France makes its pitch to take over London’s role as Europe’s banker

One should always be wary of claims made by those whose job it is to promote a particular interest, whether it be a business, an organisation, a sector or, in this case, France.

But when the Governor of the Bank of France announces that in the event of a hard Brexit Paris is poised to take over from London as Europe’s banker, we should probably pay attention. Even if he is wrong, he is in a good position to know what’s going on and the plots that are being hatched.

According to François Villeroy de Galhau, who has led the bank since 2015, UK-based financial institutions will have moved some €150 billion (£136bn) from London to Paris by December 31 when the Brexit transition period ends. A total of 43 banks and fund-managers have already transferred assets, while a further 31 British players, most of them investment companies, have so far applied to register in France.

They were doing so, Villeroy told the annual forum of Paris Europlace, the body charged with promoting the capital’s role as an international finance hub, “to make sure they can keep trading in France”.

Those who thought that a hard Brexit would have little impact on the pre-eminence of the Square Mile were, in Villeroy’s opinion, making a mistake. A temporary fix allowing European financial markets to keep using London clearing-houses (covering buyers and sellers against the risk of a transaction going bad) could not last forever, he warned, adding: “It wouldn’t be a winning bet to wager on the status quo.”

The Governor’s loaded peroration – delivered, one must assume, with the full approval of President Emmanuel Macron – was echoed at the same virtual venue by one of France’s grandest corporate panjandrums, Augustin de Romanet de Beaune, the current chair of Paris Europlace. A former head of strategy at Crédit Agricole, the world’s largest cooperative bank, De Romanet has chaired both Caisse de Dépôts, the investment arm of the French state, with assets in excess of €400 billion, and the associated Banque Publique d’Investissement, which due to its size comes under the direct supervision of the European Central Bank.

Interviewed by the finance section of the conservative daily Le Figaro, De Romanet was in upbeat mood. Banking and finance had been the source of the problem when the financial crash hit Europe in 2008. Today, in the midst of the Covid-19 crisis, they were part of the solution. Banks across Europe had played a vital role in countering the ravages of the pandemic by granting loans worth €300 billion. In addition, they had raised €370 billion in the marketplace, an increase of 45 per cent over 2019.

And where was Britain in all this? Nowhere, apparently. A new era had begun. Just as it had been easier for the 27 to agree their €750 billion recovery plan without the complication of a British voice, so the likelihood of a union of European capital markets, regulated by Brussels, was boosted by the UK’s absence from the negotiating process.

Such, moreover, if De Romanet is to be believed, was not the end to the advantages of a future sans les anglais. “In a European financial sector reduced to 27, France would have a market share almost as dominant as that of the UK in a Europe of 28.” Out of 32 areas of finance identified by the London-based think tank New Financial, he went on (and on), France was the leader in 17, including equity derivatives, private equity fundraising and asset management.

“Above all, Paris is an excellent location in terms of sustainable capitalism. French finance is to the fore in respect of its contribution to the fight against global warming, the preservation of biodiversity and socially responsible investment.”

Yes, but what about jobs? How many of the 7,500 workers in the City of London who are reportedly moving to Europe would end up in France? Thus far, it seems, just 4,000 – though HSBC, he was quick to add, had indicated that, in addition to transfers, it would be recruiting locally.

It is difficult not to conclude that De Romanet, while humming the Ode to Europe, was simultaneously waving his tricolore. He wants a single EU market for financial services, but he also wants it to be dominated by France. In short, he wants Paris to be Europe’s banker, not London.

Is that realistic? It is one thing for the EU to put up barriers against the UK should a No Deal Brexit be the outcome of the trade talks now entering their final stretch. Removing the City’s passport, it has to be said, is no small matter. It is something else entirely for bankers, investors and large corporations across the Continent to break the habit of a lifetime and turn away from a system that has served them well for the last 30 years.

London has already demonstrated that, with sterling not joined to the single currency, it can still act efficiently as the Eurozone’s clearing house. Why not from outside the EU itself? Might there not be advantages to having a bank freed of the dead weight of a centralised bureaucracy?

Perhaps. As a recent analysis by the Financial Times concluded, the EU, as it stands, lacks the hard-core economic infrastructure that would hold it together in the face of a second financial shock. In particular, it is without the machinery that would prevent the results of a default from cascading through the monetary system. Derivatives clearing is managed effectively, and with little fuss, by way of London, which oversees the bulk of the €735 trillion market. At the same time, the London Stock Exchange’s LCH Group, sitting at the heart of the global financial system, clears about 90 percent of all euro-denominated interest-rate swap deals.

Such institutions are not easily replicated. At the very least, it would take the EU, with or without Paris at its centre, years to build up the expertise, and trust, that already exists on Europe’s doorstep.

Against that, there can be little doubt that in the event of No Deal, Europe will incrementally begin the process of disengagement. President Macron – who views the triumph of French banking as the grandest of grands projets– has indicated many times that if the UK opts for “third country” status, it cannot expect indefinitely to be first when it comes to Europe’s banking and financial needs. The 7,500 City workers currently scheduled to move out of London are likely to be followed by thousands more in the years ahead, resulting in a corresponding increase in the financial clout not just of Paris, but of Frankfurt, Milan, Amsterdam and Dublin.

There already straws in the wind. Deutsche Bank has made clear that while it will continue to have a significant presence in London, it plans to relocate a large part of its business to Germany. And the decision last month by J B Morgan Chase to move $230 billion in assets from London to Frankfurt will not be the last of its kind. In the words of the Wall Street Journal, “London’s position as a gateway to Europe for U.S. banks is being eroded”.

In the end, it is not a question of shutting the City down. There is a world beyond Europe in which London, as the primary global hub, is very much at home. Rather, it is the UK’s EU rivals that can be expected to open up and grow. If bankers across the Continent, all operating within the same regulatory framework, end up ten years from now with – who knows? – a quarter to a third of the new business that would otherwise have come London’s way, the question has to be asked, how does that profit Britain?

The European Commission in Brussels is predicated on integration. It has made harmonisation its number one goal. Without the UK as a countervailing force, Ever Closer Union is the clear direction of travel, ending, one has to assume, in some form of economic as well as monetary union. It will be then, clutching their new blue passports, that Britain’s bankers will have to run ever faster to keep ahead of the pack.