Why Brexit threatens the prosperity of the City of London

Published on : 01/01/2021 – 08:14

Since the British decided to leave the European Union (EU), Europeans have fantasized about a massive transfer of activities from the City to the continent. The exodus of financial services has not taken place, but on this first day of Brexit, London markets are still having many questions about their future.

The file was put aside in the divorce discussions. Boris Johnson favored the cause of fishermen, an economically negligible cause, but politically and electorally so much more profitable than that of traders. Yet finance plays a substantial role in the UK economy. The City is one of the largest financial centers in the world.

Among the range of its services, one finds among others the largest foreign exchange market, where one buys or sells currencies. It employs over a million people in London and its turnover represents 7% of UK GDP. Its main customers are in the 27 member countries of the European Union. This is why the future of UK financial services is of critical importance on both sides of the Channel.

EU side, fear of financial market failure due to Brexit

Brussels refused to grant the famous financial passport which would have allowed the continuity of activities, and gives equivalences drop by drop for each activity, as it wishes. The City has only obtained two for the moment while the New York Stock Exchange has about twenty of these equivalences. Faced with this intransigence, the British financial markets authority announced that stakeholders in the City could use European platforms for the euro-denominated equity market, and since yesterday also for swaps, financial products that allow you to play on the difference in interest rates.

The City hopes to find an arrangement in the coming months to carry out these transactions on American places. Behind this very dogmatic, very political position, the Commission is in fact much more pragmatic because the continental stock exchanges currently have neither the skills nor the technologies to perform a certain number of missions essential to the proper functioning of financial operations, including European companies may need.

Without the desired equivalences, the beginning of the decline?

Its activities could gradually migrate to the continent. Part of the bank assets have already been transferred to Frankfurt. If this bleeding continues, the City could be drained of its substance as financial activities generally thrive where the money is. So far only 10,000 jobs have been transferred to the continent.

It can’t be said that the City’s days are numbered for the foreseeable future. The place of London is already active to find other outlets, in green finance or fintechs. It could also deregulate its markets to attract more capital. An option which is not without risk for the British economy. In the event of overheating in the markets, crash, the greater the trade volumes, the more devastating the consequences can be for the real economy.

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