Post-Brexit, EU Cities Vie to Become Next Financial Hub

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Post-Brexit London must be feeling like the unwilling party in a divorce. First, the spouse says he wants out. A day later, he says he may have made a mistake and can we think things through. The third party in the divorce — the lawyer — says there can be no concessions; you can’t live with your wonderful spouse of over 40 years and expect to have the usual access to all the other benefits of a legal union (in the U.K.’s case, access to the European Union common market) while rejecting a key aspect of marriage (free movement of labor). Then, to really rub salt into the wound, you’re both starting to get letters from complete strangers, inviting you to move in with them.

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Photo: Diego Delso / Own Work / Wikimedia Commons via CC BY-SA 3.0
The Leadenhall skyscraper, dubbed "The Cheesegrater" because of its shape, is one of a number of new tall buildings in London's booming financial area. Following the Brexit referendum, however, other European cities are looking to take a cut of London's profitable financial services sector.

London has been a major trade and business hub since the Middle Ages. It’s considered the unofficial financial capital of Europe and the startup capital of the EU. In the days before and immediately following the unexpected vote to leave the bloc, financial bigwigs were threatening to pull thousands of workers out of London and relocate them elsewhere in Europe.

Morgan Stanley said it could pull 1,000 employees out. JPMorgan Chase said before the referendum that it could pull four times that number out, but backpedalled within days of the vote to the same number as Morgan Stanley. According to KBW Analysts, Citigroup might pull 2,000 of its 8,000 workers out of the U.K., Bank of America nearly 1,400 of 5,500 and Goldman Sachs 1,600 of 6,400. That makes a total of 7,000 skilled workers potentially being dispatched elsewhere. And that’s just five financial services companies.

That is still a tiny percentage of the estimated 2 million people in Britain employed by financial services — which makes up 8 percent of the country’s GDP — as well as related industries such as accounting and consulting. Moreover, London consistently outranks other Western European cities in terms of its appeal for the financial services sector, based on criteria such as the prevalence of English speakers, good schools, a favorable regulatory environment, flexible labor laws, cultural attractions and reliable transportation and infrastructure. Potentially relocating thousands of established financial services professionals would itself be a costly move for many companies, and any significant shifts in banking operations could take years or decades to materialize, depending on the outcome of the Brexit talks.

Time Is Money

Still, the early signals from major companies have even well-heeled Londoners worried. Telecoms giant Vodafone — the very company that brought mobile phone calls to the U.K. in January 1985 — has also threatened to move its headquarters out of London following the Brexit vote. Encocam, a British company that makes everything from crash-test dummies to composite panels for trains, has put plans on hold to hire another 120 employees to work at its Cambridgeshire design and production hub, and now says it could take its business elsewhere. Spain, Portugal, Germany and Poland were all mentioned as alternatives in an article by the Reuters news agency about the company.

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Photo: Donaldytong / Own work / Wikimedia Commons via CC BY-SA 3.0
Dublin, whose shopping thoroughfare Grafton Street is pictured above, is hoping its cultural attractions, low taxes and tech industries attract London's financial services professionals.

Reuters cited Encocam’s managing director, Mike Ashmead, as saying the company “cannot wait for two years” to see how the negotiations between the U.K. and EU on the conditions of Brexit pan out. His chief worry, the article said, is that new immigration rules could “hinder his ability to hire engineers, designers and other skilled workers from abroad.”

In the past, when Encocam has hired an engineer from a non-EU member state (India, in this instance), the negotiations took 18 months, according to the article. The fear is that if the U.K. does leave the EU, it might take that long to get permits for workers from the continent, many of whom, under the EU’s free movement of people rule, can currently get off a low-cost flight or ferry to the U.K. and walk into a job.

That was one of the gripes of the “leave” voters — that workers from newer EU member states like Poland and the Baltic states were snatching all the jobs. Employers like Encocam say the workers they are courting — engineers, architects, etc. — have skills that many Brits are unable to match.

Financial services institutions are mulling a move out of London for similar reasons to the Vodafones and Encocams of the world. At present, under a system called “passporting,” companies that are registered in the European Economic Area (EEA) — the 28-member EU plus Iceland, Liechtenstein and Norway — can conduct permitted business in any other EEA state without further authorization, thereby eliminating a lot of red tape. The business just needs to set up a branch or base their agents in another EEA country, or offer cross-border services. Passporting saves companies the money and time it would cost to set up a local entity and obtain a local license to offer their products or services in that EEA country. As with Encocam, the problem with Brexit is that it could take more time to do things that currently happen quickly and fairly seamlessly — and, as the old saying goes, time is money.

