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Wednesday, November 11, 1998 Published at 08:19 GMT

Frankfurt vs London: The battle for supremacy

Can London remain at the top of Europe's financial league?

For hundreds of years London reigned supreme as Europe's financial capital.

Its dominant position in dealing in anything from foreign exchange to stocks and shares has never been in doubt.

Until now.

The launch of the euro has seen the creation of a European Central Bank (ECB) that will set monetary policy across all 11 EU countries that have chosen to join up.

[ image: Is more business heading for Germany?]
Is more business heading for Germany?
And the ECB will not be located in London.

Instead it has its headquarters in Germany's financial centre Frankfurt, which is now a serious pretender to London's crown.

A recent survey by property consultants Healey & Baker indicated that almost half of all senior executives in Europe believe Frankfurt could supersede London as Europe's financial capital.

So will the UK's decision not to adopt the euro in the near future leave London out in the cold?

Or will London be able to fight off the threat from Frankfurt and continue to eclipse continental capitals of finance?

Flourishing Frankfurt

The cranes have been towering over Frankfurt as the city prepares for the euro. Builders work furiously to construct new offices for business newcomers.

[ image: The Frankfurt Stock Exchange stands to become a major force]
The Frankfurt Stock Exchange stands to become a major force
The presence of the European Central Bank is a major coup for Frankfurt, strengthening its international business reputation and enhancing its importance as a financial centre. That may make it a natural place for large banks to gravitate to.

So what are the advantages Frankfurt holds in its head on clash with London?

  • Pan-European stock market
    Frankfurt stands to benefit from the consolidation of Europe's stock markets. The London and Frankfurt stock exchanges have announced plans to join forces, which will bring large amounts of new business to Frankfurt and is likely to be a forerunner to a pan-European stock market.

    Frankfurt has the potential to become the financial hub of the 'eurozone' and is likely to take business away from smaller financial centres. Michael Lewis, an economist with Deutsche Bank and a specialist on the euro, points out that his own group has scaled back trading rooms in places such as Paris and Madrid to concentrate its efforts on Frankfurt.

  • New business
    Frankfurt has already shown it can win a large amount of new business from London. Deutsche Terminbörse, the derivatives exchange, has made great strides in winning contracts from London's Liffe exchange. Now it has teamed up with other European rivals to provide a formidable opponent to Liffe.

    A wave of privatisation is likely to spread across Europe as governments seek to raise money by selling off assets to the private sector. That will create a large amount of new business for financial institutions. As most of the privatisations are likely to take place in France and Germany, Frankfurt is well positioned to pick up a large part of this business. Analysts also believe that German companies will begin to use equity markets more often to fund expansion, therefore creating more work for banks.

  • Costs
    Frankfurt's property costs are far cheaper than London's.

  • Location
    Geographically Frankfurt lies in the heart of the eurozone, while London remains on the periphery.

    Best of British

    However all is not lost for London.

    Even though the birth of the euro has been anticipated for some time, financial institutions have continued to flock to London.

    Significantly none of the major banks have so far announced plans to jump ship to Germany.

    And both the Bank of England and the Stock Exchange claim that London is well prepared for the euro. Both businesses and financial institutions have invested heavily in ensuring their computer systems will cope with the change.

    Indeed London still holds several aces in its ongoing battle with Frankfurt.

  • Expertise
    London's expertise in business is second to none in Europe. "Banks want to be in a place where the main markets, their customers and competitors are and where there is the workforce that they need," said Henrietta Royle, deputy chief executive of British Invisibles, which promotes the UK's financial services industry. "It (Frankfurt) is not in the same league as London. You haven't got the employment base or the expertise there," she added.

    Supporters of London dismiss claims that the creation of the ECB threatens London's dominance. "In the US, the Central Bank is in Washington and all the power is in New York," Mr Lewis pointed out. While Ms Royle said: "I think (the ECB's influence in Frankfurt) is a red herring which I can't see why logically it will make any difference at all."

  • Life style
    Frankfurt is not viewed as the world's most interesting city, while London is seen as a vibrant place to live and work. As Michael Lewis, an economist at Deutsche Bank who has lived in Frankfurt, said: "It (Frankfurt) is about the size of Reading but not as interesting." These days, where deals can be performed around the world at a touch of a button, traders are more flexible and can locate anywhere, and so far they have been reluctant to head for Frankfurt.

  • Human resources
    London's financial district employs about the same number of people as the whole population of Frankfurt. Not only is labour readily available, it is also cheaper than in Germany. "This is a people business and is has proved difficult to attract good people to Frankfurt for the long time," said Mr Lewis.

  • Language
    English is the language of international business, which puts London at an advantage over Frankfurt, although most German financiers speak English.

    London could actually benefit from the euro. "The view here (in London) and as I understand it in the European Commission is that the financial services industry in the UK ... is probably best prepared for the introduction of European Monetary Union than anywhere in the Europe.This is a potential opportunity, not a negative," said Ms Royle.

    Bruising battle ahead

    Nevertheless London has a battle on its hands to defend the £20bn worth of financial revenues it currently brings into the UK.

    "The problem is that London has such a huge dominance in markets that its share can only go down," said Mr Lewis.

    Whether London can hold on to the vast majority of financial business that now flows in from around the world depends, in the short term, on how well it adapts to the introduction of the euro.

    But the City's long term security probably depends on whether the UK signs up to join the euro.

    If the UK eschews monetary union, London runs the risk of being ostracised from the European financial community.

    "London may lose out if it remains out (of European Monetary Union) for a very long time.

    "If it looks like 2010 then ... there maybe a risk that London would become very peripheral. But if it is only three or four years then I think that is manageable," said Mr Lewis.

    In other words banks are likely to hang on before they take the plunge and move lock, stock and barrel to Frankfurt.

    Many will also bide their time in order to see if the euro turns out to be a success.

    Frankfurt will not topple London from the top of Europe's financial league overnight.

    But in the long run it could still poach a large amount of business from the UK.

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