Ever since the UK voted to leave the EU in 2016, the City of London knew it would have to fight to keep the crown of Europe’s leading financial centre. Cities across the bloc had been jostling to win business away from London long before the referendum. Now, less than six weeks after Britain’s actual departure on New Year’s Eve, Amsterdam has emerged as an early winner. Having already picked up activity in swaps and sovereign debt markets, the Dutch city stole London’s crown as Europe’s largest share trading centre last month.
In volume terms, the gap in trading between the two cities is not vast — an average €9.2bn worth of shares a day were traded on Euronext Amsterdam and the Dutch arms of Cboe Europe and Turquoise in January, compared with volumes worth €8.6bn in London. Nor is there likely to be an immediate transfer of jobs from London to Amsterdam. But as an early indication of the direction of travel for what awaits the City post-Brexit, the development is highly symbolic. Amsterdam has punctured any lingering hopes that the loss of key financial services activities from London might be gradual.
The shift of trading to Amsterdam was triggered by Brussels’ refusal so far to grant the UK “equivalence” status — a regulatory threshold that would mean the City of London could trade unhampered in European markets. It would not quite be a return to the passporting rights that gave the Square Mile a near free trade agreement with the rest of Europe, but not far behind. The negotiations on equivalence appear to have run into the sand. Andrew Bailey, the governor of the Bank of England, has now waded into the impasse, warning the EU not to cut the City off as it would damage the economic recovery from the pandemic. He also accused Brussels of holding the UK to unrealistically high standards on the issue of divergence, saying it would make the UK a “rule-taker”, something that ministers and City authorities cannot countenance.
Bailey’s trenchant intervention has deepened anxieties in the City over the capital’s status as a leading financial centre. While it is hard to disagree that the EU’s hard line may, in part, be politically driven — what politician would not want to win some of the City’s lucrative business for their home turf — the truth is, it was Britain that decided to leave the bloc. It was also British politicians, notably Boris Johnson, who put themselves in a position of distrust and weakness during the Brexit negotiations.
Above all, Amsterdam’s success is a sharp reminder of the failure of Johnson’s government to ensure that financial services, a jewel of the British economy, was an integral part of Brexit talks and the ensuing deal. The government’s error is doubly staggering because Britain has given the EU equivalence, allowing EU banks to operate in UK markets. Both decisions have left the UK little leverage. Talks are under way to establish a “memorandum of understanding” on future financial services relations, mimicking an EU-US arrangement, next month. But hopes for quick equivalence deals in key areas, such as investment banking, are not high: there is no reason to think Brussels will go easy on London.
Bailey’s central message was that open trade is critical to well-functioning economies and financial systems, especially in the wake of the coronavirus pandemic. Much of the financial world already runs on global rules, not regional ones. It is a message that should be the guiding principle of future negotiations between the UK and the EU.