EU Financial Capital

Did Paris just win the lottery?

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Paris wants to attract EU banks because that's where the money is. Source: Reuters

It seemed almost a cavalier way to decide the new location of a key European agency and hundreds of jobs, but Paris was the lucky winner when a tie vote forced officials to draw lots for the future site of the European Banking Authority after its forced exit from London.

Landing the bank regulatory agency was an important victory for Paris in its rivalry with Frankfurt to become the European Union’s financial center when Britain leaves the bloc. But the bad news for Frankfurt wasn’t that it was unlucky in the final drawing. The city didn’t even make it to the final round of voting, which resulted in the tie between Paris and Dublin. Frankfurt, home to the European Central Bank and financial capital of the EU’s largest economy, thought it had the EBA in the bag but didn’t even make it to the finals.

Winning this particular prize may in fact signal a momentum shift for post-Brexit finance in Europe. French President Emmanuel Macron, after a commanding win in presidential and legislative elections earlier this year, is liberalizing the French economy, while Germany has been plunged into a political crisis that threatens to immobilize it at a key turning point in Europe.

“The EBA of itself is not all that important,” said Holger Schmieding, chief economist at Germany’s Berenberg Bank. “But Macron is making France more attractive for businesses of all kinds, including finance. It may well be that historians see this as a tipping point.”

Frankfurt, and Germany in general, is not doing enough to capitalize on “Brexodus,” Mr. Schmieding said. In particular, Germany is doing nothing to increase the flexibility of its labor laws or ease conditions for high-earning financial professionals. “Frankfurt is losing a chance to seize the opportunities afforded by Brexit,” he said.

“I can imagine that many Americans would prefer to live in Paris than in Frankfurt, for various reasons.”

Lloyd Blankfein, chief executive, Goldman Sachs

Picking Paris as the new location for the EU bank regulator – an agency destined to become bigger and more important as the bloc makes progress to a full-fledged banking union – reinforced other trends favoring the French capital as a financial center. In an interview with French daily Le Figaro this week, Goldman Sachs Chief Executive Lloyd Blankfein disclosed that the leading global investment bank had decided to designate both Paris and Frankfurt as EU hubs – and let staff choose which they preferred to move to.

“We will have more employees on the continent. Some, if they want to, would come from London; others we will hire,” Mr. Blankfein told Le Figaro. “And I can imagine that many Americans would prefer to live in Paris than in Frankfurt, for various reasons.”

Five other cities were also bidding for the EBA headquarters – Vienna, Brussels, Prague, Luxembourg and Warsaw. Frankfurt, Dublin and Paris made it to the second round of voting among the 27 remaining EU members, and Frankfurt was eliminated for the third round. Slovakia declined to participate after the first round because no East European city made it into the second round either for the EBA or the European Medicines Agency. This paved the way for the 13-13 tie between Paris and Dublin that was decided by choosing lots. (The EMA final was also tied, between Amsterdam and Milan, with the Dutch city drawing the winning lot.)

Germany had pitched Frankfurt for the banking agency and Bonn for the drug regulator, only to come away empty-handed (Copenhagen was the third city making it to the second round for the EMA). Former Finance Minister Wolfgang Schäuble had pushed hard for the EBA to come to Frankfurt, citing not only the ECB’s presence there but that of the European insurance regulator as well. His successor in a caretaker capacity, Peter Altmaier, lobbied for the agency again in Brussels just last month. But Frankfurt got only four of the 26 votes in the second round.

Paris already had a strong case to become the leading EU financial center. Two French banks, BNP Paribas and Credit Agricole, are the biggest continental banks by assets, with Germany’s biggest, Deutsche Bank, a distant third. France’s Société Générale and BPCE are fourth and sixth respectively. Germany’s second-largest, DZ Bank, trails in 17th position. Paris is also home to the EU’s market regulatory authority, the European Securities and Markets Authority (ESMA). But the contrast between a weakened German Chancellor Angela Merkel and Mr. Macron’s strong political base could only put France in a stronger position to influence the decision.

The EBA wasted no time in welcoming the choice: “This is an important decision for the Authority that guarantees a seamless continuation of its activities by reassuring its current and future staff over the new location and putting an end to a period of uncertainty. The EBA is confident that France will support the Authority to ensure a smooth transition.” There was some evidence that surveys of employee preference at the two agencies guided the voting, and contributed to the less developed East European bidders getting snubbed.

Mr. Blankfein is almost certainly right that for most American employees, choosing Paris over Frankfurt is a no-brainer. It is probably true for European employees, too – including many Germans. As Mr. Macron levels the playing field by making France more economically competitive, Paris may well be poised to pull ahead of Frankfurt as the EU’s new financial capital.

Ruth Berschens is Brussels correspondent for Handelsblatt. Darrell Delamaide is a writer and editor for Handelsblatt Global based in Washington, DC. To contact the authors: berschens@handelsblatt.com and d.delamaide@extern.handelsblatt.com.

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