New analysis from a leading think-tank confirms that London will likely be a massive bargaining chip for the UK in upcoming Brexit negotiations.
Enough noise has been made about the negative impact to the City of London were the UK to lose its financial passporting rights; but now the threat to the European Union of such an imposition are rightly being given prominence.
After all, the EU relies on UK finance heavily.
Analysts at the Peterson Institute for International Economics (PIIE) say the number of UK companies which would lose the right to trade in the EU would be high at 5,500 but the number of EU companies which would lose access to the UK would be higher at 8,000.
It is this realisation that had the EU's chief Brexit negotiator Michael Barnier wants the EU to retain easy access to London's financial institutions following Brexit.
Why? Just look at the figures from PIIE:
London currently ranks first among global financial centers, ahead of New York and Singapore.
The next highest ranked European city is Zurich in ninth place.
Luxembourg is 12, Frankfurt is at 19, Munich at 27, and Paris at 29.
"Politicians need to be more constructive in Brexit negotiations, because otherwise, the stats point to a loss, not just for the UK but for all of Europe," says Simeon Djankov at PIIE.
And the news is bad for those EU cities that are looking to pick up financial services businesses from London
“If financial service companies move out of London, it is unlikely that many would relocate to another EU city. Europe does not have anything comparable to London to offer relocating companies," says Djankov.
“Financial centers outside of the European Union, would be more likely to attract the business because other EU financial centers rank so much lower,” adds the economist.
A City that Never Sleeps
In the event that financial services companies leave London, and assuming they would not relocate to Europe, where would they be most likely to go next?
“The pull away from London in several financial services sectors would be mostly towards the United States,” says Djankov.
New York actually has more companies listed on its stock exchange than London.
“112 companies from other EU member states were listed on the London Stock Exchange (with a market cap of £378 billion) in September 2016, out of 2,299 firms with a total market cap of £4 trillion,” says Djankov.
Whilst in New York the figure is even higher.
“The main competitor is New York: There are 155 European companies listed on the New York Stock Exchange, valued at £3.36 trillion,” writes the economist.
The UK has an especially big slice of the global insurance sector, which, if it relocated would be unlikely to find a home in Europe.
“There is no single European market in insurance, and the three largest continental European markets are dominated by local insurers: Axa in France, Allianz in Germany, and Generali in Italy. Beyond these markets, US companies like MetLife and Prudential and Asian insurers like Nippon Life are the main candidates to increase their market share should Brexit disturb the status quo,” says the Pieterson Fellow.
But it is not just insurance which would be likely to move outside of Europe altogether in the event of a Brexit, Djankov quotes other examples as well, such as Sharia-compliant finance, emerging markets wealth management, masala bond issuance, private equity, green finance, and fintech.
Djankov says only a fraction of the business leaving the Uk would remain in Europe:
“In private equity Vienna may attract some firms focused on Eastern Europe, while Berlin may attract firms investing in Central Europe. The remaining business will likely head to Asia, Dubai, or New York. Both the United Kingdom and the European Union would lose from this.”
Although Theresa May has said she does not wish to keep “bits of the EU” after Brexit, there are provisions in EU law to allow companies outside the EU free access as long as their products meet criteria set by EU regulations.
“If the continuation of passporting is not possible because of restricted movement of EU citizens, the United Kingdom may ask for something called “regulatory equivalence.”
“This is where the European Union allows companies based outside it market access on the condition that their rules and oversight of financial services are as stringent as the European Union’s,” remarks Djankov.
The City is the jewel in the crown of the UK economy, but if it is lost it may not fall to the feet of Paris, Frankfurt or Dublin, if Europe as a whole is not careful during negotiations, it could be lost from the continent forever.