Sarkozy Sees La Defense as new City

[Sheilbh]

Overarching ambition

By Scheherazade Daneshkhu, Ben Hall and James Wilson

Published: July 24 2009 03:00 | Last updated: July 24 2009 03:00

Behind the glass- and marble-clad great arch of La Défense - built at the behest of François Mitterrand two decades ago - another French president is preparing an even more ambitious grand projet for Paris.

Nicolas Sarkozy is planning a massive expansion of the business district on the north-western edge of Paris to challenge the City of London as Europe's pre-eminent financial centre. In spite of his tirades against financial capitalism, Mr Sarkozy wants a bigger slice of the business.

The blueprint for La Défense - which includes several spectacular skyscrapers and, eventually, a further 1m sq m of office space to the west of the arch - lies at the heart of Mr Sarkozy's plans for le Grand Paris : a vast programme of infrastructure improvements and governance reforms that he hopes will turn Paris into Europe's economic powerhouse.

The French government is intent on taking advantage of the City's woes and its battered reputation to turn Paris into a competitive financial centre. "It is clear today that the City is in great difficulty and that is an opportunity for France to reinforce its financial attractiveness," Patrick Devedjian, the minister in charge of La Défense expansion, said last month. His ambition was to turn La Défense into a "great financial centre, rival to the City of London".

Industry heads are more cautious in their expectations. Georges Pauget, chairman of the country's banking federation, says: "The measures taken by the government [to promote Paris] are right but, although the financial crisis presents a real opportunity to change the relative weight of Paris, it is unlikely they will result in a major transfer of business from London."

Gérard Mestrallet, the chairman of GDF Suez who also acts as chairman of Paris Europlace, a lobbying group, prefers to talk of "narrowing the gap" with the City. Arnaud de Bresson, Europlace managing director, says the French capital wants to operate alongside London with the aim of making Europe a strong financial centre to rival New York today and Asian centres tomorrow. "Politicians have their way of saying things. But we are businessmen and our job is not to come up with magic formulae but to think of the best way to advance Europe as a financial centre," he says.

Paris's heyday as a financial centre was in the late 19th century, when the strength of the Bank of France attracted gold reserves, but the capital's influence weakened after the first world war. Today, the contribution of financial services to the economy is 4.8 per cent, compared with 7.6 per cent in the UK. The industry is an important employer in both cities, accounting for 8.9 per cent of the workforce in the Ile-de-France region and 9.3 per cent in greater London.

Yet there are few business lines in which Paris can claim dominance. In asset management France is the leader in Europe, with a 21 per cent share of the €5,181bn ($7,390bn, £4,464bn) of European funds under management, against the UK's 17 per cent, Germany's 18 per cent and Switzerland's 7 per cent. It also has significant strengths in corporate bonds and equity derivatives, thanks to the market leadership of Société Générale and BNP Paribas.

But Paris trails London in most other financial services. It has little foreign exchange activity and the debt markets - even euro-denominated - are concentrated in London. "We are very far from being a first-rank financial centre such as London or New York, but Paris has a privileged place in the second division," says Noël Amenc, professor of finance at Edhec business school.

The government is nonetheless determined to take advantage of London's misfortune and believes the financial crisis has revealed Paris's under-appreciated strengths. It extols the virtues of a banking industry once derided as old-fashioned but now admired for its resilience, thanks to a universal banking model that combines investment and retail banking.

In its promotional material, Paris Europlace points out that French banks have made losses of €20bn in the financial downturn, compared with €35bn in Germany, €180bn in the UK and €350bn in the US. It contrasts the efficiency of its banking regulator, the Commission Bancaire - chaired by the central bank governor and working closely with the finance ministry - with the lack of co-ordination of supervisors in the UK that became evident during the crisis.

The government is pressing ahead with its drive to promote French competitiveness in financial services above all by pursuing the harmonisation of financial regulation and supervision in Europe - a way of eliminating what Mr Sarkozy refers to as "regulatory dumping".

"I don't want to run down another city, another system, another supervisory scheme," says Christine Lagarde, finance minister. "But I do think Paris is well-positioned to play a key role in what will be a rejuvenated and re-invigorated but certainly disciplined financial sector."

One of Mr Sarkozy's first acts as president was to cut tax on the wealthiest by extending the so-called tax shield. The maximum a person pays in all taxes is now 50 per cent of income, down from 60 per cent. The cut has become more controversial amid the crisis but the president has refused to reverse it. Indeed, the government has gone further by improving the tax treatment of expatriate French or foreign employees posted to France.

At the same time, the British government has moved in the opposite direction, with a clampdown on tax treatment of non-domiciled residents and, from next year, a 50 per cent top rate of income tax on the highest earners. "The huge advantage that London had in taxation has pretty much gone," says Ms Lagarde. France has also abolished stamp duty on share transactions, simplified the rules on prospectuses and legislated for what the minister calls "one of the most modern and efficient securitisation vehicles investors could expect".

French politicians and financiers have long supported regulatory harmonisation inside the European Union as a way of levelling the playing field with London. With the crisis sweeping aside political resistance, especially in the UK, they are closer than ever to getting their way.

French bankers are counting on EU rules on bank capital requirements to end what they see as the advantages afforded to British banks under existing UK definitions. France is also clamouring for an EU clampdown on hedge funds, which many in the industry in London regard as a protectionist onslaught against funds based offshore or in the US. French officials retort that they only want the same standards to apply to any fund wishing to operate in the EU.

