14 December 2023, 10:53
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Nicolas is the CEO of Luxembourg for Finance
Seven years on from the Brexit referendum and predictions that the City of London would meet its demise have proven overblown.
Yet look at the detail and a more complex reality is evolving. While London will remain Europe’s preeminent financial centre for many years, it also faces a slow erosion as many activities make their way across the Channel.
It is new opportunities and new job creation that London is really missing out on.
Aware of this dynamic the UK Government is trying to shore up London’s global appeal. The Edinburgh Reforms, which include 31 measures such as scrapping the cap on banker bonuses, might help in the margins.
But it is difficult to escape the fact that the EU offers a much larger market for financial services.
Access to a 450 million customer base has an inevitable gravitational pull, particularly in a post-Brexit environment where these customers must be serviced from within the EU.
I believe, however, that an assessment of Europe’s future prosperity based on an examination of its various financial centres – London versus Frankfurt or Luxembourg for example – is far too narrow.
It misses the more existential challenge all European financial services and their respective centres face today: how to compete on a global scale.
In virtually every area of finance, the US and Asia have pushed further ahead since the financial crisis. In banking, only HSBC makes the top 10 by market capitalisation.
It’s an all-American show in private capital by assets under management (AUM) with huge flows into Blackstone, KKR and Apollo.
In insurance, Europe fares better with three firms in the global top 10 by net premiums written, but all are in the lower half of that table. UBS sits third in wealth management but only after receiving a boost in assets from Credit Suisse.
In payments, the US dominates, in venture funding, in size of bond markets – the list goes on.
Nearly every day we read about another company considering delisting from London or Frankfurt or another European cash equities exchange. Many are not bothering with these markets for their IPO at all.
There are lots of reasons for this, but the reality is Europe’s capital markets are too fragmented, there’s not enough domestic pension money flowing into the European exchanges, and liquidity levels cannot compete with the US.
Company valuations in Europe are now a fraction of those in the US.
Europe needs to do three things to close this gap – and to ensure it has the investment firepower required to address the mega challenges posed by the energy transition, ageing populations, and a post covid reconfiguration of global trade and supply chains.
First, the EU must harness the power of its strongest single asset – that enormous pool of 450 million relatively affluent consumers. Most serious politicians in the EU want progress on a capital markets union, and yet too many different rules persist.
Change is coming to try and boost primary and secondary market issuance, just as there is in the UK, but the argument still needs to be won with EU members that it is no loss of sovereignty to unlock economic growth and opportunity.
Second, despite Brexit, the EU and UK must find a new and efficient mechanism with which to direct and coordinate a larger proportion of global private capital towards fighting climate change.
The task is enormous but one of clear common interest. If more of the vast pools of capital in private markets can be mobilised to invest behind energy transition infrastructure, ideally using the relatively advanced European taxonomy, rules and fund ecosystem – which are specific areas where there is still considerable alignment – we will do much more to reduce emissions and ensure a leadership role for Europe that will bring jobs and growth.
As the world reflects on COP28 and the US and Asia begin to sharpen their own focus on transition investment, now is the time for Europe to push further ahead.
Third, working together, Europe should leverage AI as it progresses these two campaigns. Rather than fall behind and wait to adopt products and systems almost entirely created and tailored for Asia or the US, it must find a way to create a financial system that can easily adapt to the increasing presence of AI in our lives and work.
This will help to future-proof our efforts and reduce the risk of AI researchers and engineers flocking towards other major tech hubs.
Delivering these three tasks will require collaboration. While the Brexit years were a toxic period for the relationship, this has been stabilised recently and more productive, trust-based discussions about the future have begun.
The Joint Financial Regulatory Forum offers a chance to reduce uncertainty, to better manage inevitable future divergence, and to advance dialogue in areas of common interest, like climate change and harnessing AI.
Done earnestly, this dialogue will help rebuild the necessary trust to envisage a sophisticated, mature post-Brexit relationship.
Establishing some new footbridges across the Channel is pragmatic, especially in a time of rising geopolitical volatility and when the West’s core values are being challenged.
Despite the many differences that exist in Europe, and all the political grandstanding that goes with that, it is increasingly clear that Europe offers stability and that we share core values and a vision.
