The Amsterdam stock market, which traded the first-ever equity in the Dutch East India company, has regained its position as the top European stock market after more than three centuries of trailing London.
When the Dutch bourse swept ahead of London in terms of the value of shares traded, it delivered the biggest single Brexit blow to the British economy, which is already reeling from Boris Johnson’s failure to get financial services included in the limited trade deal with the European Union, which came into force on January 1.
In addition, the huge Euro-dominated market for derivatives-instruments, used to hedge against movements in currencies and interest rates, has moved out of London to EU centres and New York.
The United Kingdom’s exports to the European Union dropped by two-thirds in January, and while the media and ministers have sought to explain this away as a temporary blip due to paperwork problems at borders delaying deliveries, the biggest slice of exports lost has been in financial services.
In January, the first month after Britain left the European Single Market to ‘take back control’, the opposite happened. Share trading in European companies moved back to the European Union, and the big winner was not Frankfurt or Paris but London’s oldest rival, Amsterdam.
In the first two weeks of February an average €8.7 billion a day has been traded in the Dutch city, compared with €7.8 billion in London. The difference may not seem much until you look back and find that in 2020 London traded an average of 17 billion shares a day, almost 700 per cent more than the Dutch capital’s €2.5 billion.
Both the British and Dutch stock markets had their 18th century origins in raising money for high-risk shipping ventures, expanding the East India Company and its Dutch equivalent. London pulled ahead with the financing of Britain’s Industrial Revolution. But the most significant surge for London as an international financial centre came with the so-called Big Bang in 1986, the abrupt jettisoning of rules that had allowed the London Stock Exchange to operate as a closed shop.
As I wrote in a book at the time, prime minister Margaret Thatcher had weakened trades union control in the coal and steel industries, but had made only legal threats against the the least competitive of all areas of British enterprise – the financial institutions that made up the City of London. The City comprises a square mile of offices, livery companies, churches, small parks and historic buildings that is an English county and city in its own right. It has its own Lord Mayor, police force, public services and governance, entirely separate from the 32 London boroughs run by the Mayor of London.
As the pinnacle of the City, the London Stock Exchange (LSE) valued its independence. It staunchly defended anti-competitive practices such as high fixed commissions for its licensed brokers, and for stockjobbers, middlemen who were allowed to hold a portion of stocks traded on the questionable theory that it aided liquidity and countered sudden volatility. Corporations, including banks, were not allowed to practise either as brokers or jobbers.
For LSE chairman Sir Nicholas Goodison, Thatcher was a tough opponent. He knew she wanted to privatise a raft of publicly owned government utilities, starting with the highly inefficient British Telecom, the fast expanding British Gas, as well as the profitable British Petroleum. He supported her aim of turning voters into a nation of shareholders, but knew she would baulk at City brokers making a killing out of multi-million pound asset sales.
Goodison knew only too well that the City’s old guard– and there were many – would oppose ending the closed shop, but he shrewdly calculated that international investors would also want to buy into Thatcher’s privatisations and be able to transact via banks and other institutions in Wall Street, Europe, and Japan. If the LSE were to end its ban on foreign participation in the market and allow corporates to become brokers, his disgruntled ‘old guard’ could at least be compensated by selling out at a high price.
And so it happened. Almost every major international financial institution and bank became a partner in the London stock market. Privatisations took off across the world, with varying success, but mostly enriching the City of London and its huge fund management and advisory industry.
By 2018 financial services accounted for 8 per cent of the British economy, half of that coming from the City. In 2007, the Global Financial Crisis took its toll, but by 2019 the financial services sector was still contributing $A2.8 billion, or 6.9%, of Britain’s GDP. This compared with only 0.1% contributed by fishing, the sector on which Boris Johnson focused his energies in the frenetic last-minute negotiations to secure a trade deal with the EU.
The warning signs for London as a financial centre were there for anyone who could be bothered to look, well before that critical negotiation. They were mostly ignored. I am reminded of a giant sign at the entrance of the late Kerry Packer’s garage in Sydney: ‘No Parking – YOU HAVE BEEN WARNED’, it said. Most people passed by without noticing, but those who chose to ignore it and parked outside were likely to have their cars summarily removed.
And so it is in the City of London. Traders and financial professionals in the EU have snatched a highly profitable slice of Britain’s financial services industry from under the nose of the City’s elders, who were complacent in the four years between the Brexit referendum and Britain’s final departure from the EU.
And so were much of the media, including the BBC, the public service, trade unions and the government itself. In 2018, when asked whether he was worried that business would be damaged by Brexit, Johnson memorably replied: “Fuck business.”
The British prime minister made no serious effort to ensure that financial services were included in the trade agreement; the result is that British firms lost their ‘EU passports’ to operate in the Single Market.
Earlier in the negotiations, just after his re-election in late 2019, Johnson had boasted there would be a ‘comprehensive’, ‘oven ready’ deal, not unlike that which Australia has with the EU, within weeks. It never materialised. Then EU chief negotiator Michel Barnier insisted the arrangement could only continue if the UK accepted the Brussels rulebook. Johnson insisted that taking back control meant not being a rule taker. At this point Brussels came up with the concept of equivalence – a mutual recognition of each other’s regulatory standards.
The UK and the EU are scheduled to hold talks next month to try to reach an agreement on what these standards should be, but few believe a workable deal is achievable. The UK government is yet to table what are expected to be less onerous rules; they are bound to be resisted.
Ireland’s Mairead Mc Guiness, the European Commissioner for Financial Services, reports that jobs and investment have already moved out of London to Amsterdam, Frankfurt, Dublin and Paris, a trend that will continue.
There is no sign that the EU is ready to do Johnson any favours, and give up its sudden financial gains. Lord Hill, who held the EU commissioner role prior to the 2016 Brexit referendum, agrees, saying he sees no prospect of a rational deal. He argues that the City of London, licking its wounds, needs to re-energise its links with world markets where he believes there is considerable scope to sell its services. “The longer we sit here doing nothing, which is what has happened over the last four years of paralysis over Brexit,” he says, “the more our competitive position will weaken. The choice we now have to make as a global centre is to align ourselves with the global competition.’
That, of course, means New York, Shanghai, Tokyo, Singapore and Abu Dhabi.