Legal Business Blogs

Comment: Magic Circle playbooks in Europe are full of contradictions’

To recap as the UK tiptoes towards banana republic territory in the wake of last month’s inconclusive, prediction-defying general election: City professionals face the prospect of an unsteady government negotiating a logistically-epic exit from the EU with an uncertain agenda against a much larger and better prepared counter-party. That is until the next general election in perhaps the autumn.

But let us put politics to one side and assume that a form of substantive Brexit is happening. Where does that leave top London law firms with such ominous clouds hanging over London as a finance and legal services hub?

On one hand they should be relaxed. The big four Magic Circle firms all make well over half of their revenues outside the UK and generate substantial fees in euros, dollars and other currencies that are doing a lot better than Brexit-battered sterling. The impact of that is apparent on the group’s 2016/17 results, in which currency swings have flattered subdued like-for-like growth.

And while they have plenty of issues with their European networks after their expansion splurge in the late 1990s/early 2000s, they have the benefit of very substantial practices and business in mainland Europe. Given that economic activity and confidence is picking up in the eurozone, even as it ominously weakens in the UK, those sometimes unloved European practices now look like very valuable assets.

Looking at their current European practices, the surprise is that Linklaters looks arguably in the best shape, given the firm’s troubled legacy in the region and well-deserved reputation for demoralising its Continental partners. Its practice has credibility across the region’s major economies and is even impressing rivals in Germany, a market in which it has typically struggled to hit its stride.

In contrast, arch rival Freshfields Bruckhaus Deringer has a delicate balancing act as it moves to reshape its much-vaunted German practice while galvanising its problematic Paris operation. Allen & Overy and Clifford Chance have both been on solid form in mainland Europe, albeit both facing some pricing challenges with their core banking clients.

But leading London firms are still banking on London to remain as Europe’s strongly dominant legal centre and shifting their investment around accordingly. As their priorities have tilted back towards the City over the last ten years, some ground has been ceded in France, Italy and Germany to US firms (in Paris particularly) and leading independents.

It is hard to escape the feeling that strategic half-measures, most obviously in foot-dragging regarding overhauling lockstep partnerships, have led them to be never quite calibrated to the very different competitive pressures they are facing in the City and Europe’s business centres. Not sufficiently European, not quite City enough.

Too often in the post-Lehman era they have not played to their own very significant strengths, remaining caught between two conflicting models. They need to be flexible, nimble and open to the possibility that their European offices could, in the right structure, do what they were originally supposed to: drive their businesses. Meanwhile, US firms, buoyed by the strong greenback and healthy levels of private equity in Europe, are marching on. As with the nation that birthed them, the Magic Circle may live to regret not being better Europeans.

See our Global 100 analysis on Europe.