Stealing London

The bug-eyed frog started popping up on billboards around London last October. Decked out in a natty white collar and a tie in the colours of the French flag, the garish green creature declared: "Tired of the fog? Try the frogs!"

It was a cheeky message aimed at London's financial sector from civic leaders in Paris and the amphibian quickly became a hit on social media. But there was a serious side to the offbeat poster: It symbolized the frantic effort by Parisian officials to seize on the turmoil caused by Brexit and lure away London-based financial firms. And it's not just Paris that has its eye on the City.

Frankfurt is gunning for business, too, and both cities are now locked in a fierce competition to pick off London firms anxious about accessing Europe in a post-Brexit world. It's a no-holds-barred contest with offers of lucrative tax breaks; promises of transportation improvements, speedy regulatory approvals, cheaper rents and even more English-language schools. Frankfurt has opened an office in London's financial district to push its case, Paris is dangling government aid and both cities have sent teams of high-ranking civic leaders across the English Channel to woo chief executive officers.

"Brexit is an earthquake," said Jean-Louis Missika, the deputy mayor of Paris who is co-heading the city's campaign. It "will reshape all the economic and financial landscape in Europe."

London has been the financial capital of Europe for centuries, dominating almost every kind of financial service. Today, around 360,000 people work in the financial sector in London – that's more than Paris and Frankfurt combined. But Brexit is set to change all that as British financial firms lose "passport privileges" that give them unfettered access to EU member states. That means that bankers, investment managers, insurers, currency traders and many others will have to rethink how they do business.

"We estimate, conservatively, that at a very minimum 100,000 jobs, in risk management, compliance, middle office, back-office support functions – by the way, not just in London; up and down the country – are implicated in supporting this business and clearly could be at risk," Xavier Rolet, chief executive of the London Stock Exchange Group, said last fall.

Other estimates put the figure lower, but just about everyone agrees London's financial centre, known as the City, won't be the same. Already, HSBC has announced it plans to move 1,000 people out of London to Paris, UBS has said it will move 1,000 positions, mainly to Frankfurt, and JP Morgan is considering transferring 4,000 people out of London but hasn't said where. Financial giants from China, India and the Middle East are also reconsidering where to set up in Europe now that London is no longer the automatic choice. And other cities are vying for a piece of action too, including Dublin, Amsterdam and even Vilnius, Lithuania.

"I'm absolutely convinced that it's going to be the case that you are going to have several financial centres in Europe as opposed to previously one financial centre sort of sucking everything in, like a black hole," said Thierry Philipponnat, director of the Friedland Institute, an economic think tank based in Paris.

No one wants to be seen as poaching and officials in Paris and Frankfurt are careful to insist that they didn't want Brexit to happen. But now that Britain has made its choice, the race is on and the gloves are off. Both sides aren't shy about pointing out flaws in the other; Paris is anti-business, crippled by rigid labour laws and politically dicey; Frankfurt is boring, fit only for bankers and stuck with high taxes.

"When was the last time you took your partner off for a weekend in Frankfurt?" asked Valérie Pécresse, president of the Paris regional government, with a wry smile.

Paris "is the city of light, the city of love, and a city of lunch," snapped Hubertus Vaeth, head of the Frankfurt Main Finance trade group. "And in finance, lunch is for losers."

What's at stake

Ever since Britain voted to leave the EU last June, pressure has been building on Prime Minister Theresa May to deliver on Brexit. Everything comes to a head this month, when Ms. May is expected to start the Brexit process by triggering the EU exit mechanism, Article 50 of the Lisbon Treaty.

That will launch a two-year negotiation process that Ms. May insists will culminate in the country's complete break with the EU and the ratification of a comprehensive Britain-EU trade deal, somewhat like the Canada-EU trade agreement. But many British business leaders aren't so sure, and they've been calling for Ms. May to take a softer approach and keep some ties to the EU. Few expect a trade deal to offer anywhere near the same kind of access to the EU as membership, and most doubt it can be negotiated in two years.

