Five hundred years ago, when the City of London was better known for trading woollen cloth, Italy was the financial centre of Europe. Today, international investment banks could be forgiven for employing as few people there as possible.
The same could be said for France and, to a lesser extent, Germany. A study for Financial News by Mercer Human Resources Consulting, the employee benefits consultant, underlined the extent to which tax regimes make it expensive for international banks to employ staff in continental Europe.
Mercer looked at the relative costs in terms of taxes and social security charges of employing a trader with no children earning 100,000 (€147,000). The results revealed employers and employees took the biggest hits in Milan and Paris.
Mark Sullivan, worldwide partner at Mercer, said generous retirement and unemployment provisions underpinned the results. "People receive high rates of social security in France and Italy. Until recently, some Italians could retire on a state pension worth more than they earned in work," he said.
Mercer's figures showed a bank employing a trader on 100,000 in Milan would pay an extra 42,000 in social security and other benefits. But after the trader has paid personal taxes and social contributions, he or she would end up with only 52,200.
To employ the notional trader in Paris, a bank would have to pay 50,000 in benefits and social security charges, but after personal taxes and charges the trader would take home 57,500.
London and Frankfurt are appealing by comparison. Because of a cap on social security charges, banks pay 15,000 to employ a trader in Frankfurt on 100,000, equivalent to employment costs in New York. However, after personal taxation, the Frankfurt trader takes home just 52,000. In London, it costs employers 21,000 in social security charges and the trader's take-home pay is 64,000.
Variations underscore the cost advantages to US banks of basing European staff in and around London. JP Morgan employs 11,000 people in the UK and just 411 in Germany, 417 in France and 171 in Italy; Banc of America Securities is active only in the UK; Bear Stearns has almost all its European staff in the UK, with a small office in Milan.
Davide Taliente, a director at consultancy Mercer Oliver Wyman, said most banks operate a hub and spoke model with London at the centre. "The idea is to centralise the most expensive traders and product specialists and to deploy salespeople locally. This contrasts with 10 years ago when trading operations were dispersed throughout Europe."
Peter Coym, a board member of Lehman Brothers Bankhaus and chairman of the Association of Foreign Banks in Germany, denied banks choose London purely for tax reasons. He said: "With the introduction of the euro, banks needed one place to trade all securities and it was clear this would be London." Coym said American bankers and their families prefer London because English is spoken.
The chief operating officer for Europe at one US bank said staff are in London for reasons of efficiency, not taxation. He said: "When you don't know whether the next deal is going to come from France or Romania, it makes sense to have everyone in one place. Assets are redeployed as deals come up."
Others are less convinced of the benign effects of tax regimes, however. Alberto Gavazzi, a Milan-based consultant at Russell Reynolds, the executive search firm, said high Italian taxes are a big disincentive. "If an international bank can offer the same kind of job in Milan or London, they will offer the job out of London," he said.
The Corporation of London attributes the City's pre-eminence in financial services to a combination of available talent, effective regulation and strong infrastructure. But Michael Savory, Lord Mayor of London, said: "The UK has a comparative advantage over other countries where tax and other burdens are a definite drag."
It is a message that tax planners would do well to heed. France implemented a new law in January to lighten the burden on expatriate employees.
Arnaud de Bresson, managing director of Paris-Europlace, which campaigned for the change, said it puts Paris on a more equal footing with London. He said: "It's early days but foreign banks are saying they're considering moving people to Paris already."
Meanwhile, the UK government has threatened to review the system of tax relief for non-domiciled employees, through which US bankers are exempted from paying tax on shares held overseas.
Savory warns against complacency. "The world does not owe London and UK financial services a living. We have to earn it - and continue to earn it.
"Three hundred thousand-plus jobs in the City alone and many hundreds of millions of Exchequer revenue depend on it," he said.