London’s Financial Centre is lost without urgent and radical solution.

Economic
Tuesday, June 11, 2013
Christopher Williams

The City of London’s status as a global financial centre has been under threat for some years, and in May, as part of it’s ‘Unthinkables’ series, The Bow Group called a conference debate to discuss the nature of the problem.  Three leading economists were invited suggesting radical solutions: Mark Littlewood (Director General of the Institute for Economic Affairs), Andrew Lilico (Director of Europe Economics), and John Stevens MEP (Founder of the Pro-Euro Conservative Party).

Following the Bow Group’s conference in May highlighting that London’s role as global financial centre is under immediate threat, I welcome Boris Johnson’s intervention today that urgent solution is needed.

Though few in Government will admit it, the writing is already on the wall and the pivot of financial power is moving to the East and West regional poles of Beijing Hong Kong & New York, and away from London with an almost unstoppable force. 

The Global Financial Centres Index has reported that London is scheduled to lose its status as financial centre in the next 5 years, and whilst the situation has clearly been exacerbated by the 2008 Global Financial Crisis, the decline of London’s privileged position has been a long time in coming.  Financial centres in Asia have been on the rise for some time, so the theory that the solution should be based purely around the changes brought about by the 2008 Crisis is highly questionable.

This is about the global race, and if London wishes to remain competitive radical solutions are needed. In the face of the challenge presented solutions that appear unthinkable now will soon become a necessity if we are serious as a country about retaining the one of the World's most coveted titles for London - the financial centre of the World.

 

The Problem

Whilst the situation has clearly been exacerbated by the 2008 Global Financial Crisis, the decline of London’s privileged position has been a long time in coming.  Financial centres in Asia have been on the rise for some time, so the theory that the solution should be based purely around the changes brought about by the 2008 Crisis is questionable.

The City of London provides around 8% of UK GDP and approximately 13% of tax revenue, so the loss of this Centre or even its reduction would have an unprecedented effect on the UK economy.  It is his belief that the 2008 Crisis has led to a specific regionalization of economies, and that the City of London will suffer from being outside the European economy as well as from a reduction in business from Asian economies.

The City’s main industries are undoubtedly banking, legal services, business administration, and to a lesser extent media services.  The banking sector was in relative international decline before 2008 due to the rise of Chinese banks, and has worsened since. 

The recent Libor Scandal has caused troubling damage to the City’s reputation, since a great deal of business relied upon a particularly British reputation for integrity.  Britain was the reliable provider of such services, but after such a widespread and damaging scandal clients may feel they can no longer invest in the city with confidence.  

The final sector particularly under threat appears to be the provision of Business and Administration services.  It is perhaps this sector in particular which would suffer most should Britain decide to leave the European Union.

 

The Solutions

The three invited economists offered radically different options to combat the situation:

 

Enterprise Zone

Following his analysis of the three sectors under threat, the economist Andrew Lilico suggested the idea of making the City of London a ‘special enterprise zone.’  The usual reasons for creating such a zone are either to protect a special industry to the nation, to encourage an underdeveloped industrial region, to rescue an area in decline, or to secure property rights within an economic zone against emergency government revenue-raising measures.

Whilst a number of measures would be required to remedy the threats to our banking, legal and administration sectors, Lilico particularly focused on the current danger throughout the world of governments raising revenue from sectors that were previously thought safe.

“The recent Portuguese Government decision to raid pension funds and of course Cypriot plans to access money from individuals’ personal bank accounts to combat the terrible debt they have found themselves in would be particularly worrying to any current or potential investor. 

Britain has not yet felt the need to resort to such measures, however they may not be as far away as one expects: The current penchant for ‘wealth taxes’ such as the idea s of ‘mansion’ or ‘bedroom’ taxes could well be seen as a slippery slope towards stronger measures to raise revenue to pay off the deficit if the economy does not pick up.  If such a possibility seemed likely, the City’s economy would no doubt suffer even more with a withdrawal of capital by important investors, unless the City were to be made an official safe haven for property rights.

