Is post-Brexit London doomed?

As a result of Democracy, Athens famously ‘ostracised’ (exiled) some of its more prominent generals, politicians and artists, to its eventual demise. Greek historian Plutarch said that ‘[ostracism] was not a penalty, but a way of pacifying and alleviating that jealousy which delights to humble the eminent, breathing out its malice into this disfranchisement.’ Plato hated it. His ‘Republic’ is anything but democratic. When Rome gave too much power to the public, it descended into anarchy and was almost erased from history as well. 

Yet perhaps because we failed to learn from history or because global connectivity and social media de facto and unavoidably created modern agoras (forums), plebiscites became popular again. And as it happens, they have the same effect on people as they did millennia ago: they ignite passions.

"source: Bloomberg"

Nowhere was and is that more evident, than Brexit. The discussion around the subject tends to be heavy on ideas, civics, vision and sentiment, but woefully light on data. When we talk about Brexit and its implications on the economy, we need to make a clear distinction between the political angle, and what the data tells us.

Britain is a global exporter, with strong cultural and trade ties with much of the world. The real risk of Brexit was always London’s primacy as a global financial centre. In 2021 financial services accounted for more than 8% of British GDP, the fourth highest within the Organisation for Economic Co-operation and Development (OECD) economies and nearly the highest percentage one could find in a developed economy. London accounted for almost half of that (53%).  For decades London served as the gateway of US Dollars to the EU. After Brexit, that relationship broke down.

The Brexit deal negotiated by the previous government focused mainly on the movement of goods between the EU and the UK. Trade resumed, even if friction increased. However, the Brexit deal didn’t address services, especially financial services.

The EU has granted 'equivalence' or EU market access to derivatives clearing houses in London until the end of June 2025 and had agreed to formalise cooperation between financial watchdogs, however, the deal was delayed for two years. A draft of a Memorandum of Understanding (MoU) outlining how the two sides will communicate going forward was finally released on 19 May 2023. This MoU will establish a joint EU-UK Financial Regulatory Forum, similar to the one the EU has with the United States. This is a good step towards outlining the post-Brexit financial services landscape and removing uncertainty. 

While this is a very welcome development, possibly averting cliff-edge regulatory issues, the question remains: is London still the prime financial services hub in the European Continent?

At the end of 2020, Amsterdam, Europe’s natural trading hub, managed to overtake London as Europe’s top share trading centre. Paris has also seen a significant pickup with many investment bankers many moving from London to Paris.

The assets on EU balance sheets also soared from $275bn to $1.7tn between 2018 and 2023, however, total assets of UK banks are roughly the same as they were before 2016.  Overall, trade in goods and services with the EU, as a percentage of total trade has declined significantly in the past few years.

However, financial services exports globally, have actually increased from $4.7bn to nearly $6.5bn per month. While they haven’t followed the general trend, they have remained broadly stable with the EU.

London’s importance as a European financial hub has, unequivocally, been reduced after Brexit but numbers do suggest that it retains its importance as a global financial hub. The mix and the origin of the business conducted in London could be differentiated in the coming years. The mix of investors will also shift from those who take advantage of the weaker currency, to the prospectors, to the more stable money, the mix will be more dynamic than in the past. But London a 200-year institution by itself, will remain centric to the UK GDP for the time being.

George Lagarias, Chief Economist