London’s financial firms risk losing unrestricted access to the European Union, according to eurozone leaders.
The head of the Eurogroup of finance ministers, Jeroen Dijsselbloem, said banks could move jobs outside the UK if it leaves the single market.
It comes as EU financial services chief Lord Hill announced his resignation.
However, UK economist Gerard Lyons said that despite the EU’s “unsurprising” warnings, London would not be displaced as Europe’s dominant financial centre.Many of London’s big financial institutions, which employ tens of thousands of UK staff, trade unhindered across the EU under rights known as “passporting”.
However, that would be under threat if the UK chooses to leave the single market as part of its withdrawal.
Mr Dijsselbloem, the Dutch finance minister, said limited access to the EU single market would be the “price” of the UK leaving the EU.
The head of France’s central bank also warned that London’s banks would lose their “financial passport”.
“It would be a bit paradoxical to leave the EU and apply all EU rules, but that is one solution if Britain wants to keep access to the single market,” said Francois Villeroy de Galhau, who is also a member of the European Central Bank’s governing body.
Following the Leave vote, London’s banks have begun to look at shifting some operations outside of the UK. Several European cities have long-wanted to attract business away from London.
Frankfurt and other financial centres across Europe have long coveted London’s position as Europe’s leading financial sector.
At present London is far out in front, with 414,600 people working in the City of London and a further 145,200 in Canary Wharf, according to 2015 figures.
In contrast, a study showed that Frankfurt’s commercial banking sector employed just 73,800 in 2011/12. Frankfurt’s entire population is just 687,775, compared with 8.5 million in London.
Up for grabs if the City of London does find its access to the EU curtailed is billions of dollars of trades.
Paris, Dublin and Amsterdam are also said to be eying taking a chunk from London’s investment earnings, and numerous banks are said to be considering moving staff from London to locations within the EU.
Only time will tell whether London’s access to European markets is reduced. In the meantime, London remains top of the global financial centres index, which ranks competitiveness within the sector.
While London is in first place ahead of New York and Singapore, the next best placed European city is Zurich (6th), which is also not in the European Union.
Frankfurt is in 18th place, followed by Munich (27th), Paris (32nd), Amsterdam (34th) and Dublin (29th).
It may not help the strength of UK negotiations that Conservative peer Lord Hill, the European Commissioner for financial services, has decided to resign.
He is replaced from 16 July by Valdis Dombrovskis, the Latvian commissioner who is vice president for the euro.
On Saturday, Lord Hill said he did not believe it was right for him to carry on with his work, saying “what is done cannot be undone” after the UK voted to leave the European Union.
But Leave supporters said London would remain Europe’s financial centre, and that “passporting” would be part of the negotiations.
Mr Lyons, an economic advisor to Boris Johnson, said European cities would find it difficult to displace London as a financial centre.
“We have the depth of skills, knowledge and experience that’s hard to replicate,” Mr Lyons, who backed the Leave camp, told the BBC.
Passporting for finance firms is a “negotiable issue”, he said, particularly as several European banks also use those rules to access the UK.
Continued access to the single market is now the main focus for UK finance firms, according to TheCityUK, a group which represents most of the City of London’s big employers.
Earlier, Alan Greenspan, a former chairman of the US Federal Reserve, told the BBC that the biggest impact from the UK’s Leave vote would be on “issues of finance”.
“London is a key indispensible financial centre, and there’s nothing like it including New York. What concerns me is that the focus is going to shift to other areas of economic union; Frankfurt, Paris, or what have you,” Mr Greenspan said.
US bank Morgan Stanley said on Friday it would “adapt accordingly” to a UK exit from the EU, after reports it could move up to 2,000 of its London-based staff to Dublin or Frankfurt.
The British Bankers’ Association, meanwhile, said of Lord Hill’s resignation that he “did an important job at a difficult time”.
“He worked hard to ensure a more stable and customer-focused banking sector, helping our industry play its full role in promoting economic growth,” BBA chief executive Anthony Browne said.
Banks and other financial companies can be authorised to do business in one member state of the EU, or the slightly wider European Economic Area (EEA), and then ply their trade across the region without having to be separately authorised in each country.
The EEA is a grouping made up of the EU, plus Norway, Iceland and Liechtenstein who have access to the EU’s single market.
A bank using this system can provide services by offering them from its home base to a customer in another country, or it can establish a branch abroad.
It is widely used by financial firms (not just banks) in the EU. It is also used by companies from outside the EEA, such as Switzerland and the US.
They establish themselves in one place in the EU, typically in London as the continent’s dominant financial centre, and use that as their headquarters for selling services across the single market.
If the banking passport is no longer available to British-based firms, then some operations would clearly have to shift to a location inside the EEA.
What is impossible to judge is just how much business, and how many jobs, would be affected. Would any shift be narrowly focussed on those functions serving EEA customers? Or would firms find it more cost effective to move other parts of the business as well? – BBC