As a City, London should be able to benefit from the increasing dislocation of where work gets done and where the effects of that work are utilized.  As a special economic zone, London would be a prime area for such services to be provided and for the rest of the UK to provide parasite services into London for the workers themselves. 

Whatever the decision, it is clear that Britain needs to generate a clear economic path at which the City of London must be at the centre.  Whether this involves us being in Europe or largely outside it (but trading with it nonetheless), a decision must be made.”

 

Adoption of the Euro Currency

John Stevens presented a radically different alternative to the crisis, ultimately advocating Britain’s entry into the Euro. 

“40% of business to the City is Euro-dominated.  We simply cannot afford to lose it, and the only way to keep it is to join the Euro. 

In the end banks are only as good as the taxpayers behind them.  We cannot afford to bail them out again, nor risk a lack of profit through over-regulation.  If a banking union is on the horizon, we simply cannot afford to be out of it.  On the same high street we would see Barclays backed up by 63 million citizens and Santander backed up by over 300 million citizens. 

For a long time Britain, and particularly the City, did very well out of the economic situation.  The European economy might have faltered shortly after we joined the EEC, but the globalization of financial services provided an enormous and sustained boost to the City.  London soon became an offshore provider of services and rode the situation well. 

 But the 2008 Crisis has led to a switch from offshore to onshore with state control, re-regulation and regionalization.  We cannot go back to the old days of offshore banking and financial services, so we must move with the times.  Yes Asia and Latin America will provide some opportunities, but the internalization of economies will limit these opportunities significantly.” 

Stevens believes that the sooner Britain joins the Euro, the better the deal we will get, and the stronger the chance for the City to dominate the European economy and determine its course.  In the current half-way house position we’re in, we will be excluded from European business and unprepared for business elsewhere. 

 

Deregulation

Mark Littlewood provided a less radical solution (on the face of things at least), aiming  to prevent a situation whereby we would be forced to join the Euro.  His solution however involved allowing banks to be far riskier and more dangerous – the complete opposite of the rhetoric we see in the media about the ‘awful recklessness’ of the banks.

Littlewood set about dispelling the myths surrounding the banks and the 2008 Crisis.

“It is a popular myth that before 2008 the City was an unregulated wild west in which bankers did whatever they liked without any thought to the consequences.  In fact in 2008 the City’s Banking and Financial sector was the second most regulated sector in Britain.” 

Therefore he suggested we reintroduce the concept of risk and danger into banking, but crucially to avoid this risk lying with the taxpayer. 

“Risk must be far more obvious and similar to the risk a private company takes in a competitive market.  If a company goes under it is a problem for the shareholders, for the staff, and for customers who use that company, but it is not a problem for the taxpayer.  Those involved in the company know the risk and do not expect to be bailed out.  Unregulated banks need to be able to be safely wound up. 

Most importantly, we must end the obsession with ‘rebalancing the economy’ towards manufacturing and away from banking.  Although Britain has a manufacturing sector, it is not one of our strengths, whereas banking is.  One idea to improve the sector would be to impose a form of competitive discipline on the FCA.  Banks could choose to be totally FCA compliant and advertise this to their customers.  Others could choose to be largely FCA compliant, but offer riskier products to customers (making it extremely clear that it is a risky product).  These products would definitely not be guaranteed by the taxpayer, thus placing the burden of success firmly upon the banker. 

In such an environment, trust would return as a vital factor in business, thus helping to alleviate the drop in reputation that Andrew Lilico discussed.  There would be no place for ridiculous reams of terms and conditions that no sane customer can understand.  Ts & Cs would have to be simple and clear so that customers can clearly understand the risk they are getting into, and financial advisers’ reputations and interests would be far more on the line than they are now.” 

 

Whilst the solutions presented at the Bow Group’s conference were as varied as they were radical, the conclusion was that the solution to reverse the declining influence lies with a radical approach, business as usual will not protect business in the city.