Milan (Reuters Breakingviews) – In the year since Britain voted to leave the European Union, cities as diverse as Frankfurt, Paris, Amsterdam, Madrid and even scrappy Wroclaw, Poland, have pitched their attractions to banks, investment funds and multinational companies pondering whether to shift all or parts of their operations to the continent. Milan is a relative laggard. But fashionable lateness is a Lombard charm, and there are others that make the Italian city a dark-horse candidate in the race for post-Brexit prominence.
Belatedly, Milan and Italy’s government are getting their act together, wooing firms who may find their ability to do business in the European Union impaired by last year’s referendum. City leaders have made the pilgrimage to London while the government has approved tax incentives designed to attract skilled foreigner workers and entice thousands of Italians – part of a brain drain over the past two decades – to return. Milan’s mayor is even lobbying Italy’s prime minister to move the headquarters of Consob, the financial markets regulator, to his city.
For anyone watching the travails of the Italian financial system of late, it’s hard to imagine the capital of Lombardy playing host to American, Chinese or Japanese bank balance sheets. True, its financiers brought the practice of collateralized lending to London a few centuries ago. But Italy’s higher cost of capital, partly a reflection of the country’s elevated debt load and fractious politics, makes a modern-day return unappealing.
As a place from which to do business across the single market, though, the city the Romans called Mediolanum has several attractions. Though Frankfurt has a leg up with the big banks, “there are some important sectors where we really can compete, like investment management and private equity”, says Giuseppe Sala, who celebrated his first anniversary as mayor this week. “Our efforts now are focused on asking those players to consider relocating important departments to Milan or adding people in the city.”
The Ministry of Economy and Finance in Rome is lending a hand, presenting a sort of road-show touting Italy’s fiscal benefits for incomers. These include the absence of property taxes on main dwellings, a maximum bill of 100,000 euros on foreign income for 15 years, and tax exemptions on 50 percent of remuneration for managers and professionals for five years. Italy is also speeding up its debt restructuring, bankruptcy and liquidation proceedings; lowering corporate tax rates to 24 percent; simplifying work contracts and harmonizing carried interest and capital gains tax rates.
Milan has a long-deserved reputation as the place in Italy where business gets done. It produces a tenth of the nation’s gross domestic product and hosts 85 percent of the foreign banks with operations in the country. As home to 270,000 non-Italian citizens – a fifth of the population – Milan is open to foreigners. Its seven universities attract 200,000 students, around 15 percent of whom are from abroad. Only New York plays host to more foreign consulates.
“English is very much the professional lingua franca of the city – facilitating interactions for those who have not yet mastered the language of Dante,” says Jean Pierre Mustier, a French investment banker who uprooted to Milan last year to run UniCredit, Italy’s second-largest financial institution. He notes that when UniCredit sold its Pioneer Investment arm to Amundi, the French fund manager announced that Milan will become one of its global investment hubs, with plans to hire several hundred people who would otherwise have been based in the United Kingdom.
It’s true that “Italy” and “banking” are words that have recently appeared in conjunction with “crisis”. As with its post-Brexit offensive, Italy has come late to cleaning up its financial system. While other European countries were nationalizing and recapitalizing their banks, Italy battled a sovereign debt panic and downplayed its own banking woes. Even here, though, there is room for optimism.
As soon as this weekend, authorities are expected to resolve the plight of two medium-sized banks in the Veneto region that have weighed on the domestic financial system. The contours of the bailout are still taking shape, but will likely involve wiping out the equity and subordinated creditors of Banca Popolare di Vicenza and Veneto Banca, carving out 5 billion euros of non-performing loans to a government-funded entity, and selling the remaining good assets, branches and other operations to Intesa Sanpaolo, Italy’s largest bank, for a nominal sum.
This won’t solve Italy’s banking problems overnight. There are still nearly 200 billion euros of crummy loans clogging up the economy. But at least the stock has stopped growing. And the state-led resolution of the Veneto banks may free up additional capital for Atlante, an investment vehicle funded by other Italian lenders, to acquire bad debts such as the 26 billion euros of loans that Monte dei Paschi di Siena has been struggling to offload.
Even with the end of Italy’s financial woes on the horizon, Milan is unlikely to be a grand beneficiary of lenders moving from London. But with UniCredit and Intesa both headquartered in the city, Milan is already a banking capital in its own right. As a result, Mayor Sala is focusing on an approach less dependent on finance, for instance wooing the European Medicines Agency, which is responsible for the scientific evaluation, supervision and safety monitoring of drugs in the EU. The agency will need to leave London as a result of Britain’s withdrawal.
Milan’s financial community is confident Sala can make the approach work. It’s not just work, anyway, that will sell the city. From the top of UniCredit’s new headquarters, Italy’s tallest skyscraper, Mustier has sweeping views across the Po valley to the foothills of the Alps. “Milan’s unique geographical position means you can go skiing in the mountains or swimming in the sea less than two hours’ drive from the city. And did I mention the food?”