New British Prime Minister Theresa May has said she would like to keep passporting while limiting immigration to the U.K. But the EU has already hinted, strongly, that the U.K. cannot have its cake and eat it, too. Granting countries access to the EU’s lucrative single market without allowing the free movement of labor would cut at the heart of the bloc’s economic raison d’être. Giving Britain special treatment would put it in a league of its own among non-EU countries, and that might push other EU members to ditch the union.

Startups Also Wooed

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Photo: Jimmy Baikovicius - Flickr: Open Happiness / Wikimedia Commons via CC BY-SA 2.0
Coca-Cola, Hyundai, TDK and McDonald's are among the companies whose signs flash above London's Piccadilly Circus.

As companies look for possible new EU headquarters, they are taking into consideration all the amenities London offers. They have at their fingertips in London a variety of top-class infrastructure, catering and retail opportunities to keep their office managers and staff happy. They have all the sideline financial service industries that they need to do business.

Many of the ancillary services are offered by startups, another area in which London is an EU leader. In July, Germany’s Cornelia Yzer, the Berlin senator for economics, technology and research, sent a letter to an unspecified number of U.K.-based businesses warning that the “leave” vote would “severely affect your operations” and subtly urging them to consider moving to another “dynamic economic location, Berlin.” 

“Berlin is not only the capital of Europe’s strongest national economy but also the fastest growing state in Germany. The startup number-one community is based here,” Yzer’s letter said.

She noted that hundreds of startup bosses have responded to her letter and asked for information about relocating to Berlin. We were unable to confirm her claim.

But we can confirm that London offers rich pickings for anyone who wants to start a fintech — an amalgam of financial technology — or scale up a newish company that is seeking to expand. Nearly 30 out of the top 50 fintech companies in Europe are based in the U.K., and the vast majority of those — 22 out of 28 — are in London, according to a listing compiled annually by FinTechCity. Eight in 10 of the hottest new fintech companies in the EU are in London, according to the list. The other two are in Berlin.

So London is not only a longtime financial center but also the dean of startup cities. The first startup “cluster” is said to have taken root in east London in the late 1990s. But other cities are catching up, and if push comes to shove and businesses feel Brexit will hurt their bottom line, they have a bevy of suitors waiting for them, each offering different bouquets of flowers to sweeten the deal and get them to leave London and move in with them.

Race to Replace London

Amsterdam: Apparently, the Dutch city was once the financial capital of the world, but that was back in the 1600s when the Dutch were plying the seas, trading with far-flung countries. Today, Amsterdam is not only an international city, but is also home to many major banks (ING and Rabobank, just to name two) and has a growing fintech culture.

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Photo: Mattbuck - Own work / Wikimedia Commons via CC BY-SA 4.0
The London Underground is the world's oldest and second-largest rapid transit system. Transportation is among the key criteria that have made London an attractive destination for the financial services industry.

In an article published on the Bank Innovation website in January 2015, writer Bernard Lunn said Amsterdam has “the two ‘reagents’ of a thriving innovation center — techies and rich people.” Another plus for the Netherlands is that most people in the country speak excellent English, the language of both techies and many bankers. Its international airport is one of the best in Europe, and Brussels, the EU capital, is a high-speed train ride away.

Berlin: The German capital is wooing both established financial services firms and startups. It has a much younger startup culture than London, but in just the space of several years, Berlin’s Gründerszene (FounderScene) has grown to roughly the same size as London’s. Both cities offer the infrastructure startups look for — shared workspaces, cafés and accelerators where entrepreneurs can learn the ropes of launching a startup. And, as Yzer said in her love letter to London businesspeople, Berlin is very cosmopolitan. In fact, many of the city’s successful startups were set up by immigrants. One of the biggest pluses of Berlin versus London is the un-cramped feel and more relaxed pace of life in the German capital.

