More than a tenth of the city's business is set to go. Could things get worse?by Nicolas Véron / November 13, 2017 / Leave a comment
Published in December 2017 issue of Prospect Magazine
Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there. #Brexit.” Thus tweeted Lloyd Blankfein, Chief Executive of Goldman Sachs, on 19th October. It was the first time a major American financial services firm had signalled a shift of its European operations away from London in this way: not as a decision conditional on future developments, but as an established fact of business life. It was the first, but presumably not the last.
It is too late to hope that the City of London, by many measures the world’s leading financial centre and an economic engine for both the UK and Europe, could emerge unscathed from Brexit. The City, which generates tens of billions of pounds each year in tax revenues, will suffer relative both to its competitors and to how it would have performed without Brexit and probably in absolute terms as well. Harm is now unavoidable. The UK is suffering from heightened risk and the vagaries of its politics since the Brexit vote, including the unexpected outcome of this year’s election, have reinforced that perception. There is no status quo scenario: even if the UK was somehow to remain in the European Union after all, that would be disruptive too.
By contrast, since June 2016, the perception of political risk has decreased sharply in the EU27, and the continent is also enjoying a robust economic recovery. The UK domino has fallen alone: no other member state wants to leave the EU. Emmanuel Macron’s victory in France has put an end to short-term worries about the integrity of the euro area. Other elections have yielded broadly reassuring results. Even the fiasco of Matteo Renzi’s lost referendum in Italy last December has not been disastrous. None of the numerous political challenges of the moment, including in Catalonia, Greece, Italy, Hungary, Poland and elsewhere, are widely perceived as threatening for EU integration or the euro. The EU27 remains exposed to external hazards—geopolitics, the oil price, a surge of refugees—but its major risks are no longer homegrown.