The election of the globalist and EU-champion, Emmanuel Macron, to the French presidency poses a threat to the UK’s financial sector and its economy more broadly. A potted history of the sector shows how important its outward-looking nature has been to its success. This could just as easily be undone, if the British government embarks on a hard Brexit that turns its back on its biggest market, and if a rival emerges to take its place.
The UK financial sector has always been open to the world. Before World War I, British investors invested more savings abroad in foreign and colonial securities than any other country. In 1914, the London Stock Exchange was the largest stock market in the world. Banks, insurance companies and investment management firms had a similarly global outlook.
Knocked back by two world wars, the City began to recover in the 1970s and 80s, leading the way in Europe for mergers and acquisitions, privatisations, fast-growing investment institutions – especially pension funds – and foreign currency trading. The “light touch” approach to regulation encouraged the growth of the lucrative eurobond market and the setting up of hundreds of overseas bank branches.
With the UK in the EU and a single EU market in financial services, London became the natural base for the EU operations of any financial institution worth its salt. The creation of the euro in 1999 only helped to consolidate London’s number one status as Europe’s financial centre. Even the buying up of London’s banks by European banks – such as SG Warburg by Swiss Bank Corporation in 1995 – did not dent London’s success. The country’s financial and insurance services now account for £124.2 billion, or over 7% of UK gross value added to the UK economy. Financial services companies and their employees are major contributors to the UK Exchequer.
And now there is Brexit. There are two key problems for the UK’s financial sector. One is so-called financial passporting – the legal mechanism that allows financial services firms in one part of the EU’s single market to operate across it. If leaving the EU means that UK banks or insurance companies can no longer sell financial products to customers within the EU, they will lose business. But, worse, US and non-EU banks based in the UK won’t be able to, either. So, it’s likely they’ll move at least some of their operations elsewhere. Dublin, Frankfurt, Paris and Luxembourg are already pitching for this business.
The second key problem is euro clearing. London currently gets this lucrative business, despite the fact that the UK is not even in the eurozone. EU leaders are already angling to repatriate euro clearing within the EU zone – but wrangling as to where.
Enter Macron. His views on Brexit are clear and concise: Brexit, for the British, is a grave mistake. Macron has called himself a “hard Brexiter” and has said that Britain cannot have its cake and eat it – that is, keep single market benefits while outside the EU. He asserted that EU passporting rights for UK financial institutions should be banned and euro clearing should “definitely not” be allowed to stay in London after Brexit.
So, why is this worrying? After all, his predecessor François Hollande talked in the same vein since last June’s referendum, and before. Is it just bluster?
There are a number of reasons to take Macron seriously. He has been a banker, which Hollande never was. He is promising to cut tax rates for companies and individuals rather than raise them, as Hollande did. He is also aware that there are many French bankers and fin tech experts only too happy to come home, if offered the right incentives. Manuel Valls, Hollande’s former prime minister, has already promised to halve income tax and delay wealth tax for returnees. Macron is promising even more generous packages for researchers, academics, bankers, and those in fin tech and other creative industries.
The difference this time is that Macron is planning to deregulate the French economy, especially sclerotic French employment laws. He’s also planning to deregulate French financial services. If he succeeds, Paris could be a real threat to London as a financial centre. But, to succeed, he must be the first French president for decades not to have been beaten by the country’s trade unions when trying to modernise the economy. Without a majority in parliament yet – the elections are in a month’s time – he is planning to railroad the changes through.
It’s not clear that Macron will achieve all his aims but one thing is sure, he’ll fight tooth and nail to repatriate as much financial services business as he can from London to the EU – and preferably to Paris. Macron’s election is bad news both for the City and the UK economy as a whole.
Janette Rutterford, Professor of Financial Management, The Open University Business School
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