Dublin: Many international tech companies, including household names like Apple, Google, Facebook and Twitter, have made the Irish capital their European home — often to take advantage of the very low corporate tax rate. Enterprise Ireland, the government body in charge of developing Irish enterprises in world markets, notes that Ireland also has little red tape to cut through, a bonus in bureaucratic Europe. The cost of living is lower than in the U.K., English is widely spoken and cultural offerings are arguably on par with London’s, especially the pubs.

The government agency in charge of attracting foreign investment, the Industrial Development Agency, says this on its website: “Ireland is a committed member of the European Union and provides companies with guaranteed access to the European market. Ireland is the only English-speaking country in the Eurozone and provides an ideal hub for organisations seeking a European base. The brightest talent from across Europe is attracted here, mixing with our own to offer a multinational and multilingual melting pot of skills with a positive attitude to match.” 

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Photo: Epizentrum - Own work / Wikimedia Commons via CC BY-SA 3.0
Eschenheimer Turm is the medieval gate and modern-day landmark in the German city of Frankfurt, one of the European cities looking to replace London as a financial hub.

Frankfurt: A strong contender to become the next financial capital of Europe, Frankfurt is already home to the European Central Bank, Germany’s Bundesbank and the European Insurance and Occupational Pensions Authority, one of whose tasks is to rebuild trust in the financial system. Frankfurt’s airport is the second biggest in Europe — after London’s Heathrow — and travelers can connect to most European cities by rail from the airport. There’s also room for growth in Frankfurt: The population is only about 2.5 million versus 8.3 million in London. The downside of Frankfurt is that it does not have the same cultural and culinary cachet as many other European cities, and there are some who say that making the city the financial capital of Europe would give too much power to Germany.

Luxembourg: The very international Grand Duchy is well situated, near Brussels, and offers many cultural perks, including excellent restaurants. A majority of Luxembourgeois speak English, and many speak more than one language. Finance Minister Pierre Gramegna called Brexit “sad news for Europe” in an interview with Bloomberg. “When you live for more than 40 years together, as was the case for the United Kingdom in the EU, you have a long history together, you have common legislation together and it takes a lot of time to unwind that, in order to make sure you have a new framework that is good for all parties,” he said.

However, for companies that feel they really must leave London, Gramegna said Luxembourg is the “obvious choice…. We are in the Eurozone, which is an advantage that we have compared to the U.K. for a long time, and it’s easier to reach out from Luxembourg than from London…. We have a lot of political stability and, hence, a lot of predictability.”

Among the negatives, Luxembourg is very small, raising questions as to whether it could absorb all those tech and finance workers from London. Gramegna also noted that until the U.K. invokes Article 50, which starts the withdrawal process from the EU, it will remain an EU member, with all the responsibilities and rights.

Outside Contenders

Copenhagen: The Danish capital is home to more than 12,000 information technology companies, one of the largest concentrations in Europe. But, like the U.K., Denmark is not in the eurozone, which might cause companies to balk at the idea of repeating the same mistake twice.

Paris: The Euronext stock exchange is based here, and Paris is a wonderful city, rich in cultural and gastronomic delights. But relatively few French people speak English and the country has very restrictive labor laws along with high taxes and social charges, which is likely to put a lot of companies off.

Stockholm: The most populous city in the Nordic region, Stockholm has been mentioned as a new tech hub for Europe, with the fact that Minecraft was created there listed as one of the reasons. Many Swedes speak excellent English, and there’s a lot of room for population growth, but the cost of living is very high.

Ontario: No, Ontario is not in Europe, and it’s not a city, but the commercial counselor for the government of the Canadian province, Aaron Rosland, has laid out a number of reasons for tech startups to move across the ocean: Ontario has the second-largest tech ecosystem in North America, after California; there are over 20,000 tech companies in Ontario; engineers working at those 20,000 tech companies are “more sought after than Stanford graduates,” according to Rosland; and Canada has direct, easy access to the huge U.S. market. It also has lower taxes for companies than the U.S.

Dubai and Doha: Neither the UAE nor Qatar are in Europe, but in an article for eFinancialCareers.com, reporter Paul Clarke quoted an unnamed U.S. banker as saying, “We are not thinking of transferring people from London to Dubai tomorrow, but future growth in Africa could be led out of the Middle East or South Africa.”


About the Author

Karin Zeitvogel (@Zeitvogel) is a contributing writer for The Washington Diplomat.

Last Edited on September 8, 2016

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