Financial Times, 12 June 2002


A tale of two complementary cities
London and Frankfurt are no longer vying for the top spot in Europe - they work better as complements to each other's business

By Tony Barber

Almost four years ago, at the dawn of European monetary union, scarcely a day passed in Frankfurt without a local banker, politician or commentator musing about the city's chances of challenging London as Europe's pre-eminent financial centre.

The choice of Frankfurt as the European Central Bank's headquarters and the UK's decision to remain outside the eurozone, were seen as potentially big advantages for the German city.

So, too, was the impression that Germany's financial markets - with Frankfurt at their centre - were about to benefit from a new era of reform and restructuring in the German economy and the eurozone as a whole.These days, even among Frankfurt's staunchest supporters, a more measured assessment prevails. "I am not as confident as I was two or three years ago that we will get into the super-league of world financial centres," said Rolf Breuer just before he retired in May as Deutsche Bank's chairman.

Moreover, the experience of Frankfurt and London since the euro's launch in January 1999 has been that the cities complement each other as financial centres as much as they are in competition.

Whereas German banks, insurers and legal firms see London as a platform for global operations, London-based companies use Frankfurt as a centre for business concentrated more specifically on Germany.

This point was illustrated in a comparison of the two cities published this year by the Anglo-German Foundation for the Study of Industrial Society.

Drawing on interviews with bankers, management consultants, accountants, lawyers and others in London and Frankfurt, the study concluded that many senior executives viewed London as a "global city" ranked next to New York rather than to Frankfurt.

London's role as Europe's leading financial centre owed much to the presence of US institutions, especially investment banks.

Although some respondents accepted that London's capital markets might benefit from British adoption of the euro, there was no sense that the UK's self-exclusion from the eurozone had so far damaged London's standing.

Finally, although a city such as Edinburgh has started to flourish as a centre for asset management, London still dwarfs the rest of the UK in most areas of financial business.

By contrast, while market liberalisation has improved perceptions of Frankfurt, the city's ambitions are limited by the decentralised political and economic structures set up in Germany after the second world war.

Frankfurt is unquestionably the leader in Germany's financial services sector. Cities such as Hamburg, Munich and Stuttgart have local bourses, but Deutsche Býrse, Frankfurt's recently-floated stock exchange operator, accounts for about 84 per cent of German share trading.

However, two of Europe's most powerful private sector financial institutions - Allianz, the insurer, and Munich Re, the reinsurer - are based in Munich. So is HVB Group, the country's second biggest bank.

Allianz has taken over Dresdner Bank, once one of Frankfurt's three main commercial banks.

Frankfurt ranks behind Hamburg and Düsseldorf in advertising and behind Düsseldorf and Munich in management consultancy. Berlin, Germany's new capital, is seen as a future rival to Frankfurt in legal services and, perhaps one day, in banking.

"If I were Frankfurt, I would be more worried about Berlin than about London," says an executive at one London-based institution, recalling that Berlin was Germany's banking capital before 1945.

For the biggest financial institutions, the critical issue is long-term strategy. Since taking over Bankers Trust of the US in 1999, Deutsche Bank, Frankfurt's premier financial institution, has evolved into an investment bank-led group whose nerve centres are as much in London and New York as in Germany.

Frankfurt's low profile as an investment banking hub recently caused the city's leading newspaper, the Frankfurter Allgemeine Zeitung, to ask if Frankfurt was in danger of turning into a "glorified sales operation, with the big decisions being made abroad".

In only one financial activity - international bond issuance - does Frankfurt, with an 18.4 per cent share of the world market, have the edge over London, with 9.5 per cent.

London has an overwhelming supremacy in foreign equities turnover, capturing 58.5 per cent of the market compared with 5 per cent for Frankfurt. About one-third of global foreign exchange dealing takes place in London, against 7 per cent in Frankfurt.

Overall, about 600,000 people work in London's financial sector, roughly 10 times as many as in Frankfurt.

Behind these figures lies a suspicion that Germany's tax rates deter many financial institutions and talented employees from setting up offices or relocating to Frankfurt.

According to a study conducted by accountants Ernst & Young for Metzler, a Frankfurt private bank, an unmarried, childless investment banker earning €500,000 a year would receive €307,000 after taxes in London but only €241,000 in Frankfurt.

Dieter Posch, economics minister in the state of Hesse, which includes Frankfurt, says high taxes make it cheaper for a German company to transfer its operations to London and send staff to Germany three times a week than to be based in Frankfurt.

Certainly, international recruitment agencies often bemoan the difficulties they find in enticing job-seekers to Frankfurt. Language, culture and "quality of life" are often cited as issues, though Frankfurt business life is probably the most Anglo-American in spirit of any German city.

Moreover, Frankfurt's tax-funded public services, especially transport, rarely drive residents to distraction in the way that London's do. But it is not every investment banker or other high- flier who sees such factors as a worthwhile trade-off for paying higher taxes.



© 2002 Financial Times Ltd.