international analysis and commentary

London: bigger than Brexit


Despite widespread fears about the impact of Brexit, London does not appear to be suffering overly much. The City remains the financial capital of the world thanks to the “four Ls”: language, longitude, law and liquidity. London’s critical mass and the presence of any number of European businesses keeps it strong: indeed, it is using its influence to advantage in Brussels.


Since the UK Prime Minister, Theresa May, triggered Article 50 of the EU Treaty, thereby starting the two-year Brexit negotiations, Britain seems to have weathered the worst of Brexit before it has even left. The initial impact of the June 2016 “in or out” referendum was bad: the British pound sterling (GBP) suffered its worst depreciation since the second world war and is still valued well below its pre-referendum worth. London house prices have suffered a battering and have fallen over the past year by as much as 15% in the most expensive neighborhoods. Business investment has also slowed down due to the political and economic uncertainty unleashed by the referendum. All told, the cumulative effect of Brexit so far is that Britain has gone from being one of the best performing economies of the Western world, to being the slowest growing economy in the EU, bar Italy (according to a report published in April by the IMF).

THE RESILIENCE OF LONDON. But that is probably the worst of it. London, the beating heart of the UK economy, is regaining momentum and is likely to soon drive the UK economy back into faster growth. 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 – first and foremost, financial and related professional services, the very essence of London’s economy, for which it is a global hub.

There has been no flight of City jobs to Frankfurt or Paris; there has been no exodus of EU citizens; and there has been no flight of capital to New York, Hong Kong or Singapore. London is still commanding a leading position as global financial capital. According to the consulting giant Duff & Phelps, it has just regained the crown of the world’s top financial center for the first time since 2013. 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 GBP in revenue and contributed 66 billion GBP in taxes.

This provides perspective when there is talk about the approximately 8,000 jobs that may, possibly, migrate from London to other financial capitals in Europe. Further perspective is offered by the Reuters news agency which polled 119 banks and companies in September 2017 about their intentions to move jobs out of London by March 29, 2019, the date of Brexit. Reuters found that 10,000 jobs were at stake. When they repeated the poll this March, only 5,000 jobs were still being considered as likely to move to the continent. This 50% drop marks the rapidly diminishing concerns about the impact of Brexit on London.

This pattern is further confirmed when one looks at the global finance giants. Deutsche Bank originally considered moving 4,000 jobs, now it is shifting less than 200. UBS originally planned to move 1,500 staff, now they are looking at a mere 200. Of the 40 banks that responded to the Reuters survey, only eight had moved staff across the Channel.

In short, London appears to be only marginally affected by Brexit and it has already proven its resilience to what thirteen months ago seemed the greatest threat to the UK economy of the past three generations.

LONDON’S FOUR Ls. Language, Longitude, Law, and Liquidity. With the advent of social media and new technologies, 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; finally, the amount of money (liquidity) pivoted around the City of London is without peer.

London’s legal community understands mergers and acquisitions, as well as how companies are built or liquidated, while UK regulators, courts and dispute-resolution systems are trusted universally. There are more domestic and foreign banks in the UK than anywhere else in the world, the UK hosts the world’s largest commercial insurance market while about 1.5 trillion GBP 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, recently put it, the City remains Europe’s investment banker. There are no credible challengers to that role; indeed, European businesses depend on London keeping that role.

London cannot be easily replicated anywhere else in Europe. It took decades for London to become what it currently is, both in terms of size and quality of services offered. Its growth as leading financial hub started back in 1986 with the massive deregulation of financial markets (called for by Margaret Thatcher, it was known as the “Big Bang”). That political foresight found fertile ground in London with its four Ls. Since then, London has become a magnet for finance which has drawn bankers, traders, asset managers and insurers to manage those assets and make deals; this has in turn attracted lawyers to provide legal services in support of those deals, which then required accountants.

All these professionals needed housing, driving the London real estate market to record heights. They also needed schools for their children, entertainment, restaurants, and so on and so forth. Over three decades of growth across those sectors, London’s sheer size and the critical mass of key markets and related services is hard to replicate. Business and money come to London because it is a one-stop shop. To structure such a hub, it is critical to have access both to finance and to all different professional service providers in the same place and then ensure that they can all work together seamlessly. From the investment banker to the M&A lawyer, to the supporting accountant and investor relations expert, they all need to be readily accessible and available.

The critical mass of finance and professionals that London has built over decades – with all the relevant support infrastructure – is difficult for any competitor to challenge. A simple and effective way to illustrate this point is by looking at the restaurant scene in different European financial centers. London is home to 72 Michelin-starred restaurants, while Frankfurt has two. Now, eating out may not necessarily be a top priority for a professional when considering relocating to a new city, but career perspectives, the quality of schools for their children and housing most certainly are. Indeed, those cities that emerged as potential challengers to London’s supremacy immediately after the referendum – such as Paris, Frankfurt or Milan – have all toned down their ambitious talk. Christian Noyer, the former governor of the Bank of France and currently tasked with attracting banks to Paris from London, recently conceded that the UK’s exit from the EU will not be as catastrophic as some have claimed. He now allows as how warnings about Brexit’s impact on London have been overblown.

