Lately, the word BREXIT has become a synonym for APOCALYPSE for most of the media.
At least, the media outside of UK...
There are many things to be said about this but… today, we are going to focus on this.
“Goldman Sachs to move hundreds of staff out of London”
And… this is just one example.
At the time we are making this video, 20 banks have already announced that they will move
part of their staff out of UK.
The most optimistic estimations claim that the City of London might loose over 30,000
workers…
And the most pessimistic argue that this could be as high as 200,000 people.
But wait a minute here!
Why is this this important?
Well, if you’ve been following VisualPolitik for a while, you already know that London
is the global financial capital.
More specifically, that would be the City of London, also known as the square mile.
The square mile is a city inside of a city where most of the international banks have
their headquarters.
Yes, even after Brexit, the chances are London might keep their sway on the financial markets
in Asia or even America.
But…
so far, European business accounts for 35% of the City’s workload.
And, of course, leaving the European Union is going to have some consequences.
And now you might wonder…
Well, where will all these banks go?
Which city will be the new European financial capital?
Well… after months of competition, it seems we do have a winner:
“Banks and companies plan expansion in Frankfurt after Brexit’
So far it looks as if Frankfurt is going to become the new financial powerhouse in Europe,
and perhaps, one of the most important in the entire world.
But…
What does Frankfurt have that other cities like Madrid or Paris don’t?
Well, today, we are going to answer to this question, but before we do, let’s take a
look back at the history…
WHY BANKS ARE LEAVING THE CITY?
The City of London is an area of about a square mile (see where the name comes from?) inside
broader London.
They have their own laws, their own major and, even, their own police.
This little space is home for the major international banks.
300,000 people work in the City, and from this 300,000 people, 60,000 are European immigrants
who came into the country thanks to the UK being a part of the European Union.
And…
OK, my dear countrymen, I know what you are thinking: Despite being an EU country, the
UK never was really inside the free circulation area.
This means that, theoretically, the British Government could have closed their borders
to all those immigrants anytime they wanted.
But, in practice, European citizens were getting in and out of the country as they pleased.
Nevertheless, things are going to change.
The British Prime Minister, Conservative Theresa May, holds an extremely weak position.
This is despite the fact that she won the general election in June.
She has lost a large number of seats in parliament.
In fact, it’s not even clear if she will finish her term...
And, of course, people from in and out of her party are pushing her to increase
immigration controls.
This would have a big impact in the City of London, indeed a bigger impact than anywhere
else in UK.
As we said in another video, part of London’s success comes from their ability to attract
talent from all over the world.
But, if the government closes its doors to foreigners, those banks who hire immigrants
will have it significantly harder than before.
And make no mistake!
This is not only due to the BREXIT.
In fact, the anti immigrant sentiment in UK has gone well beyond the borders of European
Union...
“Theresa May to charge companies £2,000 a year for each non-EU worker they employ.”
But wait a minute because there’s more!
As I said, Theresa May and her conservative party have lost a good share of the seats
in parliament.
And where did those seats go?
Well, they went to the Labour party, a party whose leader, Jeremy Corbin, has declared
war on the banks.
On his election manifesto, he already proposed things like this:
“Labour calls for UK financial transaction tax”
Until now, this tax was one of the biggest advantages the UK had over the EU.
As you might know, Brussels has been years debating the possibility of having a financial
transaction tax.
This is the something bankers really don’t want - no one wants to pay it.
But if UK’s parliament ends up passing such a law, a lot of companies will be wondering
if they still want to keep their offices in London.
In other words…
even if the Brexit negotiations end up being great for the UK’s interests, the air is
still becoming more and more poisonous for the UK’s financial industry.
And this explains why so many banks are starting to think about opening offices out of this
country.
But, now the question is: Why are they choosing Frankfurt?
Well, let’s have a look at that…
EUROPE’S FINANCIAL CAPITAL?
On the very day after the Brexit referendum, the race to take over London as the global
financial capital started.
