One year after the UK referendum – a Brexit balance

The surprise came overnight, and there was a rude awakening. At 2 A.M., when the first forecasts were published, it still looked like Britain would remain in the European Union. But a next look at the news reports at 6:20 A.M. made it clear: the population of the UK decided to leave, even if the majority was only 52:48. A year has passed since TV cameras from all over the world stood in front of the ECB and journalists wanted to know what was now going to happen and what Frankfurt thinks about it all. London, Brussels and Berlin immersed themselves in consultations. Nigel Farage, the head of the UKIP party that had made Brexit its goal, stepped down. Shortly after, the British Prime Minister David Cameron followed suit.

Our message: Brexit is bad for the UK, it is bad for Europe, and it is bad for Germany. Frankfurt Main Finance (FMF), the voice of Germany’s financial centre, hoped for a different outcome to the referendum, but was also prepared for the results. When these came in, that was the moment to flick the switch. The campaign to promote and advertise our location on the River Main was ready and waiting: as soon as the official referendum result was announced, an information website about Frankfurt went online, a telephone hotline for questions about Brexit was activated, a statement was published on the FMF website, and a campaign started at the same time on Twitter and LinkedIn to spread the word about the merits and advantages of the Financial Centre Frankfurt. The message was clear and relevant: “Welcome to Frankfurt”.

 

Once-in-a-century chance for Frankfurt

On June 24th, interview requests came in from all over the world. The media struggled to understand what had happened and how it would be changing the world we live in. FMF gave interviews in 15-minute intervals: on the phone, in the microphone, on camera, and yet again on the phone… The Brexit vote dominated the news all around the globe. Being in a position to talk while others were still treading their way through channels of coordination and approval gave Frankfurt a key advantage right from the start.

Despite the obvious negative repercussions, Brexit brought the opportunity of a century for the city of Frankfurt and the region. The financial architecture of the European Union was, and up to now, is focused on London. The UK’s withdrawal from the EU – and that was clear straight away – would lead to a relocation of responsibilities and business in the direction of the EU, resulting in a more multipolar financial world. London will undoubtedly remain a major financial centre, but financial centres in the EU will gain enhanced influence – Frankfurt above all. We at Frankfurt Main Finance have never tired of pointing out that it’s not a question of weakening London as a financial centre through our efforts; rather, it’s primarily about installing a stable financial sector within the EU, about building a bridge between London and the EU that starts in Frankfurt.

EBA and Euro clearing are in focus

On day one after the referendum, FMF ventured to make the well-founded estimate of 10,000 jobs that Frankfurt could gain within five years as a result of Brexit – with two essential preconditions: the European Banking Authority (EBA) moves to Frankfurt, as does the lucrative euro clearing market. While the seat of the EBA quickly became a general topic of discussion, it took months before the exceptional importance of euro clearing became clear to the wider public – a rather unwieldy topic at first glance.

The processing of derivative transactions via central guarantee entities, so-called Central Counterparties, and their supervision by the regulator is one of the main ramifications of the financial crisis. When the financial world plunged into crisis, there was in part complete uncertainty as to where the risks were, i.e. who held the actual risks festering in their books at the time. This insecurity led to fear, and the resulting loss in confidence threatened a collapse of the entire system.

Euro clearing: Frankfurt is currently the only real alternative to London

The decision as to where euro clearing operations should be carried out has been recognised as one of the key decisions for shaping the future financial architecture of the EU and Europe, and the issue has been discussed in this vein. And once again, Frankfurt is justifiably confident that it can win the day as the location of choice. Today, in addition to London, only Frankfurt – with the EUREX Clearing subsidiary of Deutsche Börse AG – has a valid licence within the EU and possesses the technical prerequisites, tried and tested in daily operation, to take over euro clearing operations from the City of London. Currently, Frankfurt is already the market leader in the clearing of exchange-traded derivatives. On the other hand, London leads by far in the clearing of euro-denominated OTC derivatives.

This lucrative business will not be able to remain in London as it has. That’s something we stressed at the time and have stressed ever since. After all, the European Central Bank, directly after its founding, wanted the supervisory of such a critical key function for the stability of European financial markets and the euro in its sphere of influence and control. Already now, there are first signs of business moving to Frankfurt, and companies are increasingly testing the clearing opportunities in the Financial Centre Frankfurt.

More uncertainty in the wake of the UK elections

A lot has happened since June 23rd last year. To mention just a few milestones: the British Prime Minister at the time, David Cameron, resigned. He was succeeded by Theresa May. She, who for all intents and purposes counted among those in the remain camp, surprised everyone in her first policy address, with the wording used ever since to illustrate the British posture towards future negotiations with Brussels: “No deal is better than a bad deal.”

The so-called cliff-edge Brexit – the running out of the negotiations on withdrawal scheduled for two years without an agreement being reached – came into view and became the most probable outcome. On March 29th, 2017, the United Kingdom formally requested withdrawal pursuant to Article 50 of the Treaty on European Union. As a result, Theresa May set the countdown in motion for the two-year negotiation period. A few weeks later, she again shocked the world by calling new elections to the House of Commons for early June. The professed goal was to receive a strong mandate for negotiations with Brussels. The calculation didn’t pay off. May and her party are now weakened, with incalculable repercussions for the Brexit process, for financial market participants, and for financial centres.

Frankfurt and Germany offer stability

If, from a European point of view, the result of the UK parliamentary election is interpreted as “a glass half-full”, then a lot of things come into the range of possibility again: even a new referendum with an open end. And even the UK remaining in the EU is no longer completely out of the question, albeit hardly likely.

If we interpret the “glass as half empty”, we are then dealing with a weak government that is only capable of making a few compromises in the upcoming negotiations because it lacks a broad mandate and a robust majority in the UK Parliament. A breakdown of negotiations and even a new election within the two-year period are conceivable. The negotiation programme, which is already ambitious to say the least, seems simply impossible to complete. Extensions, interim solutions and deadlines will probably be the result.

One thing remains certain: the decisions made by companies and by the financial and the real economy, on both sides of the Channel, must now be made under an even greater cloud of uncertainty. This speaks for Frankfurt, and it underlines the strength of Germany and Frankfurt as a refuge of stability and predictability.

Frankfurt exploits its pole position

In a host of banks and across the financial sector, Frankfurt is frequently discussed as a potential candidate for the relocation of companies or divisions. Above all, the Financial Centre Frankfurt boasts a stable economy and stable pro-European political conditions, with an excellent infrastructure, a large number of well-trained workers – especially from the financial sector –, a relatively cheap rental index and cost of living, and a high quality of life.

Metaphorically speaking, all this has brought Frankfurt onto the pole position in the race for the chances in the wake of Brexit. And the Hessian metropolis has been doing full justice to its prominent role up to now. This is shown by the successes achieved so far. Already, a Chinese, Japanese, Indian, Korean and Swiss bank have decided in favour of Frankfurt as their main location in the EU. Goldman Sachs is planning to double its workforce in Frankfurt and Standard Chartered has recently announced its intention of expanding its office in Frankfurt due to Brexit. Around 20 banks are currently in the later stages of talks about either locating or expanding their operations in Frankfurt.

The metaphor of a race also makes another thing clear: the clear winner is uncertain until the finish line is crossed. Frankfurt must continue to promote its merits and advantages and continue to address its weaknesses, rising to the occasion to capitalize on the once-in-a-century chance before it. Ultimately, a number of financial centres will certainly profit from Brexit, but the Financial Centre Frankfurt has every opportunity to become the financial metropolis of the European Union.