26 October 2017

Ireland shouldn’t bank on taking the Square Mile’s business

By Keith Boyfield

The contrast could not have been starker. Last Monday, the Institute for Free Trade launched its first Global Trade Summit at the Mercer’s Hall in the City of London. The event was positively brimming over with enthusiastic Brexit backers, save for the reporter from the Financial Times and some, but not all, of the assembled diplomats. The next day, I asked the large audience at the International Financial Centres Summit at Dublin Castle to raise up their hands if they thought Brexit was a good idea. Not a single hand went up. Nor, for that matter, did I meet anyone in Dublin last week who thought that Brexit was nothing other than a huge and misguided mistake – and damaging for Ireland.

Earlier this year a study published by Ireland’s Finance Ministry and the Economic & Social Research Institute suggested that Ireland’s exports to the UK may fall by as much as 30 per cent in the decade following a “hard” Brexit while the Irish economy could be four percent smaller than it would have been if Britain remains in the EU. No one I met argued that these figures were wide of the mark and many I talked with were concerned about the re-imposition of a hard border on the island of Ireland.

Some experienced observers, however, told me these concerns regarding the border were exaggerated. It’s clearly in neither side’s interests to establish a cumbersome physical border between Ulster and its southern neighbour. The Treasury’s recently published White Paper [Cm 9502] on customs, VAT and excise regimes points out that “in 2015, over 80 per cent of north to south trade was carried out by micro, small and medium-sized businesses”.  None of this trade, in the Treasury’s view, could be described as “economically significant international trade”.

And yet if a satisfactory deal is not reached on north-south trade and customs arrangements it is certain that every self-respecting smuggler and arbitrager will be weighing up the opportunities to make a quick euro – or pound – across this politically sensitive border. After all, Ireland levies among the highest excise duties on alcohol across the EU so the incentive already exists for copious quantities of booze to be sent south for grateful consumption.

The financial community in Dublin is looking forward to welcoming a range of financial institutions who have either already opted to move operations from the UK to Ireland, or are thinking of doing so. Kevin Wall, Chief Executive of Barclays Bank Ireland PLC, set out the reasons why his bank has decided to gear up its operations in Dublin to handle business currently conducted in Britain and establish an EU HQ in the Irish capital. A number of other financial institutions are likely to follow suit including Bank of America. Kieran Donoghue, head of international financial services at the Irish Development Agency (IDA) told the session I chaired that “several groups have privately advised us that they have selected Dublin and completed their due diligence but do not wish to make a public announcement at this point in time”.

As an English-speaking centre well used to navigating EU and British law, Dublin offers many attractions. As IDA highlights on its website “we favour green lights over red tape, which is why we are one of the best countries in the world for ease of doing business”. Savills, the chartered surveyors, point out that there is also a lot of relatively cheap office accommodation in Ireland’s capital, in contrast to London, Munich or Paris.

But the crucial question is how much business is London likely to lose? A lot of business moving to Ireland might be termed “back office” while in practice Brexit is likely to act as a catalyst for many financial institutions to reassess their whole global operations. Given London’s dominance over other European financial centres and its depth of expertise in such fields as investment banking, law and asset management, its future prospects look relatively robust.

As Mark Yeandle, a director of Z/Yen Consulting pointed out in one of the Dublin sessions, Frankfurt’s total population is a mere 700,000 whereas London has more than that number working in the financial services sector alone. Likewise, Paris, Dublin and Milan are relatively small financial centres, ranked 26th, 30th and 54th respectively in the latest Global Financial Centres Index ranking published by Z/Yen while London tops the league.

Rival EU centres have an awful lot of ground to make up to challenge London’s pre-eminence. What is more, in the past, London has demonstrated its ability to create fresh income streams from new sources such as the Eurodollar market in the 1960s and 1970s. London’s strength is that it has always adopted a global view.

Looking ahead, the smart thing to do will be to follow the money: the European Commission itself forecasts that “approximately 90 per cent of global economic growth in the next ten to 15 years is expected to be generated outside Europe”. Much of this growth is likely to centre on Asia. No wonder, then, that a number of the major investment banks, including Morgan Stanley, are reported in The Financial Times to want to direct their Asia Pacific activities through Hong Kong instead of London.

Lord Jonathan Hill, a former EU Commissioner on financial services legislation, argued in his keynote address to the Dublin Summit that Ireland needed to defend its position as a global hub for financial services.  He observed: “Contrary to the Brexit myth, Britain had a big voice in the EU on financial services legislation. With that voice stilted, who will be the champion of capital markets and of business-friendly, proportionate legislation?”

In reality, this is really a more important issue than who may or may not pick up business currently transacted in London. Global finance may well be tempted to move further East to Asia if the EU continues on its course to greater intervention in capital markets, notably with respect to financial transaction taxes.

Lord Hill identifies the EU’s challenge accurately with respect to how far it will remain attractive to global finance. Given the recent speeches by President Macron and Jean Claude Juncker in favour of greater tax harmonisation and far more centralised oversight of regulation, the onus is now on countries such as Ireland to head off the EU’s less savoury interventionist tendencies.

Keith Boyfield is Research Fellow at the CPS