Europe's competing financial centres
Jun 23 2021
Frankfurt am Main Financial centres in the European Union are often seen as competitors, snatching each other’s business in a zero-sum game.
After the British referendum on leaving the EU, much attention was paid to commenting on how individual centres fared in the battle for the „Brexit spoils“. Yet Frankfurt, Luxembourg and Amsterdam had much in common in the post-Brexit period: The honest regret of losing a world-class financial centre in Europe with London, the clear goal of making the Brexit mild, and the still valid offer to London of wanting to build new bridges. The various financial centres are certainly competitors, and that is fundamentally a good thing, which benefits the financial industry and ultimately its customers and drives companies and economies forward.
But the financial services landscape in Europe is much more differentiated than the „mudslinging“ between the different cities that some like to portray suggests. The many post-Brexit relocations of staff and assets that have come to light since 2016 have underlined this and offer a useful insight into what really makes Europe’s financial markets tick.
First, in most cases, financial institutions have chosen to relocate to where they believe the best local ecosystem exists to support a particular activity, not necessarily for the whole group. These relocations were decided by assessing the relative strengths of the different options available for a particular activity in each city based on a complex set of facts. These range from regulation, labour supply, real infrastructure, market infrastructure, cost per unit of labour and labour law, to name but a few factors. After five years, the result of this evaluation process explains why Frankfurt and Paris got the bulk of the banking activity and Luxembourg and Dublin were the preferred choice for the asset management industry. Finally, Amsterdam scored well among providers of market liquidity and trading platforms. Brussels, Budapest, Krakow, Madrid, Milan and several other cities also scored well. Other developments are still to come, such as the gradual shift of the clearing business for euro derivatives from London to the continent. This should not be seen as a sudden fragmentation of power previously concentrated in London, but rather as a welcome multipolarisation of specialised financial centres in the EU.
Secondly, the EU financial centres are in fact more integrated and complementary to each other than they are really competitors. The reason why the financial industry has spread its settlements across different cities is that each of them offers a different specialisation and thus a unique added value, while at the same time they are seamlessly interconnected to allow this specialisation to take place with little friction. This is not entirely new, by the way. There is a long tradition of integrating the skills of different financial centres. Large financial players have always aligned their value chain to take advantage of specialised financial locations. Continental European asset managers or Deutsche Börse are good examples of firms that have taken advantage of this complementarity of different centres. By exploiting the locational advantages of competing financial centres, firms from across the EU can expand their activities in segments that are better served by the capabilities available in one place or another. This also applies to regulation. In essence, then, they are able to put into practice the key lessons of both Adam Smith, the proponent of free markets, and David Ricardo, the advocate of comparative advantage. Going forward, the expertise available in each of Europe’s financial centres must be nurtured and harnessed to help the financial industry meet the many challenges it faces – from accelerating digitalisation to fighting pandemics to financing a sustainable future.
Working together in a meaningful way
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 goal of a financial centre cannot simply be to capture market share, but to embed sustainability in all financial activities and sectors. There is plenty of room: the European financial market is 4 trillion. Euros.
A lot of money that wants to work. The same is currently true for financing the reconstruction of national economies after the pandemic. There must be free-flowing capital that connects global investors with projects that need money. This is where the expertise and power of the financial centres is crucial. This is, if you like, our core business. Thirdly, the EU single market remains a powerful force attracting business, fostering growth and creating jobs. To make it even more powerful and enable EU players to face their competitors in the US and Asia, the EU should intensify its work on deepening the single market for financial services through the various aspects of the Banking Union, the Capital Markets Union, the Green Deal and the Digital Single Market. This is the opposite of a closed-off ‚Fortress Europe‘, it is about enabling fair competition to strengthen competitiveness thanks to specialisation and the scaling it brings.
Openness in trade
The EU has always led by example in terms of openness in trade. EU financial centres should certainly continue to cooperate with their European counterparts in London and Switzerland, as well as with other global centres. Therefore, ID: 2021113011 there is of course a clear role for London in this new collective effort, as finance is essentially a truly global business and hopefully will remain so.
To sum up: Brexit still carries the risk of weakening Europe as a global financial centre. But it also holds the chance to become more than a zero-sum game, because the complementarity of the financial centres brings a lot of benefits. The EU must use the current momentum to complete the banking union and create a real EU capital market. Only then will it be able to play its full role in global finance.
Source: Börsen-Zeitung, 17 June 2021, 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 © All rights reserved.
Image: Pixabay / MichaelGaid,a