With Britain due to hold a referendum by 2017 on whether to leave the European Union, many businesses in Germany are warning of disaster and the loss of a key export market. The German financial capital Frankfurt, however, is looking at the possibility of a Brexit with a sly smile on its face.
If banks choose to vote with their feet, London’s loss could be Frankfurt’s gain.
It’s a mouthwatering prospect for Germany’s sleepy financial capital that has long had designs on becoming something greater – a European heavyweight that could dislodge London as the biggest financial center on the continent.
The hopes began with the arrival of the euro, a common currency for 11 countries initially, now for 19.
Britain opted to stay out of the European currency project, keeping the pound, and Germany won a battle with France to host the euro zone’s new central bank. The European Central Bank set up shop along the Main River in a shiny new office tower on the edge of Frankfurt in a run-down neighborhood.
Alexander Radwan, a member of the Bundestag with Germany’s Christian Democratic party, remembers the expectations surrounding Europe’s biggest unifying project. Frankfurt or maybe Paris, it was hoped, could eventually replace London as the biggest financial capital in Europe.
“We believed at the time that the strongest European financial center should be in the euro zone,” Mr. Radwan, who serves on the parliament’s finance committee, told Handelsblatt Global Edition.
But many have falsely warned of London’s imminent demise as Europe’s finance capital. And so it is with a healthy degree of skepticism that Mr. Radwan eyes the current debate surrounding “Brexit.”
“Could Frankfurt become the next European financial capital? It’s conceivable, but one would expect the U.K. to defend its economic interests pretty strenuously.”
Britain’s exit from the European Union would also come with serious pitfalls for the entire European financial sector, most analysts warn. And yet, Frankfurt clearly sees an opportunity.
“In the short term, there would be negative consequences, because there would be significant unrest in the labor market. But over the medium term this could have some interesting consequences. They could be positive,” said Lutz Raettig, who chairs the supervisory board that oversees the German operations of U.S. bank Morgan Stanley. Mr. Raettig spoke to Handelsblatt Global Edition as in his capacity as spokesman for the executive committee of Frankfurt Main Finance, a lobby group on behalf of Frankfurt as a financial center.
It’s hardly just idle speculation. Mr. Raettig said that “all major banks are having to pay attention to the topic of Brexit – both its effects on London as a financial center and on their European headquarters.” A series of other executives from major global banks have suggested over the past few months that they would consider moving operations out of London if Britain votes to leave the European Union.
“If that decision were to be taken, it could have consequences for our London operations,” U.S. bank Citigroup’s Chief Executive Michael Corbat told Handelsblatt last month.
Deutsche Bank, Germany’s largest bank, which is based in Frankfurt, in the spring said it has set up a working group to consider the alternatives in case of a Brexit. Richard Gnodde, co-head of European operations for Goldman Sachs, recently told Germany’s Frankfurter Allgemeine Zeitung: “I’m not giving away any secrets if I say that, in the unlikely case of a Brexit, we would certainly move more resources to Frankfurt.”
Such comments are music to Frankfurt’s ears: “If over the medium term [Brexit] leads to jobs in the European financial sector, then Frankfurt has a good chance. Frankfurt is better structured to benefit than many other cities,” Mr. Raettig of Frankfurt Main Finance told Handelsblatt Global Edition.
Financial services would be a major prize for any country – just look at Britain. The ratings agency Standard and Poor’s said that about a third of the country’s total foreign-direct investment comes from financial services – more than any other country – and about 17 percent of its economic output comes from the sector.
Frank Gill, an S&P analyst who authored a report on Brexit and its consequences, said London’s role as a global financial center has long allowed Britain to punch above its weight internationally. Brexit could change that, possibly speeding up the move of currency trading and other activities to other financial hubs on the continent.
“A lot arguably could be replicated in a place like Paris, Frankfurt, Luxembourg or Dublin,” Mr. Gill told Handelsblatt Global Edition, luring global banks from the United States or Asia that want to do business with the European Union.
But it’s hardly that simple. “London is not easy to replicate overnight,” Mr. Gill said. Despite the threats, banks aren’t likely to take any move lightly – the costs are simply too high. There would have to be real, significant benefits to closing shop in the City of London.
