The race to replace the City of London begins

When economic historian Charles Kindleberger charted the rise of financial centres around the world in 1973, he doubted London could take the top spot in Europe’s growing union of states: “Sterling is too weak, and British savings too little.” Instead, after assessing various cities’ economies of scale and corporate pulling power, he plumped for Brussels.
He was clearly betting on the wrong horse, but Kindleberger’s treatise should still be top of European regulators’ reading list on the eve of a potentially messy end to decades of unfettered free trade with Britain.
His insights into the forces that make or break a financial center resonate in post-Brexit Europe. Over-centralisation carries big risks, bringing what he called “diseconomies of scale,” such as information bottlenecks, spiraling overheads and interference by politicians. His work is a challenge to those who scoff at the idea that London could ever face any serious competition.
The UK financial capital arguably became too concentrated for its own good. The 2016 Brexit vote showed euro-zone officials were right to warn that it was risky to have a third of all EU capital markets activity and 90% of euro-denominated derivatives clearing in one place.
Back in the 1970s when Kindleberger was writing, the City looked more like a speculative bubble than a real contender, with US banks using London as a revolving door for US dollar-denominated deposits held overseas called eurodollars. Nobody was waxing lyrical about the City’s talent pool, or superior legal system, as so many do today.
Its attraction as a conduit for European cash only really took off after the 1980s, helped by light-touch regulation, political stability and its membership in the EU single market.
Those advantages are more vulnerable today than they’ve ever been. With the post-Brexit transition period set to end on December 31, bringing an end to the UK’s frictionless market access to the EU, euro-area hubs are dangling the carrot of tax breaks and regulators are waving the stick of forced relocations. Financial firms operating in the UK have already shifted about 7,500 staff and more than 1.2 trillion pounds ($1.6 trillion) of assets to the EU.
This isn’t an exodus, and nobody’s saying that Paris or Frankfurt will suddenly replace London. But we’re in a decentralising phase where many centers can happily coexist. Dublin and Luxembourg’s fund-management hubs have wooed insurers.
Amsterdam has attracted trading firms with its fast fiber network. JPMorgan Chase & Co is moving $230 billion in assets to Germany. And Europlace, an agency promoting Paris as a financial center, estimates 4,000 direct jobs have already been announced in the French capital.

—Bloomberg