Save the City

Global finance

Britain is the home of the world’s capital of capital but no longer prizes it. That is a mistake

ATTACKS on bankers by protesters from Occupy Wall Street, Occupy London and Occupy any city where a financier might have the temerity to turn a quick buck have spiced up the dreary economic news of the past year. Yet hostility is not confined to the left. Even the bankers’ supposed allies are putting the boot in—and nowhere more so than in Britain. The prime minister, David Cameron, has promised to “end excess” in the City of London. His ministers boast about their efforts to “rebalance” the economy away from dodgy finance to honest manufacturing. Sir Mervyn King, the governor of the Bank of England, has made a habit of lambasting the Square Mile’s short-term “profits next week” culture. In continental Europe the City is viewed with a mixture of loathing (on the ground that it single-handedly caused the euro crisis) and covetousness (on the ground that all those clever French and Italian financiers should ply their trade in Paris and Rome instead).


The European leaders’ attacks, at least, should have an upside: their hypocrisy and self-interest should serve to remind Britons what is at risk. London is by many measures the world’s biggest financial centre, and weakening it is in nobody’s interest—least of all Britain’s. Better regulation of banks is certainly needed, especially to protect British taxpayers. And so far the City-bashing has been mainly rhetorical. But running down one of the world’s most successful (and mobile) commercial clusters is folly—and it is surely not the legacy Mr Cameron would wish to leave his successors.

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Finance—the funnelling of savings to their best use—is a vital industry. Britain is very good at it, leading the world in various financial markets, including foreign exchange and over-the-counter derivatives. The City’s comparative advantage is clear from Britain’s trade balance. The export surplus in financial services and insurance was 2.6% of GDP in the first three quarters of 2011. Add in the exports of related services, such as law, accountancy and consulting, and the trade surplus rises above 3% of GDP. An industrial cluster that can generate foreign earnings on such a scale is enviable. No other country, not even America, comes close to matching Britain’s trade balance in finance. And with its domestic economy floundering, Britain needs all the exporting power it can muster.
Yet the City is in danger (see article) from two sorts of threats—ones that you can do nothing much about, and ones that you can. Even with wiser politicians, the City would be likely to shrink over the next few years. New mortgages are being approved at half their pre-crisis rate, which means less business for retail banks. The number of employees working in finance across Britain is 7% below its level three years ago. The rich world’s economic funk and mostly lifeless asset markets mean the outlook for trading and the deals that bring in fat fees is the worst for years—perhaps decades. Tighter regulation also means thinner profits. And there is bound to be some drift in dealmaking towards the emerging world, whose governments are trying to develop their own financial centres.
Still, Asia also presents an opportunity. China and India have underdeveloped financial markets; Britain has the expertise. If London could become a global centre for dollar trading, why not for yuan dealings, too? Continental Europe’s underdeveloped personal-finance market should be another target.
But the City can compete successfully with other financial centres only if Britain has the right policies on regulation, tax and immigration. On regulation, there is an understandable fear that an outsized financial-services industry means an outsized risk for taxpayers. The proposals from Britain’s Vickers Commission go a long way to deal with this, dividing a tightly regulated domestic banking system (the bit that puts taxpayers at risk) from a more freewheeling international market for global capital. By contrast, the thrust of many of the proposals coming out of Brussels looks harmful. Some, such as the financial-transactions tax, can be blocked by a British veto. The rest are subject to majority vote, and Mr Cameron’s stand-off with his European partners last month—supposedly to protect the City, but really to avoid having to sell a more integrated Europe to Tory Eurosceptics—has now given London’s rivals the excuse to hamstring the City.
The British government’s own policies on tax and immigration are also doing a lot of damage. The 50% tax rate, introduced by the previous Labour government in 2010, brings in little money and has made London the most taxed out of ten financial centres for high net-worth individuals. The present generation of financial bosses, who live in and like London, may tolerate it for a while, but younger ones are feeling the pull of Switzerland, Hong Kong or Dubai. As for immigration policy, the best way to win Asian business is to lure the young Asian financiers to London. Tight limits on talented immigrants damage the City’s prospects—and indeed the prospects of every bit of British business.
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The politicians and regulators have all sorts of excuses. Abolishing the 50% tax rate is now politically dangerous. Immigrants are unpopular. And, they maintain, the risks of attacking the City are small, for it has formidable advantages that are hard to replicate quickly. London’s long business day bridges the close of Asia’s markets with the opening of New York’s, making it a convenient location for global asset managers and traders. Trading attracts liquidity and skills in a virtuous circle. But even the strongest incumbent is vulnerable to competition. Each decision to locate a new trading desk somewhere else compounds over time to a loss of the critical mass that has sustained the City as a leading financial centre.
Economies work best when they reflect a country’s innate competitive advantages. Britain should, therefore, host a relatively big financial sector, and policymakers should celebrate it, rather than deride it. If they continue their policy of malign neglect, Britain will one day wake up to discover that it has lost one of the world’s most successful business clusters, and the best hope the next generation has of earning a decent living.