For example, in Spain, the regional government of Madrid launched their own advertising campaign
designed to attract bankers.
Even the Finance Minister, LUIS DE GUINDOS held personal meetings with executives from
JP Morgan and elsewhere to offer special tax conditions.
In Paris, Emmanuel Macron has already announced lower taxes for banks in order to lure them
in from London.
But… sorry guys, it’s really hard to beat the allure of FRANKFURT.
Standard Chartered Plc, Nomura Holdings Inc. and Daiwa Securities Group Inc. have picked
Germany’s financial capital for their EU base to ensure continued access to the single
market.
Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley are weighing a similar decision
But…
what is so special about this city?
Well… first of all, Frankfurt already has the headquarters of the European Central Bank,
as well as other big banks like Deutsche Bank.
This means, they already have the network effect we always mention here at VisualPolitik.
They have lots of startups, law firms, consultants, etc…
Besides, Frankfurt has many business schools with international prestige, as well as a
university and the second biggest airport in Europe.
If this was not enough, 70% of the German population speak English fluently.
This means those British banks can send their managers to Frankfurt, hold international
meetings, and even hire locals without having to worry about language.
If you think this is not important, good luck trying to find the same in France, where only
39% of the people speak English.
Not to mention Spain, where this percentage is lower at only 25%.
But hold on a minute because there’s more!
As I said in a previous video, Germany is a decentralized country.
This means regional governments and trade unions have way more autonomy here than in
any other country.
Thanks to this political architecture, the region of Hessen, where Frankfurt is located,
can offer things like this: German labour laws (…) make it difficult
to fire people (…) Frankfurt had initially proposed a change in labour laws that would
exempt either bankers, or high earners more generally, from the rules.
OK, but now let’s think about something else…
If you have a bank and you want to set up your offices somewhere…
what is the first thing you would need?
Well, that would be a building!
You need a physical place where you can put your offices...
Well, in this regard, Frankfurt is better suited than anywhere else.
You see… after World War II, Frankfurt was totally destroyed.
And they had to rebuild it, almost from nothing.
In other German cities, urban laws forbid the building of skyscrapers in order to maintain
a uniform, more traditional skyline.
But not in Frankfurt - here you can make buildings as high as you want.
This explains why, despite a population smaller than 1 million inhabitants, Frankfurt looks
like a big metropolis.
Further, Germany has one of the cheapest real estate markets in all of Europe.
Despite the high salaries, houses, rents and square meters are half of the price of Paris.
And a fraction of the cost of London…
OK, OK, but now I know what you are thinking: ‘Come on Simon!
But what about those corporate tax?
Ay?”.
Well, yes, I know…
Germany has a corporate tax that, in some cases, reaches to 30%... By comparison the
UK is at 20%.
And you are right, but the devil really is in the details here.
Do you remember how I said Germany is highly decentralized?
Well… this applies to corporate tax too.
In this country, corporate tax is divided in two parts: a national and a regional one.
This means the Federal Government gets only 15% of this tax.
The rest depends on the region.
This means, technically, the State of Hessen, where Frankfurt is, really has the ability
to reduce this tax.
And of course, doing this might lure more and more British bankers.
And finally, if none of this was enough for you, here it comes the big finale: the financial
transaction tax - that tax we mentioned before that might scare away so many bankers.
That tax, at least in Europe, has about as many loopholes as possible.
There are so many exceptions on this tax that even his biggest supporter, the German Finance
Minister, Wolfgang Schaeuble, complained with these words:
“Even a Swiss cheese needs more than holes.
There has to be something in between them, otherwise it’s just a hole, not a Swiss
cheese.”
– Wolfgang Schaeuble So now we have a question for you: Imagine
you are the manager of one of those London Banks - what would you do?
Would you remain in London?
Or, perhaps you would move your offices to Frankfurt?
Let us know what you think in the comments below…
Meanwhile, if you want to know more about how London became such a financial powerhouse,
do click on this other video.
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