GaWC Practitioner Brief 5

The Rise of Frankfurt? A Comparison between London and Frankfurt

J.V. Beaverstock, M. Hoyler, K. Pain and P.J. Taylor

The concentration of business or producer services in key global financial centres has come to be seen as critical to states’ success in the ‘new world economy’. Developing technologies in informational communications and computing (ICT) allow flows of the key products of these services, information and finance, across national political borders and city administrative boundaries. As sites of producer service concentration under conditions of contemporary globalization, cities, not states, are the focii of these flows. The introduction of the Euro was mooted to be the trigger for a shift in the geography of flows of knowledge, finance and people into Frankfurt and away from London. The results of a Globalization and World Cities (GaWC) research study (http://www.lboro.ac.uk/gawc/) funded by the Anglo-German Foundation for the Study of Industrial Society (http://www.agf.org.uk/), shed light on the more complex interdependencies that underlie changing London-Frankfurt relations.

The Rise of Frankfurt

The introduction of the single European currency was proclaimed the trigger for Frankfurt’s rise as THE European city for finance, directly challenging and threatening London’s pre-eminent position as Europe’s leading international financial centre.

Three opportunities appeared to strengthen Frankfurt’s position in relation to London. First, in the international futures market, the demise of LIFFE and the success of Deutsche Terminbörse, suggested a complacent City of London to be vulnerable to rapid technological change in market servicing. Second, the failure of the John Major administration to win the location of the European Central Bank (ECB) for London and the German government’s success in having it located in Frankfurt would mean eleven countries would now look to Frankfurt to determine their national monetary policy. Third, foreign banks were reported to be increasing their presence in Frankfurt in order to be ‘close’ to the ECB. Importantly, in common with London during the post-war years, growth in the city’s banking sector could be seen as likely to lead to a mushrooming of non-banking producer services.

Thus Frankfurt was seen as being at a critical point in its development as a financial centre in relation to London. Frankfurt was already the financial centre of the most powerful economy in Europe and was to become the European financial centre for the Eurozone. The research set out to examine evolving relations between the two cities during the first two years of EMU against the background of these events. Would the Euro change what could be considered the anomaly of London’s contemporary dominance within Europe?

The London-Frankfurt Research Conundrum

What is this anomaly? Economic globalization literature indicates a tripartite world regional geography consisting of a USA-led northern America, German-led western and central Europe and Japan-led Pacific Asia. These regions are represented by New York, London and Tokyo, for example in 24 hour global financial markets. But whereas in northern America and Pacific Asia the leading financial centre is located in the strongest national economy, in Europe it is the fourth largest economy that contains the region’s dominant ‘world city’, London. In spite of the undisputed rise of Frankfurt within Germany since World War II to become Germany’s main financial centre, Germany’s more decentralised political and economic structure gives Frankfurt less national focus than London has in the UK.

Traditional hierarchical world city research which dates from before ICT developments fails to provide a relevant framework for studying changing inter-city relations in the contemporary globalization era. In examining London-Frankfurt relations, this study (which is part of an ongoing programme of GaWC world cities research) therefore took a different approach.

GaWC studies cities as global service centres providing international financial and business services through specific labour market processes. Advanced producer service firms organise their services through world-wide offices resulting in an ‘interlocking network’ of cities in which the service firms and their labour market practices are the ‘interlockers’. Studying London-Frankfurt relations through the activities of the firms that tie the cities together reveals complex inter-city dependencies and synergies that belie the notion of a simple competition for hierarchical supremacy.

Financial press, trade reports and official statistics were monitored for the period 1998-2001 and in-depth interview surveys were conducted in two census periods to elicit qualitative information on the changes taking place as experienced by key actors in both cities. Senior decision-makers at the grade of partner and / or vice-president and above were interviewed in 48 firms ranked in the top ten of their respective service sectors (banking, accountancy, law, management consulting and advertising). In addition 26 interactive interviews were conducted with regulators, professional organisations and government agencies.

London-Frankfurt Relations Enframed as Competition

UK and German financial press reports highlighted the supposed rivalry between London and Frankfurt. Futures and stock exchange events were reported on in terms of inter-city competition using war-like language. Relations between the cities were described as a "battle between London and Frankfurt" and a "bitter war for supremacy". From mid-1998 whether Frankfurt was ‘catching up’ with London was a regular interest – "Frankfurt’s growth is overshadowed by that of London", "Frankfurt could reduce the lead of London", "The Euro Interbank Offered Rate brings competitive advantages / It should end London’s supremacy", "Will Britain’s decision to stay out of the first wave enable Frankfurt to wrest leadership from London?". Financial market and economic statistics during the research period, as illustrated in Table 1, emphasised London’s dominance across a range of quantitative measures relative to Frankfurt.

