The City’s growth is not endogenous, it has coincided with the achievement of the European single market. In the past 20 years London managed to adapt as a bridgehead for foreign, mostly US, financial institutions’ operations all over the EU (banks, institutional investors and fund managers, and ratings agents). Karel Lannoo, one the participants of the first LSE Commission on the Future of Britain in Europe, claims that it is doubtful that this would remain the case if the City ceased to be an EU financial centre.
Anyone who has recently visited the City will realize that London has become the New York of Europe. With its dazzling and ever-changing skyline, it is apparent for all to see that the British capital is booming, probably more than any other European financial centre. At the same time, however, there is a risk that the city’s extraordinary transformation will deceive UK citizens into thinking that the growth is endogenous, based on genuine internal strengths, and to overlook the external dimension of it, above all in a European context. This is especially dangerous in light of the forthcoming British referendum on EU membership.
London’s predominance as a financial centre in the EU is a fairly ‘recent’ phenomenon, and its growth over the last two decades has coincided with the achievement of the single market, which allows for the free movement of capital and the free provision of goods and services throughout the EU. Each country was allowed to develop in its own area of comparative advantage. Germany specialized in manufacturing and cars, London, and also other parts of the UK, specialized in finance and business services. This led to a huge transformation, and those who lived in the City at the end of the 1980s would hardly recognize it today.
Back in the 1960 and 1970s, depending on the indicator used, London was on a par with Paris as a financial centre. London was more international and more market-based, whereas the size of banking assets and the contribution to GDP was higher in France. Financial sector employment was similar in both centers until about 20 years ago. London’s big bang and UK labour market reforms, the nationalizations in the early Mitterrand years and later the single market and the prospect of monetary union changed all this. London managed to adapt as a bridgehead for foreign, and most importantly US, financial institutions’ operations all over the EU.
City of London arms on a saddle blanket. Photo by RodolphRodolph. CC BY-SA 3.0
Looking at the components of the City as a financial centre today, the single most important group probably consists of US-domiciled financial institutions, banks, institutional investors and fund managers, and ratings agents. Their presence in the City is clearly related to the free provision of services all over the EU, a facility that has been further enhanced in recent years. A change in the UK’s position within the EU will rapidly have a negative impact on this freedom, and thus have immediate consequences for US banks. This latter effect will have a direct economic implications for the UK, as this group is the most competitive compared to the other components, the UK banks, other European banks as well as other foreign banks.
Moreover, the City plays a pivotal role for US banks in arbitraging between both single markets. The City provides the critical mass and infrastructure for transactions as a global financial centre, as an alternative to the US or Asian centres. When the US Commodity Futures Trading Commission and the US Exchange Commission introduced rules governing swap execution facilities (SEF) in the US at the end of 2013, euro interest rate swap transactions moved almost overnight to London. It is doubtful that this would remain the case if the City ceased to be an EU financial centre.
From a market development perspective, closer association with Banking Union would provide additional protection for the UK. As one of the few EU countries, the UK’s exposure to its banks has grown since the financial crisis. The country’s total banking assets stand over 5 times its GDP, more than the double that of the EU average. Opting in into the single supervisory mechanism (SSM), and even more the single resolution board (SRB) and fund (SRF), not to mention the European deposit insurance scheme, would provide the UK with a much larger backstop, and possibly better supervision. But this suggestion is clearly taboo.
A large financial centre like the City requires a large single market and/or requires openness towards other economies. But those voting on the UK referendum may not necessarily be aware of the importance of this interconnectedness, and what it means for the UK economy. Large parts of British public opinion, especially when confronted with threats from abroad, seem to prefer isolationism as the best way forward. This will be detrimental for the future of the City.
Karel Lannoo is chief executive of CEPS, a leading European think tank.
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This article represents the views of the author and not those of the BrexitVote blog, nor the LSE.
DEATH IN THE CITY.
Funny as it seems, most people will be happy to see a little “death” in the city of London in exchange for leaving the EU.
People know little about the city & care less.
Immigration, jobs for the lads & the certainty that comes with our own navigation through the storms that are inevitable are what the people will settle for.
However, never mind the many cleverly penned articles you will read on the subject of Brexit because it will be decided by events.
What do you know about banking, Tony, that you can tell us here — particularly banking in The City? I’ve done some, and my own experience has been that the informal contacts relied upon in the City actually are what make it work — same as Wall Street, certainly copied by us there from London, studied very-carefully for centuries in fact — the entire point of either place being face-to-face, even and even moreso in a Digital Age where face-to-faceless online now is commonly available. The entire reason why The City and other such banking centers exist and even prosper, nowadays, is that finance benefits so greatly from the unwritten, informal, back office street communication so difficult to formalize — also so difficult to spy-upon, hack-into, copy and leak and broadcast, etc.
My question for you here, then, is how best can The City maintain these now-globalized informal contacts networks, post-Brexit? The formal I’m sure will continue — written rules observed and broken, fees paid and not — but the informal becomes more difficult, when the other parties no longer are pals, chums, friends, or even friendly. Finance is literally a con-game — it works only when all sides have con-fidence in the others, if only confidence that they will & will be able/willing to pay, or at least leverage but confidence is better — that becomes increasingly difficult as distance and suspicions increase, people need to be able to pop-over to the Other Side easily and take someone out for a coffee or a beer or several whiskies.
