Should the City move to Frankfurt?

Frankfurt, Germany’s primary financial centre, meanwhile, acts as the host city for the European Central Bank (ECB), keeping it at the centre of European monetary policy, and is home to the German Federal Bank (Deutsche Bundesbank) and the Frankfurt Stock Exchange. Deutsche Börse, the company that owns the Frankfurt Stock Exchange, was in the process of carrying out negotiations of a merger with NYSE Euronext to become the largest single stock exchange in the world, with headquarters in Frankfurt and New York City, but the move was stopped by the European Commission in February last year.

Deutsche Bundesbank formerly acted as the central bank for the Federal Republic of Germany, and before the widespread use of Euro as Germany’s currency, the Bank would also devise monetary policy of the country and for the then German currency, Deutsche Mark. Famous for its successful control of inflation in the 20th century, it continues to act a German banking powerhouse.

Since the Second World War, financial institutions in Germany have largely been based in Frankfurt, the country has adopted the Euro as its currency and has been actively impressing investors with the availability of safe German government bonds. Banks in Germany were among the first to be affected by the global economic crisis but the situation has somewhat recovered, paving the way for Frankfurt to emerge as a new global financial centre.

In the wake of the global financial crisis, it is important for London to continue to maintain its position as a great economic centre. The financial crisis has impacted confidence in the City remaining a major financial centre and its ability in continuing to conduct business, owing to crises such as Northern Rock. Furthermore, there’s also been a drop in the City’s “global competitiveness index” from second in 2006 to twelfth in 2008, which The World Economic Forum points towards a decline in the tax environment being an important factor.

The City should not move to Frankfurt however, because London continues to appeal to many leading corporations and financial institutions in the world, despite a sort of paradigm shift taking place in global wealth towards the East. In 2009, the City managed 36.7 percent of global currency transactions. A substantial amount of US dollars and Euros are traded in London annually and its financial services sector supplies about 11 percent of the country’s tax income and 15 percent of corporation tax.

Perhaps the City can build on its strengths in the domestic market to sustain economic recovery, by putting to use Singapore’s financial centre as a model, which was reformed in 1997, turning a local financial centre into a regionally significant player. London’s domestic financial sector is primarily composed of commercial banking, retail banking and retail insurance, while its international financial sector is composed of wholesale insurance, asset management, exchanges, investment banking, hedge funds, private banking and private equity.

The United Kingdom continues to play an important role in foreign exchange turnover, with the contribution standing at 34 percent, and also has the largest international capital flow in the world, with inflows in 2007 standing at $2,159bn and outflows at about $2,000bn. Capital inflows and outflows are the total amount of money invested into and out of a country during a particular year in foreign direct investment, equity, debt, currency and deposits, loans, other residual flows, foreign trade credits and foreign exchange reserve assets.