The French government is bending over backwards with promises of tax cuts, in order to present Paris and the eurozone as a safe haven from the uncertainty of Brexit, and the risk of economic depression in the United Kingdom. EURACTIV France reports.
France’s banks, insurers and financial institutions did their best to play down fears over eurozone stability after Brexit at the International Financial Forum on Tuesday (5 July), an event organised by Paris Europlace to promote the French capital as a major financial hub.
“The United Kingdom is an important economy, but it only represents 4% of global GDP,” Samir Assaf, Chief Executive of Global Banking and Markets at HSBC, told EURACTIV.fr. “The real effects of Brexit will be British, not global,” he added.
Assaf believes the country’s GDP could take a serious hit during its separation from the EU. He predicted that the country’s economy could contract by 2.7% as inflation climbs as high as 4%.
“But the market indicators are at the same levels as they were before Brexit. So it is not the end of the world,” a specialist said. Jean Lemierre, the chariman of the bank BNP Paribas, broadly agrees.
Mad about the eurozone
“For the first time, we cannot count on the United Kingdom. There is no government, we cannot place our trust in the future, there is just too much uncertainty,” the banker said. He stressed that the European Union – even without the United Kingdom – is still the biggest single market in the world, and it has robust financial institutions.
“The longer the uncertainty persists, the more the UK will suffer. But the eurozone is a huge area with strong infrastructure and all the right expertise,” Lemierre said.
What the financial sector fears most is sustained uncertainty. “It might be in the interest of certain British diplomats to delay their exit. But in doing so they would be exploiting Europe for their own ends, possibly even driving it towards destruction by encouraging the rise of nationalism,” warned Bernard Spitz, the president of the French Federation of Insurance Companies.
This concern is shared by the BNP Paribas boss. “Now people are saying the Brits might stay after all. But this is not possible, they want to end free movement. That is not something we can give them.”
Valls tries to entice traders
Prime Minister Manuel Valls announced he would do his best to make the domestic business conditions the most attractive in Europe.
“It is a gesture of trust from France towards those that want to come to work here, to innovate, to create jobs in France and to participate in our country’s outreach,” he said.
In order to aid individuals and businesses to set up in France, the head of the government announced the establishment of a “one stop shop” for information by the end of the summer.
This will be designed, Valls explained, to help French “impatriates” (citizens considering returning to France) and foreigners thinking of settling in France to find information easily and understand the tax systems that apply to them.
And the partial tax exoneration for returning French citizens will be extended from five to eight years.
These measures are clearly designed to tempt the City of London’s high-paid bankers – French or not – who would otherwise be put off by the country’s high rates of income tax. The prime minister also promised a progressive cut to corporation tax from 33% to 28%.
Big questions over clearing
Paris’ efforts to boost its attractiveness as a financial hub also hinge on its ability to grow as a centre for clearing. Clearing houses play the role of intermediaries for financial transactions, acting as both buyer and seller and helping markets to work efficiently.
They are normally required to use the official currency of the country where they work, but the United Kingdom currently has special authorisation to clear transactions in euros. The future of this exceptional deal is up in the air since the Brexit vote.
And other financial centres are lining up to take over these highly lucrative activities, particularly on the derivatives market. Today three quarters of the eurozone’s derivative transactions are cleared through London.
A eurozone budget to stabilise after Brexit
Tuesday’s International Financial Forum witnessed numerous calls for greater European integration, particularly within the eurozone. The head of the European Stability Mechanism, Klaus Regling, was among those who recognised integration as one of the EU’s most glaring problems.
“We have to make progress on certain issues at a European level, like the Capital Markets Union and Schengen. But others can be solved at national level,” the banker said.
Regling also advocated a more effective system of risk sharing between European countries, along the lines of that used in the United States. This he sees as the only way to move the Economic and Monetary Union forward.
“A budgetary capacity, even a very limited one, would allow us to absorb asymetric shocks. This exists in the United States, for example. The states can borrow from the federal state in times of crisis and pay the money back later on,” he said.
The European Stability Mechanism may be an embryonic European Stability Mechanism budget – it is made up of contributions from each state– but it functions like a guarantee fund, and with its hybrid, intergovernmental status, it lacks the credibility of a real European budget.
The mechanism may soon be called into service to address the Italian banking crisis, which has been deepened by Brexit.