25 Years IWH

IWH President: Why London Will Remain Europe’s Most Relevant Financial Center. Three Arguments.

“Despite Great Britain’s referendum London will retain its dominant position as financial center within Europe. This is what we have learned when the Euro was introduced as the uniform currency of Europe but gets even more obvious when we consider London’s location factors: the size of the city, its regulatory environment and the human capital”, states professor Reint E. Gropp, president of Halle Institute for Economic Research (IWH).

20. July 2016

Authors Reint E. Gropp

Currently the future of London as Europe’s financial center is discussed aggressively. It is not only speculated about shifting it from London to Frankfurt, Paris, Dublin or Luxembourg but even about the possibility of London’s breakdown. Similar threats already had to be faced by the island in 1999 when the Euro was introduced. Still, nothing has changed London’s status as one of the leading financial centers of the world. “It will be similar with the Brexit”, Gropp says, “simply because neither a common currency nor the membership in a huge trade association are the crucial factors for being a financial center”.

Regulatory Environment

The most important financial centers worldwide are located in New York, London, Hong Kong and Singapore. The reason behind their attractiveness for financial business is not necessarily a tremendous economy, but rather their regulatory environment. Mainly this is also what makes London that appealing as a financial center. In contrast to the potential candidates France and Germany, Britain is substantially more trusted in the self-regulation of its markets. Gropp: “London offers a much better environment for financial transactions. This will not change by Britain’s decision to leave the European Union. Quite the opposite: The separation of Great Britain from the EU could eventually lead to more deregulation which in turn could even increase London’s attractiveness.”

Size

Additionally, the size of the city is an important aspect. “When we consider the number of people working in the financial sector of London, which are several hundred thousands while Frankfurt’s total population amounts to 730,000 people, we see that a locational shift of London’s financial center to Frankfurt would solely be impossible for spatial reasons. The clusters and networks between people which play a decisive role in investment banking have to be taken into account, too. Networks like these cannot just be transferred easily from one city to another.”

Human Capital

Thirdly, the financial sector is heavily dependent on its specific human capital. This means it has to be relied especially on university graduates in the field of finance. Yet, at German universities these subjects have almost not been well-established. There is even a lack of a proper title for such a field of study in Germany. Hence, the absent source of young academics in this area has a negative impact on Frankfurt’s chances of success. “Language matters are another important factor. Since English is dominated by every university graduate in contrast to German, Great Britain is also far more attractive than France or Germany with respect to the language. Neither this factor will change by Britain’s exit of the European Union.”

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