One of the main concerns among financial firms is the loss of passporting, a crucial provision that allows companies to register in London and operate in every EU member state without further registration. Around 5,500 British-based firms hold at least one passport and most firms hold more than one to cover a wide variety of products such as mutual funds, corporate bonds, insurance policies or syndicated loans. According to Britain's Financial Conduct Authority, 336,421 passports have been issued in the country. Once Britain leaves the EU, those passports will expire and firms will have to rely on provisions in a new trade deal. But if the Canada-EU agreement is anything to go by, access to the EU won't be as seamless as passporting.

Another issue is clearing. London operates one of the world's largest clearing houses, an intermediary step that helps facilitate trading in equities, bonds and derivatives. What's key after Brexit is London's dominant role clearing euro-denominated products. The City controls about three-quarters of this trade, which is worth nearly $1-trillion a day. That's something that has long irked EU officials who argue euro clearing should be done in a country that actually uses the currency. In 2011, the European Central Bank tried to snatch this business away, saying it would no longer provide liquidity support to euro-denominated transactions done outside the euro zone. Britain appealed to the European Court of Justice which blocked the ECB in 2015. But once Britain is out of the EU, the court's rulings no longer apply and there are already indications the ECB and others will strike again.

"The City, which, thanks to the EU, was able to handle clearing operations for the euro zone, will not be able to do them," French President François Hollande said just days after Britain's referendum. "It can serve as an example for those who seek the end of Europe. … It can serve as a lesson."

Many companies, including Canadian firms based in London, are waiting to see what kind of deal Ms. May negotiates. "The Brexit vote has resulted in increased concerns about the economic, legal, political, regulatory and trade consequences for the U.K. and Europe," said a statement from the Royal Bank of Canada, which has 6,000 employees across Britain and Europe. "We will be monitoring negotiations between the U.K., the EU and individual member states closely to assess the potential impacts to our business strategy in the U.K. and in Europe."

But as they wait, Paris and Frankfurt are swooping in.

The Paris pitch

Marie-Celie Guillaume stands in front of the window of her office overlooking Paris's sprawling business complex known as La Défence. She leans forward slowly and begins pointing out several building sites.

"They are demolishing the tower here and they are going to build the international headquarters of Saint-Gobain," she said citing a 38-storey building being built for the French building-products giant. "There's another one going up just opposite here. There's another project; they are going to demolish those two buildings over there and build two towers. So yeah, there's a lot going on."

Ms. Guillaume is director-general of Defacto, the public organization that manages La Défense, one of the largest business districts in Europe and the epicentre of France's financial-services industry. This is no ordinary suburb. La Défense is at the heart of France's long-held aspirations of becoming a financial and business capital in Europe. The dream began shortly after the Second World War when president Charles de Gaulle ordered the demolition of two small towns on the western edge of Paris to make way for a district that would showcase French business acumen. Even the name for the area is symbolic, taken from a local statue that depicts a young woman standing defiantly beside a cannon during France's defence against the Prussians in 1870.

Today, La Défense is home to more than 500 companies, including Euronext, which operates stock markets in Paris, Amsterdam, Brussels and Lisbon. Roughly 160,000 people work in the gleaming skyscrapers that line the many streets and walkways, and there are three universities, including one of the country's best business schools.

Now, with Brexit, many people across Paris believe the time has finally come for La Défense to step out of the shadows of London and Frankfurt. "We believe that Brexit is a real opportunity for us," Ms. Guillaume said.

This is no sudden or haphazard campaign. A team of officials representing the city, the region and local businesses began planning their post-Brexit pitch months before Britain's referendum on the EU. They started out by surveying dozens of financial firms in London and the United States to find out how they viewed Paris and what they wanted in a financial centre. That led to a series of recommendations they took to the national government.

The government instantly got on board, announcing a host of tax measures to lure executives. That included extending a special tax break, from five years to eight years, for executives who move to Paris. Under the changes, the effective tax rate for someone earning $400,000 was cut to 24 per cent from 38 per cent for eight years. And during that period of time, all foreign properties and assets will be excluded from the calculation of wealth. Paris officials say the 24-per-cent rate compares with 38 per cent in Frankfurt and 43 per cent in London. And if an executive moves in 2017, they pay no tax for the year. The government is also cutting the corporate tax rate from 33 per cent to 28 per cent by 2020.

And that's just the start.

