01/08/17

This is how Emmanuel Macron will make Paris the financial hub of Europe after Brexit

The harder France presses the UK on matters like the financial passport or euro clearing rights, the more business Paris can lure away from London reports The Independent.

Nearly four decades ago, Margaret Thatcher cemented London’s position as the uncontested centre of financial services in Europe. Though it helped that London offered an experienced, English-language workforce, a flexible working environment, and a common law framework, the global financial shift to London was mostly achieved through important reforms and deregulation that boosted the UK’s competitiveness.

Today, Macron in France has few of these advantages to offer the financial world that would make Paris an international finance hub, but, perhaps surprisingly given the challenges he faces, there are some quick steps he can take to begin to capture the Thatcherite mantle from London. Macron has the credibility and personality to convince the players of the City of the benefits of Paris. But when it comes to reforms, he must show that he is not only able to talk the talk, but also walk the walk.

Macron was elected on the basis of a promise to reform vital sectors of the French economy and administration. One of his first challenges is to get a labour market reform bill to Parliament by September. Should he succeed, that should pave the way to make Paris an attractive location for financial services for the single market. To some extent this will depend on the outcome of the Brexit negotiation, and a hard Brexit, with the UK losing access to the single market and dropping out of the customs union, would further strengthen the case for France as a finance hub.

Paris is not a stranger to the international financial sector. It hosts several of the EU’s top banks, the pan-European Euronext stock exchange and ESMA (the European securities mad markets authority). Paris has the second-largest asset management industry in the world, twice as big as the German car industry, and the largest European bond market with 35 per cent market share. France also has a vast pool of talent thanks to top-ranked financial education in schools like HEC, ESSEC, INSEAD, and Sciences Po.

However, a true financial hub such as London is a network of all kind of services. Hence it is not a single reform that will guarantee Paris; It also has to offer a network enabling market participants to raise capital, prepare and follow through on M&A, trade equities and bonds, hedge risks, and develop new financial products. This requires a pool of experienced and competent people in wholesale, investment and retail banking, capital markets, legal services, auditing, rating, data collection and analysis, consulting, communication support, private equity, hedge funds and financial supervision.

The working environment for this talent has to be flexible. Strict rules on working hours will undermine Paris chances to succeed. So, Macron’s initial reforms to create a far more flexible labour market are crucial. Along with this must come cooperative unions, less burdensome bureaucracy, and the use of English in all business transitions.

Financial players will also remain wary of planting flags in Paris so long as the French legal system prioritises outsized, advantage-based fines over resolutions that allow justifiable fines to be paid in line with France’s EU neighbours.

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With regard to taxes, France has already adopted one of the most generous expat tax regimes, allowing new residents to limit the burden of higher income taxes for several years. Macron could go even further and lower the corporate tax to 28 per cent or less by 2020.

Paris will need to make sure that the City loses its direct access to the single market after Brexit. The harder France presses the UK on matters like the financial passport or euro clearing rights, the more business Paris can lure away from London. Paris could cooperate with Germany and broker a deal which moves the EBA to Frankfurt close to the ECB and clearing and settlement of euro-denominated trades to Paris. In addition, Paris could try in close cooperation with the European Commission and the European Parliament to increase the role of ESMA.

It is not a given that the aspirations of Paris will succeed. Dublin offers London’s culture and language, Frankfurt has already implemented the necessary labour market reforms many years ago, and is host to the ECB and the Banking Union. In addition, there is a lot of uncertainty about the pace and public acceptance of the reforms in France.

For this reason, Macron has to push through major reforms much more quickly than his five-year legislative term would normally allow. Instead of years, he has months. There is no doubt that London is likely to remain a global financial centre for the foreseeable future. Yet an ambitious reform agenda that looks to the long term will show that Macron is serious about restoring France’s competitiveness. After a convincing victory in the legislative elections, giving him a strong majority in Parliament, Macron is in a unique position to lead such a change. Perhaps in four decades’ time, we will look back admiringly at how Macron overcame the odds and laid the foundations for a Parisian financial hub.