Frankfurt is also hardly the only place bankers might be enticed to go. A fractured Europe could simply lead bankers to shift away from the continent altogether. HSBC, for example, is mulling whether to move its headquarters to Asia.
Whether the euro zone could profit from a British exit largely depends therefore on exactly what kind of environment meets Britain on the other side: Would the European Union help Britain protect its financial interests? Would they crack down or open their doors to banks that are looking to cross the channel?
“Could Frankfurt become the next European financial capital? It’s conceivable, but one would expect the U.K. to defend its economic interests pretty strenuously,” Mr. Gill said.
In other words, London’s future as a financial capital outside the European Union hinges on the tough negotiations that would follow Britain’s exit – talks that are likely to take many years. It is part of the reason that both Mr. Raettig and Mr. Gill said they have yet to see any concrete signs of banks taking steps away from the British capital. Everything is simply too much in the air.
A key question would be, for example, whether Britain is given “passport rights” that allow banks based in the country to sell products anywhere in the European Union.
It’s a right that applies not just to E.U. countries. Switzerland, for example, also has passport rights. But should the European Union try to block that access for Britain, Mr. Gill says “large financial institutions would presumably look around for another financial sector cluster which has some of the characteristics that London currently has.”
Another question is the E.U.’s laws on the free movement of labor. One of London’s strengths is that it can draw on a bigger pool of talent than Frankfurt, Luxembourg or Paris, said Mr. Raettig. People from all 28 European Union members have the right to work freely in Britain, and vice versa. About 2.3 million E.U. citizens currently live in Britain, while about 1.7 million British citizens live in the rest of the European Union.
“This would be no small displacement. This would be a tectonic shift,” Mr. Raettig said.
Mr. Radwan, the German parliamentarian, hopes that the remaining European Union would come to its senses rather than get into a tit-for-tat. He expects an arrangement to be found, if only because the European Union will have much bigger problems if Britain choses to leave.
“We don’t want to get into a situation where we are punishing each other. When it comes to passporting rights, for example, I don’t expect the U.K. will be discriminated against,” he said.
Nor is it just up to Frankfurt whether it could pick up the pieces if London did go the way of previous global financial capitals. Mr. Gill notes that German politicians are unlikely to do what it takes to lure the kinds of Anglo-Saxon investment bankers that they have long regarded with a healthy dose of suspicion.
Germany’s reluctance to push its advantage, in that sense, could result in another country seeing an opening to lure banks to its own shores. It wouldn’t be the first time that a country like Luxembourg or Ireland, for example, tried to steal away business by offering lucrative tax benefits.
“The question is, after taxpayers have assumed much of the cost of an extended financial crisis, which jurisdiction would want to host a financial cluster?” Mr. Gill said. “It may very well be a smaller economy, which would be keener and more willing to reconfigure their tax framework to accommodate financial services… A smaller European economy would consider banking to be a source of high paid jobs, and hence tax receipts.”
And yet, such talks of the benefits of Britain leaving the European Union make any policymaker uneasy. Even if Frankfurt might have an opening, Brexit will have serious negative consequences for Europe, too.
“We live in a world where we are discussing an exit of Greece from the euro zone and an exit of Britain from the European Union. That was unimaginable five years ago. We are at a turning point in E.U. history. That threatens not just London as a financial center. It will have political consequences,” Mr. Radwan, the CDU parliamentarian, said.
Even in the financial sector, the demise of London wouldn’t necessarily be a boon to the rest of Europe. Mr. Raettig said the uncertainty over Britain’s role would likely lead some banks to hold back on spending: “If I have a project that I am able to delay, I’d probably do it,” he said.
He also pointed to London’s role as a source of capital-market funding, which many E.U. policymakers are hoping to build up as an alternative to the continent’s bank-heavy system of lending. Britain’s exit would make it that much harder for the European Union to reduce its over-reliance on banks.
“There would be a bunch of uncertainties. It wouldn’t necessarily be positively disruptive; it would tend to be negatively disruptive,” Mr. Raettig said.
Christopher Cermak is an editor covering finance and economics for the Handelsblatt Global Edition in Berlin. He has previously worked in Frankfurt and Washington. To contact the author: firstname.lastname@example.org