The city and the region have also set up a one-stop shop for firms looking to move, offering help for everything from where to find office space to how to fire workers and how much severance to pay (Paris claims that it's at least a month less than in Germany). Regulators have introduced fast-track procedures that could see a foreign-based firm registered in Paris within two weeks. And local schools around La Défense have promised to add more places for international students. There are also a series of transportation improvements under way, including a rail link to the airport.

The group wasted no time in pouncing once Britain voted to leave the EU on June 23. Within hours of the results being confirmed, city officials sent 4,000 letters to chief executives across Britain urging them to consider moving to Paris. Then Defacto launched the frog campaign.

"We didn't want to be aggressive because we thought that Brexit was quite a trauma for people in London and we didn't want to appear aggressive," Ms. Guillaume said. "We thought [the frog campaign] was fun. It was a way of making fun of ourselves and using the clichés of how we think about each other."

Despite the concerted effort, many officials acknowledge that France has an image problem when it comes to business. That stems in part from the early days of Mr. Hollande's tenure in 2012 when he called finance his "true enemy" and vowed to slap a 75-per-cent tax on the rich. The prospect of the far-right National Front's Marine Le Pen winning the upcoming presidential election has also sent tremors through European financial markets.

"We have a marketing problem," said Robin Rivaton, CEO of Paris Region Entreprises, the economic development agency of the Paris region which includes the surrounding suburbs. "The brand of the Paris region as a business brand is very weak. It is seen as a tourism location or retail location but it is not seen as a business land of opportunity."

Mr. Rivaton rhymed off a stream of statistics to show how far Paris has come. He pointed out that it is home to the largest European bond market, one of the continent's biggest stock markets and has more asset management firms than Germany. There's also a growing high-tech sector, with city officials designating 23 sites as innovations hubs backed by government and private-sector money.

Europlace, a Paris organization that represents around 400 businesses, is targeting 40,000 direct and indirect jobs from London. It has produced stacks of promotional material that compare Paris and Frankfurt, and all show the French capital as a far more diversified financial centre. "The big difference is that Frankfurt is a city of banks, Paris is a business centre," said Europlace's managing director Arnaud de Bresson. "And French guys are everywhere in trading rooms, in London and New York. Did you ever see German guys?"

The Brexit vote "opened a period of fierce competition between the main cities of continental Europe," said Ms. Pécresse, the president of the Paris region, after hosting a session for 80 business people in a five-star London hotel. "If you want to play safe then you have to have one foot in London and one foot in Paris."

The Frankfurt pitch

Frankfurt Mayor Uwe Becker smiled when asked about Paris's all-out campaign to woo London businesses. Then he shook his head and scoffed. That's not the German way.

"We are not going there and trying to take everything we can; just saying, come to us, we'll give you everything," he said from his office in the Roemer, a medieval building that's been home to the city government for more than 600 years. "We don't come there with huge flags and PR. We don't compete with low taxes."

He also didn't hesitate to take a potshot at his French rival, carefully hitting Paris where it is most vulnerable by mentioning the looming prospect of a Le Pen victory. "You don't know what France will look like a year ahead. Nobody hopes that the National Front will win the election, but you don't know which way France will go in the upcoming years. Germany is politically stable."

And that is largely the theme of the Frankfurt's low-key but intensely competitive approach to Brexit. Frankfurt is the stable, safe bet. Paris is not.

"In our mind, Frankfurt will be the No. 1 place on continental Europe, the future financial centre of the European Union," Mr. Becker said in summing up the approach. "And if you want to play a key role in the future, the best place is Frankfurt."

Like the Parisians, officials in Frankfurt began preparing their pitch a year ago. They decided not to adopt the Paris-style approach of tax cuts, government help and public pronouncements. Instead, they planned a more direct assault, hitting up London-based firms one on one and offering seminars on how to set up in Germany.

"We don't believe it's right to communicate in a very aggressive way," said Johannes Schaefer, who is part of the Brexit team at Frankfurt Economic Development GmbH, a development agency for the region. "We said whatever we do, we just hand out an invite. Whoever wants to come, we are more than willing to get details together. Decisions are with the U.K. companies."

