CELEBRATIONS were understandably muted across the Square Mile last week when London once again topped the latest Global Financial Centres Index (GFCI).
Muted, because the seriousness of the global economic situation means that all other issues are overshadowed. And muted, because clearly London’s competitiveness and primacy are under increasing threat.
According to the GFCI, London was rated one point above New York – with Asian centres rapidly closing in on both. The narrowing of this gap is a reflection on the recent uncertainty plaguing both the Eurozone and the US. But it is also a sign that the financial centre of gravity is shifting towards fast developing centres in Asia and Latin America.
This begs the question: is London set to slip inexorably down the league?
It is a truism that there is never more to lose than when you are top of the table. The City makes a massive contribution to the UK economy: £53.4bn in tax, 14.5 per cent of total national income and over 1m jobs. Clearly, there is a lot at stake.
We have well-established structural strengths that will continue to give us a competitive advantage. But the sheer size of the market and the demographics in countries such as China, combined with rapid growth, mean the importance of centres like Hong Kong and Shanghai will increase.
Their development could be seen as a threat to London, but I prefer to see it as an opportunity. As their domestic marketplace gradually opens up the overall volume of business globally will increase, even if our market share falls. The City has always succeeded by adopting an international outlook and China’s recent backing of London as an offshore trading centre for the renminbi highlights how we can succeed in this changing landscape.
That is, of course, if we do not shoot ourselves in the foot with potentially damaging regulation.
In this light, Manuel Barroso’s proposal last week to introduce a Europe-wide tax on financial transactions raises huge concerns. The European Commission claimed the tax was designed “to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the member states”. This is misleading and disingenuous to say the least.
The Commission’s own impact assessment suggested that more money could be lost through firms choosing to relocate outside of the EU than would be raised by a tax. Furthermore, one study has suggested that 62 per cent of the revenues generated by an EU-wide transaction tax would come from the UK.
London is Europe’s financial capital and would be disproportionately affected, placing us at a huge disadvantage to New York, Asian and other centres. Jobs would disappear as trading volumes declined and businesses moved elsewhere. Thankfully, the treasury have pledged to resist the tax if it is not implemented globally, but even then it could negatively impact growth.
This uncertainty over the future is perhaps the biggest threat to London. So we need to be ever more strategic, intelligent and proactive in ensuring that we stay top of the league.
Michael Bear is Lord Mayor of the City of London.