Counting the costs of Brexit starts with London

For whoever wants to see the real-life results of giving in to populism, the UK’s case is a fascinating one. Counting the costs of Brexit is only beginning, but already the picture is a gloomy one. 

The City of London, until recently the world’s second financial centre after New York, was left out of Boris Johnson’s negotiations completely.

This was despite the repeated attempts by various experts to draw the UK prime minister’s attention to the fact that the City was the source of more than 10% of tax revenues and it would be a disaster for the economy to shrink it.

Not even two months since Boris Johnson’s deal with the EU, the City has lost two important symbols of its supremacy as a financial centre in Europe.

Amsterdam became the largest centre for trading European shares in January, with around €6.0 billion worth of trades of shares of EU companies moving to stock exchanges in EU cities in the first day of trading of 2021 alone.

The difference between the volume of shares traded in Amsterdam and those in London is not that large yet: €9.2 billion in Amsterdam compared to €8.6 billion in London.

But this has already diminished the importance as a financial centre of London, which according to some estimates used to host around 30% of the overall trading in EU shares.

The loss was neatly summed up by Alasdair Haynes, chief executive of pan-European exchange and trading services group Aquis Exchange, quoted by the Financial times:

“Shifting liquidity is one of the hardest things to do. It’s not ‘Big Bang’ — it’s ‘Bang and It’s Gone’. The City has lost its European share business,” he said.

As if to prove the truth of this quote, in short order followed the loss of another symbol of the City of London’s financial might: trading in euro-denominated derivatives.

Data analysed by IHS Markit for January showed that London’s share of trading of interest rate swaps denominated in euros fell from around 40% in July last year to a little above 10% in the first month of 2021.

It’s true that not all trading went to EU venues, whose share only increased to around 25% from 10%. About 20% was routed via New York, which has a so-called “equivalence” regime with the EU.

Boris Johnson’s broken promises on Brexit?

Brexit supporters say that this does not matter, because the City is still a big financial centre, and has been an important hub for international trade and business for centuries.

That is true, but many of the conditions that existed at the time no longer exist nowadays. Among the most important the British pound used to be the world’s reserve currency, but it lost its place to the dollar.

City of London by night. Image from Pixabay

Another argument that Brexit supporters have often voiced is that the City of London was in any case becoming too big, and other sectors of the economy need to grow to replace its importance.

That other sectors should grow is fine, but it doesn’t look like this will happen any time soon. And Brexit supporters have never explained exactly why these sectors were unable to grow at the same time with the financial centre, rather than only once it is diminished.

While the loss of euro-denominated trading in shares and derivatives isn’t inflicting a lot of damage to London right now, in time it might. Clients of financial services firms like to have everything more or less local, so this relative “trickle” could turn into a flood.

A lot of other businesses in the UK’s dominant service sector depend on the City of London. Boris Johnson should for once in his life start to see that details matter, and use the charm he is famous for to persuade the EU to renegotiate the relationship with the UK

After all, the Leave campaign promised, before the Brexit referendum: “There is a European free trade zone from Iceland to the Russian border and we will be part of it… Britain will have access to the Single Market after we vote leave.”

If Boris Johnson does not ensure access to the EU market for financial services, he would publicly break the promises he made when he was leading the Leave campaign.

Presumably, people would not want to re-elect a prime minister who keeps breaking his promises.