Will London Still be the Financial Capital of the World ?

Experts believe that the effects of Brexit will be varied in nature. What has happened now is a mere announcement of the intention of Britain to leave the European Union. However, the effects are not really seen. There are contradictory views about the possible outcomes. Some believe that the outcome will be catastrophic for Great Britain. However, many are not as skeptical.

One of the most significant downsides of Brexit could be the fact that London would possibly lose its title of being the number one financial center in the world. The entire economy of London is largely influenced by it being the financial capital of the world. The schools, the supermarkets, and those Michelin starred restaurants all receive some of the money generated by the financial sector. Loss of jobs in the financial sector would, therefore, have a cascading effect on many other sectors and lead to loss of livelihoods across the entire economy in general!

Global bankers who once made London their home will now have to abandon it if they want continued access to the European single market. The other member nations are advocating for difficult rules for Britain post-Brexit. They want to set up an example to deter other member nations from taking similar steps at a later stage.

• Why London was the Financial Capital: London has always been the undisputed financial capital of the European nations. It ranks number 1 in the list of financial centers in the world. The competition is not even close. Frankfurt, the closest competitor, is one-tenth the size of London. It ranks number 23 on that list. The city of Paris is bigger in size and infrastructure, but the socialist attitude of the government makes it number 29 on that list.

  The scale of financial activity in London can be gauged from the fact that even though Britain is only the fifth largest economy in the world, London is still ahead of its competition (even New York!) and continues to hold the title of being the financial capital of the world.

• Competition is Heating Up: The competition is heating up to snatch some business away from London. Brexit is a political change that will necessitate the movement of jobs from London to countries within the European Union. It is for this reason that JP Morgan Chase has purchased office space in Dublin.

  Similarly, companies like Nomura, Daiwa, Goldman Sachs, Deutsche Bank, etc. are all moving parts of their business to the small German city of Frankfurt. Paris has also seen some gains. However, the fact that Paris is vying some of the action is making the government look hypocritical.

  The French government was amongst the first to blame capitalist banks after the 2008 crisis. These banks were vilified, and the governments won their elections upon the promise of eradicating the people from the clutches of these banks. Now since the French government is giving red carpet treatment to potential banks that are willing to set shop in Paris, a large section of the French population is losing trust in the French government.d

• The Brexit Effect: Brexit has necessitated the movement of jobs from London to the European Union. This is because derivatives and other contracts related to EU parties must be cleared within EU. Hence, if the big banks want business from their EU clients, they will have to set up shop within the EU. The question now arises which European city they would choose for the purpose.

  Frankfurt and Paris are front-runners in this race. Cities like Dublin and Brussels will also experience gains. These cities know that once financial sector sets up shop in a city, it creates a wide variety of secondary employment in the form of restaurants, schools, hotels, clubs, etc. As a result, there is a mad rush between these cities to get as many jobs leaving London as possible. These cities are soliciting these banks by giving access to cheaper land and also better tax breaks. It is ironical that after 2008, these same governments couldn’t stop criticizing these banks. However, about a decade later they are doling out freebies to get these banks on their shores.

• Why London May Not Lose Much: London already has an ecosystem that a financial city requires. It has access to some of the world’s best financial talent. The center has mushroomed for many decades.

  It is unlikely that the gains of several years will be undone overnight by a political move. The result of this exercise would be the London would lose about 15% to 20% of their jobs to these other cities due to regulatory issues.

  If regulations are not a concern, the job loss could be even less. The outcome is entirely dependent upon the nature of the agreement between EU and Britain and the degree of access granted to British companies to the EU market. London may slip to number 2 or number 3 on the list of world’s financial hubs. However, it will still be the largest financial hub in and around the European continent.

To sum it up, London is likely to lose it’s number one crown. However, it will still be a formidable financial hub in the years to come by.