In a last attempt to win the title of the post-Brexit financial hub for Frankfurt, the German government might soften its strict labour laws that are more protective of the employees, yet more challenging for the employers than those in London.
In the light of the intensifying worries of London-based bankers about their future in the country, the biggest European financial hubs get more and more competitive in wooing the largest global banks to relocate their London offices to Europe's mainland. Even though British financials have been generally staying away from announcing any definite plans on the move, after the last week's speech of Theresa May on the Brexit course, the analysts started warning the bankers that they might not receive that "special treatment" they were hoping for.
Last week, the new Prime Minister emphasized that the government was going to focus on dealing with the immigration issues in the country and reconsider partaking in the EU's core "free movement principle" as soon as Brexit comes in force. May made it clear that her country and the European Union would not share the same road anymore when it comes to the European single market. And that is exactly what the financials were afraid of.
For the industry, accounting for roughly one eighth of the total country's GDP, the "hard Brexit" means a serious distortion of the sector's established workflow. With that in mind, the plans of moving the European financial capital from London to elsewhere in Europe become more real than ever.
"While Theresa May, the UK’s prime minister has made several appearances on various different TV media today, she has confirmed that banking sector will receive no special treatment when it comes to Brexit negotiations. An extremely dangerous tactic because the biggest concern among various businesses is how they will be able to continue to operate if they lose all the talent which is from other countries," an analyst Naeem Aslam told the Telegraph.
That is why, the London-based major international banks have received a round of the pitching presentations from several biggest European financial hubs including Frankfurt, Paris and Luxembourg last week, reports the Financial Times. The European bankers have presented the cases of making their cities the "next London" of Europe, with Frankfurt going as far as to suggest a change in the German labour laws in order to make the city more attractive for the bankers from the U.K.
According to the Financial Times, the main problem London firms have with moving the European headquarters to Germany is the country's strict labour law that makes it much harder and considerably more expensive to fire employees with higher income levels. As the employee "turnover" in the financial industry is very high, this is a significant drawback for the banks that are used to working with much softer British labour regulations. At the moment, the costs of laying off a banker with the remuneration of over $1 million in Germany are 10 to 15 times higher than in London.
But, as part of the Frankfurt pitch, London bankers were offered a solution for this problem, reports the FT. The delegation from Frankfurt said that the German government was ready to consider relaxing this law and restricting the employee protection refunds to €100,000 or €150,000, what would make the legislation closer to that of the U.K. Some experts commented that the German law regarding the redundancy terms was not created for "people like this" referring to the high-earning bankers and rather for the senior employees and those with families.
If the law is passed, this would make Frankfurt closer to its goal of being the relocation choice of the U.K. financials if London loses its passporting privileges. According to the Financial Times' analysts, Frankfurt is currently the city with the highest presence of the top 10 global banks including such big names as HSBC (NYSE: HSBC), JPMorgan (NYSE: JPMorgan Chase & Co [JPM]), Goldman Sachs (TOCOM: Futures On Gasoline Feb 2017 [GS]), BofAML (NYSE: Bank of America Corporation [BAC]) and, naturally, Deutsche Bank (NYSE: Deutsche Bank [DB]). This makes the German banking hub the logical choice of the global financials as it would be easier for the businesses to move their offices to a location where their branches are already present.
According to The Times, Goldman Sachs, one of the largest London financials, has been considering moving as many as 2,000 employees and a major part of its London-based operations to another European city if London choses for the "hard" divorce from the EU and eventually loses the "freedom of movement" rights. Other businesses are also increasingly anxious about how Brexit will affect the trading relationships between the countries. And only keeping the existing passporting rules or something similar to those will allow the City of London to keep its position as a number one European financial center.
"There remain numerous uncertainties as to what the Brexit negotiations will yield in terms of an operating framework for the banking industry. As a result we have not taken any decisions as to what our eventual response will be, despite media speculation to the contrary," Goldman Sachs told CNBC.
However, several major Wall Street banks including Morgan Stanley (Milan Stock Exchange: Mediaset [MS]) said that they were more likely to move their London-based operations to New York rather than Frankfurt or any other European city. Morgan Stanley's CEO Jamie Gorman claimed that he saw New York as the best solution for the situation as no other European location could offer the "necessary infrastructure" able to satisfy the needs of the global bank.
“Brexit is all about the survival of the union. It’s been a phenomenal social, economic and military success. But somewhere that has been lost in this discussion. And that discussion exists in Spain, Italy and across the union,” Gorman told the Financial Times.
Indeed, the infrastructure of Frankfurt cannot compete with that of London as the German financial hub has a little over 700,000 inhabitants and a smaller stock exchange while London is a home to over 8.6 million people and the sixth largest stock exchange in the world. Even though changing the labor law is a very serious move from the German government, it is still unclear whether this would be enough to make Frankfurt the next European capital of finance.