The latest salvos have been fired in the EU’s battle to drain the City of London’s financial business. Brussels – with France at the helm – has long cherished imposing a continental blockade on Britain’s financial access to the EU. But, like Napoleon’s 1806 embargo on British trade to the continent, things are not that simple.
The Cassandras have had to eat their words following their predictions that there would be tens of thousands of Brexit-induced job losses in the City after 2016. The Financial Times’s own survey shows that rather than delivering a big hit to financial services, nine of the world’s largest asset managers have ramped up their headcount in the capital by 35 per cent over the past five years, and most international banks have also increased staff, including French BNP Paribas. Of course, asset managers have set up EU funds to be able to sell to European investors post Brexit, but the numbers are limited.
It would have been a major challenge to the City if the EU had prepared for Brexit by developing a single European financial centre to encourage deeper capital markets and an accompanying financial eco-system of lawyers, accountants and fintech companies. In fact the reverse has happened. Rather as with Napoleon’s 1806 blockade, the continent has splintered. Paris, Frankfurt, Dublin and Amsterdam have each taken a share of the underwhelming relocations, allowing the City to divide and rule among increasingly fragmented European capital markets by sheer dint of volume and concentration of high value business.
It is the clustering in London that cannot be recreated easily. By way of illustration, on Monday Le Monde carried a piece about the creditable performance of French high-tech start-ups achieving the coveted billion-dollar valuation – ‘unicorn’ status – and their ability to attract finance. The figures speak volumes. In 2020 France had 10 ‘unicorn’ companies, Germany 15, and the UK 26 – the third highest globally. On the crucial issue of finance, UK start-ups attracted £11 billion in funding, France £4.7 billion, and Germany £4.5 billion. But even then, it seems that much of the European financing came via London.
When the Governor of the Bank of France, Francois Villeroy de Galhau, detailed France’s four great financial challenges for 2021, Brexit was top. After his embarrassing miscalculation about relocations after Brexit, the Governor now estimates that just 2,500 staff and £148 billion assets have moved from London to Paris (with no mention of French transfers to London). But he knows only too well that these British relocations and virtual asset transfers are there to allow the City to continue selling its own packages to EU clients after ‘passporting’ ended on 1 January.
Ignoring European financial fragmentation since 2016, the bank chief affirmed that it was ‘now or never’ to construct ‘European financial autonomy’, especially for derivatives trading where he claimed, somewhat audaciously, that Paris had advantages. Similar Paris exhortations were uttered at Britain’s accession to the EEC in 1973, after the ‘Big Bang’ in 1986 and the creation of the Euro in 1999.
In the mild-mannered world of central bank governors, the aristocratic Villeroy de Galhau was probably not expecting the riposte three weeks later from his colleague at the Bank of England. In a speech last week, Andrew Bailey – clearly taking a leaf from the UK chief Brexit negotiator David Frost’s book – did some plain speaking to Paris and Brussels about forthcoming financial negotiations, particularly around granting ‘equivalence’ status to the UK.
Bailey accused the EU of holding the UK to standards it would ‘not agree to be held to itself’, of wishing to apply discriminatory restrictions not applied to other financial centres and insisted that the UK would not be a post-Brexit ‘rule-taker’. It was ‘not acceptable when UK rules govern a system ten times the size of the UK GDP’. He might have politely added that given the City is one of the world’s biggest financial hubs it is stretching credibility for it to be a ‘rule taker’, when EU cities hardly make the top ten. Indeed, the recent risible claim from the FT that ‘Amsterdam ousts London as Europe’s top share trading hub’ was briskly debunked by the economist Gerard Lyons, who pointed out that most EU trading is a subset of the international trading that takes place in London, not to mention derivatives and currency trading where London is the global leader on which the EU is cruelly dependent.
Napoleon’s blockade of British trade with his European empire and continental system (a proto-EU) caused little economic damage to the UK. British exports to Europe dropped, but trade increased with North and South America. Extensive British trade continued through Spain and Russia fracturing the continental system, while the loss of Britain as a trading partner weakened the economies of France and her European allies. Irritated European governments were spurred to ignore the Continental System, thereby weakening Napoleon’s coalition. The Continental System and the blockade collapsed with the Emperor’s abdication in 1814. The French have a saying: ‘history doesn’t repeat itself, but it stutters.’