Bankers in London, home to Europe’s biggest stock exchange, derivatives market and asset-management business, have a message for European leaders looking for greater integration: We’re happy to go it alone.
The city, which gained trading freedom from French-speaking William the Conqueror in 1067, is setting its sights on markets beyond Europe after U.K. Prime Minister David Cameron vetoed a European treaty last week.
“I don’t think the future of London is entirely dependent on Europe,” said Terry Smith, 58, chief executive officer of London broker Tullett Prebon Plc and asset-management firm Fundsmith LLP. “This may lead to a reconsideration of London’s future. We can go back to as it was in history, being a financial-services center to the world, including places with which we’ve got historical ties: the Americas, Asia, Africa and bits of Europe.”
Cameron cited defending London’s financial-services industry as the main reason he refused to join 26 other nations in a European Union treaty to rescue the euro last week. He was left out of further negotiations with French President Nicolas Sarkozy and German Chancellor Angela Merkel, leading to criticism from the Liberal Democrats, his coalition partners, that Britain would be frozen out of decision-making in Europe.
“There’s been a history of antipathy from French and German policy makers toward the City of London over the years,” said Neil MacKinnon, global macro strategist at VTB Capital in London and a former U.K. Treasury official. “Whether by accident or design, the use of the veto allows the U.K. to escape the clutches” of EU officials.
Sarkozy and Merkel have endorsed a financial-transactions tax that the European Commission says would raise 57 billion euros ($75 billion) a year. U.K. Chancellor George Osborne has called the plan an “attack” on London firms, which his government estimates would pay 80 percent of the tax.
“If the financial-transactions tax were to come into effect, it would be bad for the City,” said Rob Harbron, an economist at the Centre for Economics & Business Research Ltd. in London. “It would disproportionately affect London out of any major city in the euro zone.”
London is the world’s biggest market for interest-rate derivatives, with $1.4 trillion of daily revenue, or 46 percent of the world’s total, according to the Bank for International Settlements. The U.K. is also home to the world’s biggest foreign-exchange market and 251 foreign banks, more than in any other country.
“The City is relieved” at Cameron’s refusal to sign the treaty, according to Steven Bell, chief economist at hedge fund GLC Ltd. in London and a former U.K. Treasury economist. “For the U.K. economy it’s the equivalent of North Sea oil and it’s not running out.”
The U.K.’s financial-services industry makes up about 10 percent of the country’s gross domestic product and 11 percent of its total tax receipts, according to The City U.K., a lobby group backed by the City of London Corporation, which governs the financial district. Financial-services employ more than 1 million people in the U.K., the group said.
About 288,000 of these work in the City of London, according to the CEBR. That’s 9.3 percent fewer than in 2010 and the lowest headcount since at least 1998 as firms cut jobs amid the European debt crisis and tougher regulation.
London Ranked No. 1
London remains the world’s top financial center, according to a survey of 1,887 executives by consulting firm Z/Yen published in September. The city beat New York and Hong Kong on issues such as regulation, tax and lifestyle, while the euro crisis caused Frankfurt and Paris to drop down the list, the survey said.
“There clearly was a danger that had the U.K. acceded to the proposed treaty amendments there would have been a whole raft of untutored, blunt-force regulations that would have endangered the whole industry and also economic recovery,” said Philip Keevil, a former head of investment banking at S.G. Warburg & Co. and now a partner at New York-based advisory firm Compass Advisers LLP. “So Cameron was right to exercise his veto.”
Sarkozy last week cited the lack of unified regulation as a cause of the global financial crisis as Cameron made his case for defending London from European rules. British banks were bailed out by about 1 trillion pounds in capital and guarantees from the government after Lehman Brothers Holdings Inc. failed in 2008.
Banks Versus Economy
Royal Bank of Scotland Group Plc required a 45.5 billion-pound rescue and Lloyds Banking Group Plc needed more than 20 billion pounds. Cameron’s veto provides further help to the nation’s lenders rather than the economy, according to Andrew Russell, professor of politics at Manchester University.
“This seems to be about the protection of banks rather than the country as a whole,” Russell said. “The question will be what material difference this makes to Britain’s economy rather than the Square Mile,” he said referring to London’s financial district.
While banks, brokers and fund-management firms should be “grateful” to Cameron, they must be wary of the long-term ramifications of his decision, according to Michael Kirkwood, ex-chairman of Citigroup Inc.’s U.K. division.
Poll Backs Cameron
“It’s sad that we got ourselves into that particular state,” said Kirkwood, who now leads Ondra Partners LLP, a financial-advisory firm. “In the longer term, if the U.K. becomes isolationist and Europe pulls together there are risks to the City. Europe is still a huge economic bloc and anything that might result in the Europeans building an option to avoid the City would be unhelpful.”
Cameron’s decision has popular support, according to an opinion poll by Populus for the London-based Times newspaper. Almost 60 percent of those asked backed the veto with 14 percent opposing it.
Niall Ferguson, a professor of economic history at Harvard University in Cambridge, Massachusetts, agrees. Cameron’s stance is good for London “because as things stand the euro zone is heading for an austerity death spiral,” he said. “If I were a rich German, I would already have put half my money in London. In sterling.”