London claims victory in the Brexit wars

JPMorgan Chase could have chosen Paris, Frankfurt or even Amsterdam. Yet the giant US bank has decided to build a new £3 billion European headquarters in London’s Canary Wharf instead. That is a huge vote of confidence in London and the City at a time when faith in the British economy has reached its lowest point in recent memory. It is also a sign that the Brexit wars have finally been won – and the City will remain the key financial hub for Europe.

Given the UK’s recent dismal track record of delaying any kind of new project, and allowing costs to escalate with dozens of unnecessary regulations, it may be a few years before the diggers and cranes actually get to work. Even so, with 12,000 square feet of space, it will eventually be a huge addition to the Wharf’s existing floor space and it will be home to 12,000 staff, making it the bank’s major hub for Europe and the Middle East. Canary Wharf has been struggling since the pandemic as firms adapted to working from home. A major new tower will boost the Wharf after a difficult few years.

In the aftermath of the UK’s departure from the EU, Paris and Frankfurt, with the help of officials in Brussels, made a huge effort to replace London as the key financial centre for the continent. In Paris, president Emmanuel Macron introduced special tax deals for bankers fleeing across the Channel, and the French regulators even translated all their forms into English to make the paperwork easier.

Meanwhile, Frankfurt created promotional videos selling the lifestyle to be enjoyed there to London-based finance workers. Huge amounts of money and energy were poured into the campaign and there was lots of speculation that one or the other would become Europe’s main financial centre, with London reduced to little more than a regional outpost.

We don’t hear very much about that any more, and for good reason. In reality, both cities have become less appealing over the last few years. The bankers who moved to Paris have found that promises of lower taxes have turned out to be illusory. With a huge deficit to finance, the French government is desperate to raise money any way it can, and “the rich” are an easy target. It has already introduced extra taxes on anyone earning more than €250,000, hardly a fortune at JPMorgan, and it is now threatening a wealth tax as well as a plan to force the rich to “invest” in government bonds at zero interest.

The country is so politically unstable, it is hard to know what might happen next. But one point is clear. It would be a very risky place to locate a major banking headquarters right now.

The Brexit wars have been won

Germany is not much better. Its industrial slump has made it the worst performing of all the major European economies. Government spending and borrowing is soaring as it starts to rebuild its military in the face of Russian aggression, and its political system is trapped in permanent coalitions that makes significant reforms impossible, while the far-right AFD rises in the polls. Germany is not in as much of a mess as France, but it is hard to see Frankfurt becoming a major financial centre any time soon, even if it is home to the European Central Bank.

Both cities have blown the opportunity. In the end, both were too bogged down in domestic politics and their own economic decline, while the EU carried on imposing more and more regulations on finance, ignoring the opportunity to deregulate. It has been a long time since we read a report about bankers relocating to Paris or Frankfurt, and we certainly won’t be hearing about many over the next few years.

The UK is hardly in great shape. London has plenty of challenges if it is to survive as a major global financial centre. It needs to find a way of reviving the IPOmarket to reverse the decline in the equity market, to stem the exodus of entrepreneurs, to persuade the government to stop raising taxes all the time and to embrace new technologies to stay ahead of its rivals. And yet, it does have one thing going for it. Despite leaving the EU, it has won the battle to remain Europe’s main finance hub. JPMorgan’s new tower will prove it.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.