Moreover, none of those potential competitors have emerged as a possible new hub for financial and related professional services, which is what London effectively has been for decades. Indeed, financial institutions considering moving jobs out of London have scaled down their numbers. They have been considering a plethora of choices across the continent – from Dublin to Lisbon – yet no other city has emerged as a leading hub. This fragmentation consolidates London’s prominence and ensures that there is no credible alternative to London in Europe.

TAKING MATTERS INTO THEIR OWN HANDS IN THE CITY. The second underlying reason is that the City of London is aware of its strength and assets and is protecting its prominence. London is actively lobbying, with support from European businesses, to keep its financial standing post-Brexit. The City and its financial industry have not left it to the UK government to negotiate a good deal for them in Brussels. European businesses and industries are even providing their support because they have a vested interest in keeping a large, liquid market for 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 have taken matters into their own hands and are likely to succeed in securing their vision of Brexit. In the event of the UK leaving the EU’s Single Market, which it probably will, what the Union is currently offering to the City is the so-called “equivalence”. Equivalence is a mechanism whereby the European Union allows non-EU companies in certain sectors to sell products or services across the EU. Equivalence is therefore unilateral: it would be up to the EU to decide whether UK rules and regulations were adequate for continued access to the single market in any given sector. That would leave the City at the mercy of Brussels as the EU could pull back on “equivalence” access at any point. This exposure would be anathema to Britain’s hardest Leavers. It would also be unacceptable to the City, as it would make the UK a pure rule-taker as opposed to rule-maker, which is the role it needs to play in order to retain and protect its leading global position. In short, equivalence is not good enough.

EQUIVALENCE VS MUTUAL RECOGNITION. What London needs and seeks is something closer to “mutual recognition”. In other words, it needs a system under which both parties independently set their own rules and regulations but share a mechanism for mutual recognition of those rules and regulations and share a body that arbitrates disputes. Mutual recognition would maintain the sovereignty of both parties, while ensuring the stability and continued prominence of London’s financial markets. This is a critical element as London and the UK would not be forced to become “rule-takers”, as they would under “equivalence”, but would very much continue to be “rule-makers” in those sectors where London effectively commands a leading role globally, most notably in financial services.

At the same time, the UK and London are forging ahead in developing yet another hub of related economic activity: namely, new technologies and, above all, fintech. According to a recent survey by the London Stock Exchange and the lobby group TheCityUK, the British fintech sector already contributes 6.6 billion GBP annually to the British economy, employing more than 60,000 people. Just as importantly, the sector is expected to grow by 88% over the next three years. This innovative sector of economic activity will not only complement, but further enhance London’s controlling position in the financial markets, based on new technologies. As the City of London Mayor, Charles Bowman, recently said, any job losses due to Brexit will be more than offset by innovation in London’s fintech sector.

OUT, WITH OPT-INS. The third underlying reason why Brexit will not diminish London is the huge compromise that Brexit will eventually prove to be. Theresa May’s initial three redlines – to leave the customs union, leave the Single Market and leave the jurisdiction of the European Court of Justice – will all be crossed to some extent. We may well end up with a Brexit only in name and of very little substance. Sure, the “will of the people”, as expressed in the June 2016 referendum, will have to be respected and Britain will formally leave the European Union. But, as the prime minister of Luxembourg, Xavier Bettel, put it: “Before, they were in and they had many opt-outs; now they want to be out with many opt-ins.” That may well become the future definition of Brexit. As is often the case in Brussels, Realpolitik will prevail and compromises will be made.

Make no mistake, both sides will have to make compromises and Britain probably more than the remaining bloc of 27. The customs union may well be the first redline that Theresa May will have to cross. Much as she professes the opposite, the British PM does not have a solution to the Irish border problem. If the UK were to leave the European customs union, a hard border would have to go up between the Republic of Ireland and Northern Ireland. That is not something that the British people voted for when they voted to leave the EU. Nor would a hard border be compatible with the Good Friday Agreement, which brought to an end decades of violence in the streets of London and Belfast.

Ironically, so far, Brexit has highlighted the importance of London in the global capital markets and as a hub for financial and related professional services. It has become increasingly clear that London is more likely than not to continue setting the global standards for those markets and services. This is the very opposite of becoming a passive rule-taker.

In conclusion, London is bigger than Brexit and will be only marginally affected by it. With specific regard to financial and related professional services, it is more likely that London will impact Brexit rather than the other way around.

*A version of this article was published in Aspenia 81 – “Il ritorno delle città-Stato”.