France has joined calls for "standardised" over-the-counter derivatives to be traded on exchanges and processed through clearing houses. Jean-Pierre Jouyet, chairman of the Autorité des Marchés Financiers, the French regulator, says London has "to accept that Paris has a role" in clearing trades in euro-denominated derivatives. France wants euro products to go through a clearer based in the eurozone, whereas the only credit default swap clearing in Europe is done by LCH.Clearnet, which is based in London. However, its French arm is to launch a eurozone CDS clearing service out of Paris by the end of the year, partly in response to what its parent describes as regulator demand.

Ostensibly, France wants a eurozone clearer because the European Central Bank would act as lender of last resort in such markets. But a confidential Bank of France report obtained by the Financial Times this year revealed the real reason: without a eurozone solution on clearing there could be "an increase in the weight of the London market".

Finally, French banks and the government are pushing for agreement by the Group of 20 leading economies for curbs on traders' bonuses. France has introduced a code that bans guaranteed bonuses, provides for clawbacks and ties payments to bank performance. But without similar changes in London and elsewhere, its banks are at a disadvantage in attracting talent. "The French want to level the playing field in Europe so they can compete on the quality of their restaurants," sniffs a UK official.

Even if harmonised regulation clipped London's wings, would Paris gain? Its quality of life and transport links are certainly regarded as a plus. But Paris has disadvantages that are hard to overcome. The most obvious is that the English language and English law are the preferred standards for global finance, though those in the industry insist this is no longer a barrier.

"The relative advantage of English is reduced now because most people speak English," says the banking federation's Mr Pauget, also chief executive of Crédit Agricole, which has roots as a lender to farmers. "Inside our company, which is typically French, if a document is in English, we do not usually have it translated."

Hardest perhaps for Paris to emulate is the efficiency of having bankers, accountants, lawyers and supervisors in close proximity to one another in London's Square Mile. "A financial centre is about having critical mass," says Prof Amenc. "People want to be close to each other. London has critical mass. I don't see what today would lure people away to Paris."

As if to underline the importance of proximity to customers, NYSE Euro-next - the Wall Street operator that bought the Paris stock exchange two years ago - said this week it would move its European equity data centre from Paris to London. This would shave off milliseconds on orders placed by high-speed traders, most of whom are located in London.

There is also the ambivalence of much of the French political class to capitalism, particularly financial capitalism. France's top bankers were incensed last year when, summoned to the Elysée and seated in a corner, television cameras showed them being given a finger-wagging by Mr Sarkozy.

Nevertheless, Ms Lagarde says her "crusade" for Paris is already seeing the return of managers and traders "who had considered London as a tax haven in many ways".

Will there be enough of them to fill the new offices at La Défense? That probably depends as much on London's capacity for scoring own goals as on Paris's promotional measures.

"The only way you can change it is if the UK government puts up tax rates and makes it harder for non-domiciled people to work there," says a senior London-based financier. "This has been happening and, if it keeps increasing, then one day one of these measures will be the straw that breaks the camel's back."

Frankfurt banks on the real economy to keep its edge

Parisian ambitions of clipping London's lead in financial services are sure to stir memories 500km east. In Frankfurt at the turn of the millennium, bullish forecasts abounded that Germany's banking capital would become Europe's financial centre of gravity, spurred by being inside a vast single currency zone of which the UK was not part.

But far from being isolated, London prospered. Today, realists in Frankfurt acknowledge that they are in a different league, the euro notwithstanding.

Will Paris pose a new threat to "Bankfurt"? Both hope to capitalise on London's vulnerabilities. Both also see advantages from some of the same trends in finance, such as moves to harmonise regulation across Europe - which may propel some market participants back to established centres by curbing opportunities for regulatory arbitrage.

Frankfurt - ranked eighth in a "global financial centres index" published by the City of London; Paris came 19th - does not appear too concerned. Lutz Raettig, chairman of Morgan Stanley's German operations and a leading advocate of Frankfurt, says Paris is too domestically focused. Some 200 foreign banks have operations in Frankfurt and one-third of the population is non-German. "There is a huge mix of nationalities and talents here," he says.

The European Central Bank, which is planning a new Frankfurt headquarters, will also remain a cornerstone of the city'sEurope-wide importance. But German banks are relatively small and have had a bad crisis - perhaps giving heart to Paris, whose domestic banking system is much more consolidated.

The European Commission's drive to set up a eurozone clearing facility for over-the-counter credit default swaps is another test. Eurex, owned by Frankfurt's Deutsche Börse, is considered a frontrunner but Paris-based Clearnet is also setting up a facility, perhaps setting off a race to see where liquidity ends up.

Still, no bankers will move to Nicolas Sarkozy's towers in La Défense to serve Europe's German-speaking market of 95m people - just as few would dream of serving the French market from the banks of the Main rather than the Seine. In Frankfurt, there is confidence that Germany's powerful "real" economy will continue to create opportunities for finance.

Achim Klüber, until recently head of the foreign banking association, said last month: "Remember that Germany is the biggest exporter in the world and one of the biggest economies. Banks that want to be part of that need to be here."

Copyright The Financial Times Limited 2009

[The Minsky Moment]

The French banks have certain niches where they are relatively strong, like wealth management.  And English is not the bar it used to be; French bankers and banks understand that these days it is a basic pre-requisite to doing business.

As I see it there are still several huge bars to Paris becoming a major financial center: 
1) the wealth tax
2) Suspicion that as compared to the UK or even Germany, the French state is more likely to intervene in undesirable ways, even if the fiscal burden is (temporarily?) reduced
3)  There is no central business district.  La Defense is on the periphery; its as if Wall Street was located in the middle of Queens.  The big accounting firms have dragged themselves out there, but most of the high-end law firms prefer to be in the city center on the other side of the Blvd Peripherique.   And who can blame them?