Paris faces an uphill struggle to compete as a global financial centre, lobbying hard to create a more attractive environment for foreign financial institutions. Helena Frith-Powell reports.
It is hard to believe, looking at the dominance of London in the fixed income market, that during the 1970s both Morgan Stanley and Merrill Lynch had their global headquarters for bond trading in Paris. It was a window of opportunity that the French government missed.
“There was a time when we could have really made a difference, we could have competed with London,” says a French analyst working for a major US bank in the capital. “But instead we engaged in a policy of financial control and bureaucracy, thus stifling any growth.”
According to Jean-François Tiné, head of equity syndication at Société Générale, it was more than a cultural preference for London. “European investment banking has historically been led by Anglo-Saxon firms, and for them London is a natural place to be, but the City of London also offered a much better tax environment for firms as well as for employees.”
He says that today, the only way the French could catch up would be to offer tax incentives. “But can you imagine a situation where people making well above average earnings are able to pay less taxes? It would cause an uproar.”
The organisation charged with encouraging foreign financial institutions to set up in Paris is Paris Europlace, which has been lobbying hard for changes in the tax laws, among other things.
Although Paris Europlace was founded 10 years ago, for Gérard Worms, general partner of Rothschild & Cie in Paris, it is only during the past two years that it has started to raise its profile. “This was as a direct result of what Frankfurt was doing. We started to discover that the problem was not only with London but with Frankfurt as well. We realised that we had to be active in order to maintain the position that Paris has. No-one would question that London is the leading place but, even so, we have to work to keep the market share we have.”
Much of the credit for the higher profile goes to Marc Viénot, the chairman of the board of Paris Europlace, and honorary chairman and director of Société Générale. “He has done a lot to define the role of Paris Europlace and to implement the action plan,” says Arnaud de Bresson, managing director of Europlace.
Talks stall
Even so, his efforts may be in vain. One of the most significant initiatives that Europlace took on was to lobby the government to introduce similar tax breaks in Paris for foreign workers to those in place in London. Sources say this would have led to the creation of thousands of new jobs, particularly in the financial sector. The initiative is a key factor in Europlace’s aim to encourage a more flexible regulatory environment in Paris. But Mr de Bresson says: “We are still trying to reach an agreement to continue talks.” Talks have been stalled for some time and one analyst says the plan is “in the bin”.
“The fact that they were unable to conclude the talks has been one of Europlace’s major failures,” says the analyst. “This would have changed the role of Paris in the world and would have been a step towards making the city a truly significant player. I am amazed the government, especially this new government, has refused to go through with it. We all thought they were forward thinking and market oriented. Obviously, old France is still in the driving seat.”
Mr de Bresson maintains that the government is co-operating with Europlace and that there has been much progress since the organisation was created. However, he concedes: “We have had some failures. We still have a lot to do on the fiscal and regulatory side of things. We are trying to find a good combination between some positive aspects that exist in France and the need to move quickly in an Anglo-Saxon direction. Two areas we are focusing on now are the securitisation industry and structured instruments.”
He does not doubt that Paris’s role as a financial market will increase. “Globally, Paris has made a lot of progress,” he says. “If you look at where we were 10 years ago on the equity side, for example, there is no comparison with now. The main flow of Euronext [the cross-border European market for equities, bonds, derivatives and commodities created in September 2000 by the merger of the exchanges in Amsterdam, Brussels and Paris] is in Paris and it is a bigger trading platform than its competitors. Also we have seen a big increase in corporate bond issues as well as asset management activity.”
Francis Mer, minister of economy, finance and industry, would not be drawn on specifics but did insist: “We are trying to be as attractive as possible as a financial centre. This is perfectly normal. We view the financial sector as any other industry and we are trying to introduce measures to encourage financial institutions to come here.” When asked which measures, he smiles and says “several” – signalling the end of the interview.
Corporate centre
What is the difference between the European capitals? According to Mr de Bresson: “London is a city of brokers, Frankfurt is a city of banks and Paris is a city of corporates. So where are the clients? This is very important; Paris is a true corporate centre.”
Microsoft took the decision to base its headquarters for Europe, Middle East and Africa (EMEA) in Paris more than a decade ago, for example. According to Jean-Philippe Courtois, senior vice-president of Microsoft Corporation and president of its EMEA division, this was based on two main factors. “First, we needed to attract skilled people and, when you ask people where they want to be based in Europe, Paris is one of the favourite cities. Second, during the course of our research, we found there was a very strong corporate presence here, particularly in the IT sector.”
Mr Courtois says that Paris’s role as a financial centre is becoming increasingly important. “London is certainly still in the lead but, based on the feedback I am getting from many corporates, there has been a major acceleration in this marketplace. I think this has been due mainly to the euro and the development of the Euronext market.”
