(Bloomberg Opinion) -- “Allocate capital to the European Union – or else.”
That’s how you might sum up the bloc’s Brexit strategy on the finance industry, with promises of market access being used as leverage to get U.K.-based firms to move jobs and investment out of London and onto the continent. While this attempted shakedown shows how much the Brits have to lose from Brexit, there’s a risk too of self-harm for the EU.
The tough line from Brussels has, of course, created doubts about the City of London’s previously unchallenged global position. EY, a professional services provider, estimates that British finance companies so far have disclosed 1.3 billion pounds ($1.6 billion) of Brexit relocation and planning costs, allocated 2.6 billion pounds of capital for new entities abroad, planned an estimated 7,000 job moves, and expect to transfer 1 trillion pounds of assets out of the country. These are seen as costs worth paying to keep access to their EU clients.
Rather awkwardly for the Brexiters who doubted that any American banker would choose the continent over London, cities such as Paris, Frankfurt and Amsterdam are proving them wrong as companies move their headquarters out of the U.K. London’s dominance is “not a God-given thing,” Philipp Hildebrand, vice-chairman of the U.S. asset manager BlackRock Inc., told Bloomberg Television last week.
Still, it’s important not to get carried away with the “end of the City” stuff. Anyone waiting for a much bigger exodus, or signs that Brexit will unify and strengthen the euro zone’s financial market, will have been disappointed by the lack of progress. The European Central Bank’s supervision arm, the Single Supervisory Mechanism, warned last week that U.K.-based firms had transferred “significantly fewer” businesses, job functions and staff into their new European hubs than necessary.
There has been some foot-dragging, clearly. At the end of January Bloomberg News found that the likes of JPMorgan Chase & Co. and Deutsche Bank AG were planning to relocate about 400-500 jobs apiece, just 10% of their initial estimates. More recent predictions of 7,000-10,000 staff moves for the sector as a whole barely compare with the 200,000 City departures that the London Stock Exchange’s old boss warned about back in 2016.
Perhaps this is all unsurprising given the run of bad news coming out of the euro zone lately, from its economy to the performance of lenders such as Deutsche Bank. Or maybe it’s just a natural desire on the part of City firms to delay spending and upheaval until they really have no choice.
You have to ask, though, whether the ever-tougher line taken by Brussels against jurisdictions outside the EU or on the brink of leaving – namely Switzerland and Britain – is merely providing an incentive to the finance industry’s many skilled lobbyists to find workarounds.
It’s ironic that just as Deutsche’s shares plumb new depths, those of the London Stock Exchange Group Plc are hitting record highs, boosted in part by the successful lobbying of regulators to protect cross-border euro clearing under any Brexit scenario. Bankers have managed too to convince individual EU member states to take a softer approach than Brussels at times. Germany’s and France’s recent no-deal Brexit planning laws, for example, created a few handy carve-outs for finance.
Faced with such obvious challenges to their authority, the temptation for European-wide regulators will be to double down. But this can be self-defeating.
Look at how the pressure campaign against Switzerland over the terms of its access to the single market (seen as a test case for Brexit) has flopped. Retaliatory measures from Bern neutered the Brussels attempt to force EU firms to trade Swiss stocks on EU soil, and the Swiss bourse is reportedly mulling an EU acquisition as a workaround. The overall impact might just be a higher cost for the end investor.
While defending the single market and its rules is laudable, the danger is that rushing to erect a regulatory moat around the continent’s financial sector will unintentionally make the market less liquid, less global and less attractive. Jonathan Faull, a former EU Commissioner, suggests that the bloc’s regulators should find ways to cooperate with the U.K. and set policy jointly. Brexit’s politics may be toxic, but technocratic heads should stay cooler.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.
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