Hong Kong performed this invaluable task for many years, for Japan and China — entrepôt-function — neutral turf where one could meet others to discuss & debate things which never might be mentioned back in Tokyo or up in Beijing, hammering out agreements which later would get inked formally in the latter two places. This may be the future you have in mind for The City, and I do not dispute that and actually welcome it — the banking-crippled US needs that too, any true trade does. But will such a role be enhanced or hampered, for the City, by a Brexit? Will City bankers find such brokering & enabling better, post-Brexit, or will much of their “informal” networking, with to begin with their largest current customer the Continent, be irretrievably lost?
The city of London will survive a Brexit very well. It has long experience of re-engineering itself & its services. To try to guess what will happen with the city depends on your crystal ball. Honest pundits say they don`t know – others pronounce with certainty!!
However, the people do not much care about the city anyway.
Events will move the vote one way ot the other, not bankers or propogandists
I posted this on another thread, so forgive me for repeating myself, but I would be interested to hear views from both sides of the debate.
All the discussion on Brexit (or Bremain) that I have seen discusses the impact on politicians’ and businesses’ interests, but little on British society.
For example, “British global influence” does not affect crime rate, “loss of access to the European market” has little to do with the Health Service, and the prediction of London’s financial meltdown does nothing to attract interest from Shires and Rural Britain worrying about floods and infrastructure deficiencies.
My point is, simply, that the UK ‘people’ are not fully engaged with the discussion because it’s seen as being held outside of their domain..
Yes, there may be jobs lost or gained by leaving Europe and there may be investment lost or gained, but nobody outside of the elite knows, or cares enough to worry about things out of their control. But we will be blamed if it goes wrong.
What seems a real plus for leaving to me, is that, in becoming less attractive to finance and business (and, as a result, the corrupt and self-congratulatory practices that go with them), British society stands to gain in the re-balancing of societal pressures (housing, crime, health, education).
It may do Britain good to get out the endless rat-race and creation of celebrity fat-cats that Capitalism has become.
Maybe the biggest issue is that the UK does not fit readily into the European ‘social’ model. We tend to rely on the US model, with the political elite, the richest and the loudest running the country rather than allow fairness and social balance, as in European countries. If we leave the EU, these classes will have lost some of their hold, but what comes after?
I studied your local government when I was at university there, Paul, and later I worked on it specifically in London. The growth of that one city impressed me greatly — it is far larger now than when I was there, and many times larger than it was when I first visited in the 1960s. I’d like to suggest that it will grow even larger, and more significantly far more important to the rest of Britain, if there is a Brexit.
The specialization involved in going-it-alone — an EU-severed UK’s comparative-advantage — is most likely to be finance. That means The City. You might want to consider, then, the results — upon your “re-balancing of societal pressures (housing, crime, health, education)” — a vastly increased London, in size and in significance, might create.
You appear to favor a re-distribution, one that might be more equitable: that might be achieved by a decentralization of the power and focus The Southeast now enjoys, a project urban studies has pursued for years in Britain, France, Japan, other places where a single giant urban region has come to dominate.
But I think it more likely that such a re-distribution will be made more toward London, than away from it, with a Brexit. The increased national importance, at that point, of the skill London uniquely possesses now — international banking — seems likely to augur increased concentration of resources there, not in Manchester, York, Norfolk, Glasgow…
Digital techniques, so heavily involved in finance, might in fact enable de-centralization instead — that has been the dream of many, to deconstruct the cities and tele-commute… But the need in finance for face-to-face — witness now the greatly-enlarging City, Wall Street, Tokyo — appears to be creating more, not less demand for the city-centers instead.
Of course there is the chance for intermediate technology, too — the small-is-beautiful approaches developed by a group lodged in Covent Garden, of all places, which caught the imaginations of so many of us in the 1960s & 1980s… I think those most likely to be realized for Britain, however, only in conjunction with some larger entity, myself: so let the Swiss or Germans be the bankers, in other words, and the Italians be the haute couture designers, then the French-intensive farmers in smalltown / rural Devonshire might concentrate on / specialize in their deep-digging techniques for Britain instead of marching to The City to do banking — but for that the Swiss would need to change-back to banking now, and Britain would need the Swiss, the EU, the current entanglements — going-it-alone, however, choosing Brexit, the British would become, would have to become, The Bankers… not just for Britain but for the world… that’s how comparative-advantage works, and there would not be much room left in it for British farming…
Is that what younhave in mind? I write as one who loves your country but is by no means expert in it — so if I’m wrong please tell me where.
