Doctors and managers in the NHS are often accused of shroud waving whenever cuts are proposed. You know how it goes, “Cut NHS budgets and thousands of people will diiiiie!!!” It’s usually enough to send most politicians running for cover.
But the City is just as bad. The shroud our financiers wave is London’s position as the financial capital of the world. Impose too much banking regulation, they cry, and London’s number-one status will be under threat as the banks start to relocate to other cities. They’ve waved the shroud so often that even the Treasury now takes it for granted. Its white paper on reforming the UK’s financial system begins:
This chapter introduces the Government’s strategy for reform of financial markets. It explains the importance of financial services and markets to the UK economy, and the pre-eminence of the UK as a global financial centre.
In other words, maintaining London’s pre-eminence is government policy.
But why? As the FT’s Martin Wolf said last week, this might mean that we just end up with ‘a competitive advantage in the supply of global “bads”’.
The financial crisis caused by the banking system has crippled the world’s economies but the UK has taken a bigger hit than most. Whichever set of forecasts you read, the picture is the same; the UK starts the recession with lower levels of debt than comparator economies but finishes with one of the highest. It’s not hard to see why. According to the Economist, at its peak, the finance industry accounted for 8% of GDP and 25% of corporate taxation. But we also had some of the largest banks. As this handy Guardian graphic shows, relative to the size of our economy, our banks are massive.
Consequently, we got a double whammy. We had to pay more to bail out our banks at the same time as the taxes they generated and the parts of the economy they supported fell through the floor. Britain is in the state it is in because of London’s pre-eminence as a financial centre.
Martin Wolf gives a stark warning:
The simple and painful truth is that another such financial shock might even bankrupt the British state. No industry can be allowed to impose such costs – comparable, in fiscal terms, to those of a major war – on a largely innocent public.
If we allow a return to the lightly regulated financial mayhem of the last decade it could push us over the edge.
But the fetishisation of London’s financial pre-eminence raises another question. Over the medium-to-long-term, isn’t the eclipse of London inevitable?
As economic activity shifts towards China and India, more of the world’s big companies will be based in Asia as will those with capital to invest. Why would Asians want to invest in Asian companies through a European intermediary? If an increasing number of IPOs are from Asia, won’t they list in Hong Kong and Singapore rather than London?
When six out of the seven largest economies in the world were in Europe and North America, it made sense for the world’s financial systems to revolve around the axis of London and New York. As the world’s economy shifts south and east, the importance of both cities will diminish.
There is something post-imperial about this obsession with London’s financial pre-eminence. We cling to our world financial capital status like we clung to our superpower status in the 1950s. And look where that got us.
None of this is to say that banking and finance will no-longer be an important part of Britain’s economy. Financial services will have a significant role in our economy for years to come and, for that very reason, we need to protect ourselves from the damage it can do to our economy. The priority must therefore be to protect the rest of us against a banking system getting out of control. If that means that some of the more gung-ho bankers leave the country and we lose our precious number one status, so be it.
In all probability, though, a number of financial centres will emerge in the future, of which London will be one. All are likely to be more highly regulated than they have been in recent years and there may even be penalties for those ‘rogue states’ that try to attract business away with low regulation. It could be, as I have said before, that a well thought-out and managed regulatory environment becomes a selling point for a country’s financial markets. Even if London’s laissez-faire regulation is a thing of the past, people will still come here to do business.
As we rebuild our financial system, we need to do so in such a way that protects us from the sort of cataclysm we have just experienced. That means tougher regulation. Perhaps it also means that London won’t be number one in the financial charts any more but, in the end, that is probably inevitable anyway.