Guest contribution by Hubertus Väth in “die bank”
The countdown was projected on to the side of Prime Minister Boris Johnson’s office and residence at 10 Downing Street until Brexit’s completion on 31 January 2020, midnight Brussels time. Negotiations on future relations are underway. However, regulatory questions for the financial sector remain largely unresolved. London will – also in the well-understood interests of the EU – remain the leading financial centre in Europe for a long time to come. This does not mean, however, that the UK’s withdrawal will be without consequences. The cake will be newly cut, and Germany should use this opportunity to establish Frankfurt as the leading financial centre in the EU, all the while striving for constructive cooperation with London and Paris.
In December 2019, British Prime Minister Boris Johnson’s won a clear parliamentary majority for the Conservatives campaigning with the slogan “Get Brexit done.” This victory cut the Gordian knot of Brexit and overcame the blockade in parliament which had dominated the world’s view of Brexit since then Prime Minister Theresa May formally ended EU membership on 29 March 2017.
One thing is now clear: an orderly Brexit has been completed. No more, but also no less. The withdrawal agreement between the new EU-27 and the United Kingdom was ratified in January; however, it leaves all the details of future relations to be negotiated in a further treaty, which should come into force on 1 January 2021.
Frankfurt started in the pole position
A race is underway between EU-27’s financial centres competing for relocating Brexit banks. The Financial Centre Frankfurt started immediately after the referendum in 2016, as well did Paris, Amsterdam, Dublin and Luxembourg. For a long time, Frankfurt was undisputedly in pole position. However, Frankfurt was unsuccessful in the final round of its bid for the seat of the European Banking Authority (EBA), which has a high symbolic value despite having only around 200 employees. EBA’s decision in favour of Paris was a turning point that brought the financial centre on the Seine back into the race.
Measured above all in terms allocation of resources, Frankfurt am Main is still on its way to becoming the new EU-27’s leading financial centre, albeit only just. The intensive preparations prior to the referendum for possible scenarios, concentrated marketing of the Financial Centre Frankfurt all over the world since June 2016, Germany’s AAA rating, internationally well-respected supervisory authorities, and the ever-growing support from the federal government and ministries in Berlin are showing success.
Almost 60 applications for approval of new or expansion of existing legal entities have been submitted to BaFin. As of the end of 2019, already 1,500 new jobs have been created. A further 2,000 jobs will follow shortly, and many in positions of responsibility in London have employment contracts which, in the case of Brexit, provide for a move to the continent.
Eurex Clearing, a subsidiary of Deutsche Börse, increased its business in euro-denominated OTC interest rate swaps in 2019 by more than 80 per cent year-on-year. Daily clearing volumes rose from an average of €59 billion to €110 billion, and outstanding notional amounts rose from €7.0 trillion to €12.8 trillion in year-end comparison. By the end of 2019, Frankfurt enjoyed a global market share between 13 and 14 per cent. This trend continued at an accelerated pace at the beginning of the year. In addition, the number of publicly known customers increased by more than 180 to over 310 institutions. Major trading houses confirm that bid-ask spreads, settlement volumes and liquidity are on a par with the competition in London.
A marathon, not a sprint
What many underestimate, however, is that the competition to become the EU’s leading financial centre is not a sprint, but a marathon, with hurdles, obstacles and pitfalls. Since Emmanuel Macron was elected President of France, Paris has emerged with increased self-confidence. France has declared that promoting the financial industry is of top priority and is attracting visitors with financially lucrative special regulations and, last but not least, the alluring ambience of a centuries-old cosmopolitan city with the Eiffel Tower, Louvre and Versailles.
Frankfurt, on the other hand, is a city at second glance. It scores with a stable framework, a high degree of reliability and low costs. By international comparison, Frankfurt boasts an excellent infrastructure. Frankfurt has the world’s most powerful commercial internet hub, the airport ranks second in a global ranking of international connections, and in terms of quality of life, the Main metropolis has ranked seventh worldwide for years. Compared to Paris, these advantages may seem a little boring – but for the financial industry, soundness should be the order of the day.
Opportunities for a European solution
Companies, pension funds, insurance companies, state financing agencies and private customers have a heightened interest that the financial industry in the new EU 27 will be at least as strong as in the EU 28, even without London. And the governments of the eurozone, the European Central Bank and the EU Commission should have a novel interest in a strong financial market, as they hope to create with the euro an international currency on a par with the US dollar.
Negotiations for the new relationship between the EU and the United Kingdom have been in preparations for a long time, even if they’ve officially only just begun. By calling for accelerated implementation of the EU banking union in November 2019, Federal Finance Minister Olaf Scholz has already sent a signal, because the banking union will become more important than ever given the upcoming post-Brexit negotiations.
The chances for a European solution are good. After all, now that the uncertainties surrounding the grand coalition have been resolved, Germany and France with Emmanuel Macron have governments capable of action and with Ursula von der Leyen, the EU Commission has a President hoping to set a positive tone. It is also a fortunate coincidence that Germany, as the strongest economy within the EU, will hold the Presidency of the Council of the European Union in the second half of 2020, and will be able to provide impetus in this function and hopefully set the tone on financial market issues.
There are many challenges to establishing Frankfurt am Main as the most important continental financial centre within the European Union, but the opportunities are great as well. The coming months will show whether Frankfurt can unsparingly seize these and set the course for the long-term development of the financial industry in Germany, as well as for prosperity and employment in the city of Frankfurt. The future of the financial centre is just in the making. Now it needs those who will take action.