By John Lavelle

The Brexit vote has been the seminal event of the 2010s for the United Kingdom, and possibly Europe.  In the wake of Brexit, most of the analysis and prediction have focused on the effects, mostly negative, for the United Kingdom; however the European Union will be affected in many negative ways as well.  The most glaring is the change for their financial sector.  London was the financial center of the European Union, accounting for around thirty percent of its capital markets activity, far more than any other city in Europe. But now, London and its assets are no longer a part of the EU, and Europe must find a way to replace it to strengthen its markets.

              First, where are these possible replacements for London?  Unsurprisingly, the frontrunners are all located in the West, as the eastern part of Europe is less complex and developed in terms of finance.  Amongst EU and financial leaders, the five consistent contenders are Frankfurt, Amsterdam, Dublin, Luxembourg, and Paris. Each of these cities has much to offer as the new financial center of the EU.  

Frankfurt is the current financial center of Germany, the nation with the largest GDP in the EU, as well as the highest scoring city in the Global Financial Centers Index.  It also has the headquarters of the European Central Bank, and many large German corporations. More American banks, such as JP Morgan and Deutsch, are also making their presence felt in the city by creating office spaces and spending more resources.  Recently, the city has become a serious contender as the center of euro clearing, the system in which financial transactions are made. 

              However, many European countries are cautious of giving that much economic power to Germany, and Frankfurt also has the problem of not being an English-first language city.  Making Frankfurt the financial center of the EU would give Germany even more power and influence over the continent, as it already has the highest GDP in all of Europe. This would, unsurprisingly, make many other nations nervous about Germany gaining more power within the EU, creating a huge barrier for Frankfurt.

              Then there is Amsterdam, the oldest major financial center in Europe. Right across the channel from London, Amsterdam has been one of the biggest financial beneficiaries of Brexit. Amsterdam has one of the strongest ‘Fintech’ sectors in the world, as well as one of the strongest trading centers in Europe, with Chicago and London opening stock trading centers in the city. Many companies, both financial and otherwise, have been moving from London to Amsterdam; most notably Panasonic relocating its European headquarters from London. Moreover, the city is increasing the number of institutions as well, such as the European Health Organization. It also has a central location, between France and Germany, as well as being close to London, which will still be important for the financial sector.

              However, Amsterdam does have its downsides.  Holland has a much smaller economy and GDP compared to the other European nations.  There are also questions of whether Holland, as one of the ‘frugal nations of the EU’, even wants the political and economic tool of becoming the new center. As for relations with businesses, recently the government capped bankers’ bonuses to 20% of their salaries, which will certainly deter businesses from Amsterdam.

              Then, there is the dark horse of the race: Dublin. Although the capital of the Emerald Isle is smaller in population, area, and in the amount of businesses; it still has much in its favor. The city is English-speaking and has low corporate taxes, which has gained much commercial interest for the city. Like Amsterdam, it too has a strong ‘Fintech’ sector as well as many high value funds for many other sectors, such as ESG and AWM. Moreover, Bank of America and Barclays are choosing Dublin as their new EU headquarters, becoming prime examples of companies moving from London to Dublin after Brexit.   

              The main concerns about Dublin are its location and size.  As previously stated, Dublin is smaller than the other cities and Ireland has a smaller GDP than other EU countries. Ireland is also more directly linked to the negative consequences of Brexit than other countries, due to Northern Ireland and the fact that they are more dependent on Britain for trade.  Although Ireland is politically stable now, if there is a hard border in Ireland, that might not last. Finally, there is the issue that they are not on the continent, nor in the same time zone as Germany and France, which will cause an inconvenience for the markets and sectors in Europe.

              Paris is another interesting option. The host city of the European Banking Authority and the largest management firm on the continent, Paris has also become a benefactor of Brexit. Paris is home to stable and successful banks, both commercial and national.  HSBC and many other banks have moved from London to Paris as well. French GDP is not only strong, but also growing. The most important positive for Paris is its reputation.  Not only is Paris world renown in cultural and tourist terms, but it also has a strong financial reputation due to its banks, leaders, and age. Many experts and minsters (including Bruno Le Maire) believe that Paris could even overtake London as the financial center of Europe before 2030, if conditions hold.

              Paris is indeed strong in banking, but not so much in other sectors, such as Fintech, trade, and industry, which the other frontrunners are.  It also is less competitive throughout all its industries, especially banking, which does have its positives, but could make it unfriendly for new up and coming businesses to move there.   Taxes are also higher compared to Dublin and Luxembourg, which has deterred many companies from moving to Paris. Finally, the politics of Paris and France are far less stable than elsewhere.

              Finally, there is Luxembourg, the frontrunner, and rightfully so.  It has a low tax rate, high GDP per capita, and centrally located; at the center of Western Europe.  Luxembourg already has a strong banking industry and is a center for investment funds in Europe. It has the second largest fund domicile in the world (€4.5 trillion managed) and has 50% of all overseas funds from the UK. Politically, it has strong ties to all its neighbors and the United Kingdom, which means that overseas companies and nations will be willing to grant Luxembourg the status as the financial center of Europe. Like many other cities, many multinational corporations are planning on making the nation the home of new headquarters and subsidiaries, such as AIG, J.P. Morgan, and Lloyd’s of London. Luxembourg is also multilingual, having a population that can speak French, German, and English. It is no surprise why Luxembourg is the front runner.

              Luxembourg does have two glaring issues however.  The first is its size, as it is one of the smallest nations, in both population and area, in the world.  The small area means that there are only 4 million square meters of office space, compared to around 30 million in Greater London. The small size also causes Luxembourg to have a small economy, only 2.5% of the UK’s GDP. The other is its reputation as a tax haven with little regulation and investor protection.  Annually, Luxembourg costs EU nations billions of euros in lost tax revenue, with a substantial proportion coming from Germany and France. This has caused much friction in relations between the Grand Duchy and the EU.  As for the issue of reputation, one needs to look no further than the Luxembourg Leaks, better known as LuxLeaks.  The scandal proved that hundreds of multinational companies participated and benefited from tax rulings and tax avoidance schemes in Luxembourg. Although no company was charged with a crime, Luxembourg gained a negative reputation from the leaks and continued to be viewed as a haven.  Luxembourg has made some changes to improve its image and taxation system, but cannot shake the stigma gained from the LuxLeaks.

              But who will succeed London? The answer depends on who decides? Will it be the states or companies?  The public or private sector?  If it is to be the states of the EU, then Frankfurt will be chosen as it is stable and strong both politically and economically. Most other states will accept and follow eventually, due to Germany’s strength and Frankfurt’s industrial and economic importance.  However, the choice will belong to the companies, as if enough choose to move and focus resources in one city, then that city will be the new financial center of Europe.  There is little that the countries of the EU could do to otherwise. So where will it be?  It will be the Grand Duchy of Luxembourg.  It has too much to offer to refuse. Low taxes and a central location will draw companies from all over Europe.  The ‘pros’ will help the private sector the most. As for the points of contention, the negative reputation that Luxembourg receives has much less, if any at all, weight for companies and the private sector; the reputation comes from the harm to governments due to the lack of tax revenue.  Luxembourg will act as a bridge for the EU to the markets of the UK and the rest of the world, and lead Europe’s economy into a new age.   

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.