But there was much groundwork to be done first. City officials hired a consulting firm to hone their message. They met with 14 international schools in the area who promised they could increase their space by 50 per cent to accommodate newcomers' children. They talked to the country's financial regulators, who have a notorious reputation for being difficult, and got them to agree to hold meetings in English with British companies. The regulators even said they would let firms file their registration documents in English, as well as most corporate taxes.

Despite their protestations about not being aggressive, within hours of Britain's referendum results, they struck. Main Finance, which works with the city's financial firms, launched a website listing all the advantages of moving to Frankfurt, including its multicultural makeup – people from more than 180 countries live in the city – and its transportation network that can get anyone almost anywhere in about 15 minutes.

The economic development agency also quickly opened an office in central London to communicate directly with City managers. And senior politicians from the state of Hessen, which includes Frankfurt, descended on London to make their case to business leaders and politicians, touting the city's ample office space and low business costs, which are about one-third of London's.

To co-ordinate everything, officials from the city, state, region, economic development agencies and business groups began holding a conference call every Monday evening to strategize and follow up on leads.

"We look at [Brexit] as a great loss, on the one hand; a loss for Europe and a loss for Germany," said Mr. Vaeth, of Frankfurt Main Finance. "Nevertheless, for Frankfurt it's going to be a gain. Never waste a good crisis and a crisis it is."

Mr. Vaeth and others have a particular eye on the clearing of euro-denominated futures and the proposed $34-billion merger of the London Stock Exchange and the Deutsche Boerse AG, which is based in Frankfurt. They have been adamant that given Brexit, the merged stock exchange should be based in Frankfurt and all euro clearing should be done in the city. That flies in the face of the current status of the merger, which calls for the new exchange to be registered in London, and the expressed concerns of many British politicians who fear a German takeover of currency trading.

"Hessen has shown a desire to promote Frankfurt at the expense of London," Sir William Cash, a Conservative member of Parliament told the British House of Commons recently. If the LSE-Deutsche Boerse merger goes ahead, he added, "the combined group will be able to bulk up euro clearing and exchange … through Frankfurt generally at the expense of London. Given the declared political objectives to promote Frankfurt, Paris and the euro zone, this is not an outcome which is in the U.K.'s national interest."

The merger has been thrown into doubt because of regulatory issues raised by the European Commission, relating to an electronic trading platform controlled by the LSE. But even if it fails, concerns over euro clearing remain. "This is a very, very strong political issue," Mr. Vaeth said. "There is a strong will. It's a political project and there's a political will. It's very clear."

Frankfurt has another issue to address; its image. The city of 730,000 is hardly considered a vacation hot spot and the rows of glass office towers make it appear almost soulless. Although its history dates back more than 1,000 years, Frankfurt was flattened during the Second World War and it has been rebuilt almost from scratch. The city has managed to cling to its roots in business, which date back to the Middle Ages when the area was a major trading route across Europe. Now, along with the ECB and nearly 200 foreign banks, Frankfurt is also home to one of the largest airports in Europe, a host of massive trade fairs and dozens of transportation logistics companies. "Once you're here, the image changes," Mr. Schaefer said. "Getting around is easier. Everyone speaks English. There are 14 international schools."

Mr. Vaeth is under no illusions about how Brexit will play out. He described the current situation in astronomical terms; right now London is the sun and Frankfurt and Paris are orbiting planets. After Brexit, "it will be closer to a planet and moon system," he said. "We'll have more moons. Frankfurt will be the biggest."

So who will win?

Another one of those moons may be in Ireland. From his office in Dublin, Kieran Donoghue marvels at the competition between Paris and Frankfurt.

Mr. Donoghue is head of the international financial services group at IDA Ireland, a government organization that bids to attract foreign investment into the country, and he is quick to point out that Dublin, too, is in the race to win post-Brexit business. Like the others, Dublin has launched marketing campaigns, hosted seminars and offered countless reasons why London firms should move there.

"Part of what's driving all this is a recognition that London is so big, and the industry is so large in London, that no single European centre by itself could accommodate the potential scale of relocations that might have to occur," he said. Because of Brexit "the industry doesn't have a choice. Its geographic footprint is going to have to change. Frankfurt and Paris will get bigger. And so, too, will Dublin."