Just How Low Can European Governments Go?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
City of London-based financial institutions are intensifying their search for plan-B locations as concerns continue to rise about Brexit’s potential threat to their unfettered access to EU markets and workers. With an estimated 35% of London’s wholesale market activities forecast (by Brussels-based think-tank Breugel) to migrate across the English Channel in the coming years, the race is on to displace London.
However, as the competition for Brexit spoils intensifies, relations between euro nations are showing signs of strain. Tax-haven par excellence Luxembourg, equipped with a multi-lingual specialized workforce, is likely to be hot property in a post-Brexit world. The country’s competitive tax rates have already caught the eye of AIG, private equity giant Blackstone, and Lloyd’s of London, the world’s largest specialty insurance market, all of whom have expressed an interest in relocating part of their London operations there.
Luxembourg’s success has drawn the wrath of fellow Eurozone members like Ireland, which recently complained to the European Commission about “dangerous competition” from rival centers competing to host financial firms.
“Other cities in Europe are being very aggressive in trying to win business,” Eoghan Murphy, the minister in charge of promoting Dublin’s financial center, told Reuters. Murphy raised concerns about “creeping regulatory arbitrage,” a reference to undercutting rivals with lax rules, something about which the Irish republic knows a thing or two.
But it’s not just Europe’s tax havens that are vying to woo the world’s biggest financial institutions; also at it are some of the continent’s largest capitals.
Paris has promised to unfurl the red carpet for the City of London’s highest paid bankers by offering low tax rates and bank-friendly legislation while also seeking to grow as a clearing center. It’s in stark contrast to the combative stance France’s President Francois Hollande took against “the world of finance” – “my true opponent,” he called it – before winning national elections in 2012.
Since being in office, Hollande’s feelings have mellowed. In October last year, he even dispatched his Finance Minister Michel Sapin to New York to try to lure Wall Street banks like Goldman Sachs, Bank of America, and JP Morgan Chase to a newly liberalized Paris. But Sapin seemingly failed to impress, perhaps because he needed an interpreter to get his message across in English.
English-language facility is considered a key factor in banks’ post-Brexit relocation plans. It’s essential for attracting a global workforce. To that end, the financial market regulator in Madrid is strongly urging the 35 companies listed on Spain’s benchmark index to publish company reports and other information in both Spanish and English, with a view to making it mandatory in the future.
Madrid is also keen to flaunt its abundant stock of commercial and residential real estate, something Dublin sorely lacks. Madrid currently has 250,000 square meters of office space but that could rise to as much as a million in two years’ time, when Brexit negotiations are expected to have terminated, said Ricardo Martí Fluxá, the president of Spain’s Association of Real Estate Consultants. That’s a four-fold expansion in just two years — proof, if ever needed, that Spain’s real estate industry is back on its feet.
The newly built flats and offices will need occupants. In an attempt to find them, Marí Fluxá will participate in an event at Spain’s London embassy in early April with Spanish diplomats, civil servants and senior figures representing City-based firms. As Spanish daily El Economista bluntly puts it, the meeting has one sole aim: to “steal away” firms from the City.
Madrid also hopes to bag an important financial institution, such as, say, the European Banking Authority (EBA), in the knowledge that proximity to major seats of political, judiciary and regulatory power is an essential source of competitive advantage for major financial institutions. It’s one of the main reasons why London, once the center of the world’ biggest empire, has served as one of the world’s top-three financial capitals for the last 200 years. It is also the main reason why, if the City of London does fall from grace, the biggest beneficiary is likely to be Frankfurt, which is already home to Europe’s most powerful financial institution, the ECB.
The fact that Germany also enjoys more influence over European economic policy-making than any other EU Member State would certainly be an added enticement for the world’s biggest financial institutions. Over 70% of respondents to an Ernst & Young survey said they expect Frankfurt to come out on top in the race to displace London.
But such a move is unlikely to be welcomed by many other European countries, especially those in the South where resentment over Germany’s influence over their economies is already running high. Nowhere is that more so than in Italy whose government is also trying to entice City-based firms to Milan, despite the fact that its own financial sector is hanging by a thread.
As for the City of London, the semi-autonomous square mile within London where the shady threads of global finance meet, it continues to operate as it always has. As The Guardian reported today, UK banks, including serial offender HSBC and state-owned RBS, played a major role in the global laundromat operation run by Russian mafia outfits, just as they played a frontline role in every major global financial scam and scandal of the last decade, including Libor, Forex, MF Global, the London Whale, and rampant gold and oil-price rigging.
And so, rather than seizing this opportunity to stifle the malign role that the City of London plays in the global economy, most European capitals are now determined to emulate it. By Don Quijones.
Tax planning for a post-Brexit world. Read… Brexit Drains Swamp in London, Creatures Head to Luxembourg