AT least three times since the 1960s, the City has been saved by the stupidity of others. London’s economic prominence is partly home-grown, of course, not least thanks to the free-market reforms of the 1980s. But a key driver of the City’s survival and subsequent triumph has been its ability to mop up industries fleeing destructive taxes or regulations imposed by foreign governments. It is therefore a tragic paradox that we are about to allow history to repeat itself – albeit in reverse, as this time it is London that will lose and others that will gain, courtesy of our new high-tax and anti-finance political consensus.
The story of the City’s rebirth starts in 1963 when John F Kennedy decided to discourage US investors from buying foreign bonds. His interest equalisation tax slapped a 15 per cent levy on interest payments made by foreign firms to US citizens; foreign companies that used to raise funds from the US had to find new sources of capital. This gave London a big boost. The first eurobond – an international security denominated in a currency not native to the country where it is issued – was organised in 1963 for Italy’s Autostrade by London merchant bank SG Warburg & Co (now part of UBS); firms came flocking here to borrow in dollars and other currencies. Washington gave us another fillip with its “foreign direct investment restraint program” of 1968, which restricted how much US firms could send out of America to fund investments. US firms responded by borrowing money overseas instead; they too turned to London’s eurobond markets. These moves saved the City: the rest of the UK was collapsing in the 1970s but the City survived against all the odds. The pool of talent assembled in London as a result of the eurobonds boom helped make the City a centre for loan syndication; after Bretton Woods’ final demise in 1971, London also emerged as a key forex trading location. By 1974, when the interest tax was removed, it was already too late: New York, which could have emerged as the world’s uncontested financial capital, now had a rival it would never be able to shake off.
Then in 1999, Germany, France, Italy and the others adopted the euro; refusing to abolish sterling was one of the few decisions this government ever got right. The City was in a panic in the run-up to the euro; many bankers wanted to ditch the pound, thinking that London would flounder outside the euro and that Frankfurt, home of the European Central Bank, would gain. Many even started learning German. But instead of hurting London, the euro saved us again. All the minor eurozone financial centres were wiped out; even Frankfurt withered. Everybody moved their regional HQs to London, attracted by the low tax, pro-business climate of the time.
The next boost came from the US Sarbanes-Oxley laws of 2002: after Enron, the US authorities over-reacted, forcing all listed firms to adopt onerous accounting rules. The stable doors were shut after the horse had bolted; it would have made more sense to analyse properly the causes of the bubble of the 1990s, rather than over-reacting to one of its relatively minor manifestations. Global firms shunned US exchanges to list in London, cementing the City’s role as a global centre servicing Russia, Eastern Europe and Asia.
It is shocking how times have changed, entirely for the worse. As Mark Twain put it, history doesn’t repeat itself exactly – but it certainly rhymes.