The pending exit of the U.K. from the European Union (i.e. Brexit) has created many questions around the future of London as a global financial center. London, along with New York, have been the reigning global financial centers, but London’s pending loss of direct access to the EU places its position under jeopardy. While London has been a center of finance and commerce for decades, if not centuries, much of its growth and dominant position in the current global financial system has come as the gateway to the EU, the Middle East, Africa and beyond for banks and other financial institutions located in the US and Asian countries.
Many economists and financial analysts expect the €2 trillion in Euro-denominated financial transactions and asset management currently facilitated in London to shift to financial centers inside the EU. Already, seven UK property funds have been suspended after investors rushed for the exit, which are now preventing redemptions and have begun listing UK properties for sale.
London made an ideal global financial center and gateway for the US and Asian countries for multiple reasons including a well-developed and efficient common law based legal system, lower than EU average corporate tax rate (UK:20% vs EU:22.09%), educated English speaking workforce (English is the dominant language in finance), navigable labor laws (especially compared to other EU countries), time zone advantages, and ease of access from/to New York City.
London will remain a significant financial center as long as the Pound is one of the globally accepted reserve currencies and a gateway for significant non-Euro denominated financial transactions, which is likely, but its role as a dominant global financial center will be diminished. So the boding question is, where is the next global financial center for the EU? Spreading core operations over multiple cities is not an efficient model for financial firms.
Several EU cities are existing global financial centers, albeit smaller than London, that may vie for London’s Euro business including Frankfurt, Brussels, Paris, Amsterdam, Luxembourg, Zürich, and Dublin. Below is a brief analysis of each city:
- Frankfurt: The European central bank is located there and several international banks have indicated they are looking to expand there, but Frankfurt is a far smaller city than London and labor laws in Germany are widely seen as more onerous than those in the UK. Additionally, a civil law based legal system, a higher corporate tax rate (29.72%), and non-native English speaking country, makes it a less attractive alternative to London.
- Brussels: Similar to Frankfurt from a legal system, labor laws, corporate tax rate (33.99%), and language vantage, Brussels is a major center for international politics, servicing as the de facto capital of the EU, as well the headquarters of NATO. This is not necessary favorable for finance and business, as the city’s political focus creates a battle with other industries for talent, real estate, investment, and local government attention.
- Paris: While the French government has announced plans to attract bankers from London, the high corporate tax rate (33.33%), complex civil law system, rigid and often burdensome labor laws, and the Toubon Law mandating the use of the French language in the workplace and business deter from the attractiveness of Paris. That being said, the City of Light is a high-profile, large cosmopolitan city on par with London that is an attractive place to live, drawing abundant talent.
- Amsterdam: A very livable city where English is an official language and is compulsory in the Dutch secondary education system, makes Amsterdam attractive for international businesses. While the corporate tax rate (25%) is lower than many of the other existing EU global financial centers, the city lacks space to grow, has a civil based legal system, and strict labor laws that highly favor employees.
- Luxembourg: A sizable player in private banking and investment fund management, it has a reputation for secrecy and as a tax haven. While now compliant with OECD standards on exchange of information, the negative reputation remains. A relatively high corporate tax rate (29.22%), lack of English as an official language, civil law based legal system, and rigid labor laws are drawbacks. The second smallest city on this list, London is estimated to have 200,000 more finance workers than Luxembourg’s total population, so it is not in a position to grow in any meaningful way, especially considering its historically low unemployment rate.
- Zürich: While very livable like Amsterdam, the smallest city on this list has the highest cost of living in the EU and second highest in the World. This cost would only increase if it were to absorb finance jobs from London, which could make it hard to attract talent and keep labor costs under control. Zürich has a very favorable corporate tax rate (17.92%) and well established banking and financial institutions, though it has very little room for growth with significant competition from other industries such as insurance and R&D. While English is commonly spoken, it is not an official language. Switzerland uses a civil based legal system and has rigid labor laws similar to the other EU countries already profiled.
- Dublin: While smaller than London, Dublin is the closest surrogate on many significant factors including a well-educated, native English speaking work force, common law legal system (originally based on English common law), and more employer friendly labor laws than most EU countries and similar to London’s. Dublin has some unique advantages over the other cities on this list including very low corporate tax rates (12.5%), an International Financial Services Center which offers a high concentration of financial services companies (and trained staff), plus (if they are still available) some unique “offshore” tax advantages, and it is accessible via relatively short flights from New York City. Additionally, Dublin is a highly livable cosmopolitan city with cultural similarities to London, and strong existing business and government working relationships with the US. The attractiveness of Dublin has made the current office space market tight but land exists for development and growth.
Based on this analysis, Dublin is in the best position amongst existing EU global financial centers to take advantage of UK’s Brexit and the potential loss of Euro based business conducted in London.
While it is unlikely Dublin will ever achieve the size and scope of London as a global financial center, Dublin now has a unique opportunity to grab a more prominent position in the global economy and bring more prosperity to the city and Ireland. Only time will tell, but I’m rooting for Dublin and the land of my ancestors.
Tax rates sources from KMPG website: https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html