Table 1 London/Frankfurt: Key financial market statistics

Sources:

ⁱ London Stock Exchange (quoted in International Financial Services London (IFSL) 2001).
ⁱⁱ Bank for International Settlements (quoted in IFSL, 2001).
ⁱⁱⁱ Thomson Financial Investor Relations, Target Cities Report 2000 (quoted in IFSL, 2001).

A parallel GaWC quantitative study of 100 producer service firms operating across 316 cities globally, illustrates the different roles of London and Frankfurt within producer service firms’ global network. The analysis indicates that London ranks 1 and Frankfurt 7 in terms of their banking connectivity. London is shown to be the most connected world city over all producer services while Frankfurt ranks only 14 as a global service centre. These comparisons highlight differences in the cities’ relative size but qualitative data from the interviews uncovers a relationship that is much more complex than quantitative measures suggest.

Table 2 Top 20 cities for banking network connectivity and global network connectivity

Frankfurt-London Business Relations

Relations between London and Frankfurt were found to be determined not by issues of currency but by business competition in global and local markets and a great complexity of cross-border business drivers and tensions which produce contradictory de-centralizing and centralizing spatial forces. The fundamental tension facing firms is negotiating trans-border global reach against local sensibilities. This global-local tension underlies other tensions relating to organisation, knowledge production, operationalisation, and locational issues. The result is a web of co-operative service business network connections between the two cities and other key global and European financial centres. At the level of the firm, the fact that it is the same major firms operating in both cities means that intra-firm relations constitute inter-city relations and therefore competition between firms does not create competition between cities. Thus there have been increasing city interdependencies brought about by inter-firm competition in cross-border markets. In addition the findings highlighted the importance of flows within knowledge, cultural, power and public-private governance networks beyond the level of the individual firm in determining London-Frankfurt relations.

London’s Strengths

Some key factors were identified as determining the way tensions and network flows are affecting London-Frankfurt relations.

• History – London’s depth of infrastructure and critical mass of knowledge, skills, languages and power are key business locational factors.
• Regulation – London remains regarded as an ‘open’ city for business and a global markets location with favourable regulation, taxation and employment policies.
• Agglomeration and scale economies – London has the highest international flows of capital, knowledge and skills in Europe.
• Labour market and talent – London has a deep transnational skilled and specialised labour market with diversity of languages and cultures required by international business.
• City culture – In a ‘people-driven’ business, London is the preferred city to live in and this is critical to its choice as a hub for international business, particularly by the leading global economy, the US.

… and Weaknesses

• But London has rising office space costs, transportation and environmental problems while Frankfurt has strong technology and infrastructure – Frankfurt’s importance is growing.

The Euro as a Non-issue for London-Frankfurt Relations?

Surprisingly for the researchers, the Euro was a non-issue. The major findings were: first, that business environment takes precedence over currency in determining relations between the cities; second, that Frankfurt’s development as a financial and business services centre is not at the expense of London; and, third, that London remains the key financial centre within Europe. Responses in both cities were overwhelmingly consistent.The ECB has been an image boost for Frankfurt but has not had a detrimental effect for London as a financial centre. Typical responses illustrate the lack of importance firms attached to the introduction of the Euro: "The fact that the Euro has not been introduced in England has changed nothing in relation to the leading position of London, including the Euro-business"; "It’s having no effect on business strategy"; "There’s been no impact on business in London and Frankfurt". However it was seen as essential that London ensures its inclusion in EU policy-making.London was regarded as being "in a different league" to Frankfurt: "the premier European financial centre on most measures that you want to use"; "A financial trading centre for the world" relative to Frankfurt; "The only city in Europe to do true international business". London’s size was seen as critical to its popularity as a place to conduct international business while Frankfurt was seen as a ‘very important’ financial base in continental Europe. They were seen as having different complementary roles but not competitive relations.

Conclusion: London and Frankfurt as ‘Cities in Globalization’

London has therefore maintained its role as the key global hub in Europe and a strategic command centre in the world economy. However, Frankfurt is increasing its importance as a ‘gateway’ from London to continental European markets and Frankfurt’s growing connections with London are seen as essential to the development of international business in Frankfurt.The research demonstrates that financial and business service networks play a key role in constructing fundamental interdependencies between the cities. While firms compete with each other in global service markets, as strategic sites for their offices, the cities are connected through essentially co-operative relations. While Frankfurt is gaining in strength, this is not indicative of ‘fierce competition’ as it has sometimes been portrayed. As one respondent put it: "Does Frankfurt benefit from London or is London benefiting from Frankfurt? Well yes, if you like, we’re benefiting from each other." The challenge for policy is therefore how best to support the synergies between London and Frankfurt through co-operative cross-border governance.

Beaverstock, J.V., Hoyler, M., Pain, K. and Taylor, P.J. (2001) Comparing London and Frankfurt as World Cities: A relational study of contemporary urban change. London: Anglo-German Foundation (download: http://www.agf.org.uk/pubs/pdfs/1290web.pdf).