Shahriar Tadjbakhsh, managing director of Goldman Sachs in Paris, says that is why it is essential for the firm to have a physical presence there. “It is incredibly important,” he says. “You have to be close to your clients, you have to listen to the same radio station, read the same newspapers, watch the same TV. Here in Paris, 60%-70% of our clients are within 15 minutes’ walking distance of our office.”
Physical proximity
Sylvain de Forges, director general of Agence France Trésor, says that out of 21 primary dealers he uses, only one is not covering him from Paris. “Maybe many would be very pleased to deal with me exclusively out of London but I tell them, that’s your risk and you risk losing me as a client. Although our personal contact may be good, without the physical proximity it doesn’t work as well. And I am not different from any kind of corporate.”
He says that although it has always been possible to cover French clients out of London, it is now becoming increasingly difficult. “There is a lot more competition and a lot of banks are prepared to be here. When you want to seduce someone, you don’t say come to my place; you go to them. And sales is very much a question of seduction. As a client, I want to have regular physical contact. I need to see the guys, to sit down and discuss things with them. The relationship should be profitable and loyal.”
Customer demands
Some would argue that even if the banks are there, they are not qualified to deal with customer demands. Thomas Pearsall runs an IT consultancy in Paris. He advises on start-ups. “Paris has always been slow to embrace innovative financing of start-ups,” he says. “I would always advise my clients to go to London. I keep hoping things will change. I live here because I believe in the future of Paris as a financial centre but it has been quite slow to develop. Yes, you can have good relationships with banks here but the decisions are made in London.”
In the battle between the world’s major financial centres, some argue that London’s dominance is no longer a given fact. “Ten years ago it was a truly important financial centre and Wall Street came second,” says André Wormser, a board member of French private bank Banque d’Escompte Wormser. “Now it is totally different – the dollar, the US economy, you can’t argue with their dominance, even if, on the human side, we are still very close to London.
“One of the problems has been the euro, of course. When there was no euro, sterling came second, it used to be a world-wide currency. But now 80% of the transactions on our books are in euros.”
Integration is key
Mr Wormser argues that the position of Paris in the future will depend on whether or not the European markets truly integrate. “Everything hangs on this. If we remain national then I think Frankfurt will be in a better position than Paris due to the amount of capital it can attract. On the other hand, if we go European, the real competition will be between London and Brussels, not Paris. They are in a better position demographically and they also have more flexible rules that govern the market than we have.”
One analyst says it is more a question of culture than demography. “Investment banking is a business run by English and American banks that are all in London,” he says. “They have set up offices all over Europe and control 70% of the flow. So, in effect, 10 guys control 70% of the business and 90% of them are American. Paris as a financial centre is just not going to happen. It may be intellectually and gastronomically exciting, but it is impossible on a practical level.”
Cross-border trend
One way for the French banks to increase their dominance is to move across the European borders, a trend that some say is already happening. “I think we are going to see the emergence of very strong, universal-style banks like BNP Paribas,” says Mr Tadjbakhsh. “For the moment they may be happy with heading up the list of M&A deal volume in France but do you really think they will be content to stay within their own borders? My feeling is they will start to work across Europe.”
Mr Tiné says that the French banks are gaining focus. “We can’t be all things to all people on the investment banking side,” he says. “But we are looking at sectors in Europe, such as luxury goods, where we have expertise and specialising on that throughout the region. But we are not going to go and bid for a deal in, say, Germany on something they are good at. That’s a waste of time and money; leave it to the Germans.”
Hopes on Euronext
A lot of hope is pinned on Euronext and its ability to attract banks and investors to the capital. Since its inception three years ago, it has achieved much, becoming the biggest European trading platform in terms of volume. Recently, it transferred its derivatives products to the Liffe Connect trading system, significantly enhancing the French equity options market. It will become the first exchange to make futures contracts on single stocks available to the German retail market when it launches its Universal Stock Futures.
The latest rumour is that Euronext is going to add Borsa Italia to its list of exchanges. According to Mr Tiné, Euronext is already a big platform and will grow bigger.
Other observers do not agree. “It is nothing more than a back-office function that could be performed anywhere,” says one commentator. “It is completely deprived of significance.”
Roland Bellegarde, chief executive of cash markets at Euronext, disagrees. “Euronext is the market itself, where you find the liquidity from the Euronext countries.” he says. “We are attracting and pooling savings across three countries towards a pan-European trading platform and uniform listing requirements. Obviously, the economies of the three countries are reflected in the volume of trade, of which French securities are an important part.”
Paris has a lot of things going for it. Great food and wine, for a start. But it seems that the age-old cliché of France being too bureaucratic still stands. When asked about the city as a financial centre, the most common reply is that the law is not flexible enough to make it truly attractive on a grand scale. And the bureaucracy goes down to the most basic levels. One investment banker asked The Banker to e-mail him some information about the magazine. When asked for his e-mail address, he said: “Oh no, it’s far too complicated. I’d better take yours and you can just hit reply.” He sighed. “Just another reason why France will struggle to be the financial centre of the universe.”