As for the European “social” model, you’ll find I believe that my friends the French are a lot more like you than you imagine — smalltown & rural farmers, at heart, the lot of them, and very interested in fairness-and-social-balance, just like Devonshire and friends and neighbors I had in Oxfordshire — just like in the hills of California where I am now, as well… if we ever get any real rain again up there… The national characteristics at which you point and to which you object are pretty much urban phenomena anywhere they occur, I belive. The trouble is, then, for Britain, that domination by your Southeast — just as for the French their trouble is Paris, famously-defined as “Paris and the French desert”, and for the Japanese their monstrous Greater Tokyo. Your question is, really, what to do about that One Big City, the worry being that not only are urban / rural values out of balance, now, the latter are in danger of being swallowed entirely and disappearing completely: it’s my own feeling that Brexit would do that to Britain.
Our own solution incidentally for our particular “richest and the loudest” is to send him to the Scots… he’s already purchased part of the place, we’re hoping he’ll buy the rest and emigrate to there… Scottish hard-headedness will tie him up in knots.
🙂
That Goldman Sachs has contributed most generously to the “Stay” group is the most serious mistake the “stay” group could have made. The “Leave” people are beside themselves with joy.
Foreign interference in such a serious British social-economic area is certain to create big resentments & the opposite of what Goldman Sachs intends.
Elitism has brought the crazy EU systems to us all & elitists are still trying to drive the agenda. The founder of the EU Jean Monnet said that the people should not be told what is going on because they would not understand it.
The Euro currency is crazy, skewered to Germany. Do you think the huge German export industry is due to German efficiency?
No it is not.
It is due to the fact that the euro currency is overvalued for all other Euro-zone countries but undervalued by 60% for Germany. How long will this last? There has to be either a continuous & huge Germany transfer of funds from the German finance ministry to all other Euro-zone countries or the Euro-zone implodes. If Germany agrees to never ending transfers [a big political problem domestically] they will decide that they own Europe.
If the Euro-zone implodes under the weight of its own hypocrisy then elitist will blame everyone but themselves – again.
This time, please God the people of Britain will have the final decision.
What strikes me is that the discussion – as far as I can observe – is not based on proper knowledge and facts.
Apparently it is very difficult to make a simple and clear overview of pro’s and con’s together with the real data presented?
I would think a top-class institute like the LSE must be able to produce such in a few weeks?
Another argument which I don’t see in the discusion, is that the Brexit will cause also the breaking up of the UK.
Scotland will separate without any doubt, followed by Wales.
But I am afraid the English have to experience first their life after the Brexit and have to experience what it means to have to accept rules on which they have no influence whatsoever, being a country smaller than Poland…….
We – Europeans – come gradually to the conclusion we might be better off without the English.
I wish you wisdom!
Certainly you point to real risks, Constant — I agree — and with all the problems facing the EU itself, these days, I think it is as important for the EU, that the British stay-in, as I think it is important for the British themselves that they not leave.
The Brexit is hysteria and disintegration — isolationism — there have been many studies, and they all show the damage which will be done, but in the hysteria they get labeled “biased” and are dismissed by the extremists. The business & financial communities uniformly predict economic decline at best, even disaster. Europe needs to hold together & not give up on one another.
I said there have been “many” studies: the following are several, from a quick Google search I made just now — studies & news articles pointing to studies, all easy to reach & read online — one from a group at LSE, & others too — they all say basically the same thing, that Brexit is a bad idea, for both Britain and the EU —
“What if…? The consequences, challenges and opportunities facing Britain outside the EU”
http://openeurope.org.uk/intelligence/britain-and-the-eu/what-if-there-were-a-brexit/
“BREXIT: the impact on the UK and the EU”
http://www.global-counsel.co.uk/system/files/publications/Global_Counsel_Impact_of_Brexit_June_2015.pdf
“Brexit ‘would trigger economic and financial shock’ for UK”
http://www.theguardian.com/politics/2016/jan/25/brexit-would-trigger-economic-financial-shock-for-uk
“Brexit to Nowhere: The foreign policy consequences of ‘Out'”
http://www.ecfr.eu/article/commentary_Brexit_to_nowhere_4094
“EU referendum: Leading UK scientists warn against consequences of Brexit — Leaders from across scientific disciplines tell MPs leaving EU would relegate UK to bit player in worldwide research”
http://www.independent.co.uk/news/uk/politics/eu-referendum-leading-uk-scientists-warn-against-consequences-of-brexit-a6784886.html
“Should We Stay or Should We Go? The economic consequences
of leaving the EU”
http://cep.lse.ac.uk/pubs/download/EA022.pdf
— there are many, many more — they have been done in every European country now & all say the same thing — be careful, tho, of the extremist & isolationist nuts, but their “studies” are easy to spot, few facts but many opinions, mostly, and very emotional & shrill. Pick a respected institute in any country or language, tho, & you will find similar good studies there.
This just in from George Soros, on this topic:
“I am convinced that Britain should stay in Europe not only for economic but even more for political reasons. An EU without the UK would be a much weaker union…
“The campaign for the Brexit has deliberately misled the public. Currently, Britain has the best of all possible deals with Europe. It has access to the common market where nearly half of UK exports go while it is not weighed down by the burden of having joined the eurozone.”
The EU Is on the Verge of Collapse’—An Interview
George Soros and Gregor Peter Schmitz
FEBRUARY 11, 2016 ISSUE
http://www.nybooks.com/articles/2016/02/11/europe-verge-collapse-interview/