK will leave the EU now calls for the “commencement of equivalence assessments by both parties as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020.” The agreement also calls for “close and structured cooperation on regulatory and supervisory matters, grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability, recognising this is in the parties’ mutual interest.”

The third underlying reason why Brexit will not diminish London is the huge compromise that is the Brexit agreement. Theresa May’s three redlines – to leave the customs union, leave the single market and leave the jurisdiction of the European Court of Justice – have all been crossed. Short of a second  referendum or a general election, Britain will end up with a very “soft” Brexit. Sure, the “will of the people”, as expressed in the June 2016 referendum, will be respected and Britain appears to be set to formally leave the European Union on March 29, 2019 or after a limited transition period. But, as is often the case in Brussels, Realpolitik prevailed and compromises were made.  The recent statement by the Advocate General of the EU Court of Justice,  Manuel Camps Sanchez-Bordona, that Britain can unilaterally reverse Brexit and remain an EU Member State without seeking permission from the other 27, has opened a third option, namely that Britain simply changes its mind and it all goes back to the status quo ante.

In conclusion, regardless of the final outcome of Brexit, with specific regard to financial and related professional services, it is more likely that London has impacted Brexit rather than the other way around.