Can the City survive Brexit?

[Celerity]

The world’s biggest international financial centre faces its toughest test



https://www.economist.com/leaders/2019/06/27/can-the-city-survive-brexit

The world has a handful of great commercial hubs. Silicon Valley dominates technology. For electronics, head to Shenzhen. The home of luxury is Paris and the capital of outsourcing is Bangalore, in India. One of the mightiest clusters of all is London, which hosts the globe’s largest international financial centre. Within a square mile on the Thames, a multinational firm can sell $5bn of shares in 20 minutes, or a European startup can raise seed finance from Asian pensioners. You can insure container ships or a pop star’s vocal cords. Companies can hedge the risk that a factory anywhere on the planet will face a volatile currency or hurricanes and a rising sea level a decade from now.

This metropolis of money, known as the City, generates £120bn ($152bn) of output a year—as much as Germany’s car industry. Because it allocates capital and distributes risk at a vast scale, its influence is global. But now, with a “no-deal” conclusion looking increasingly likely after a change of leader of the Conservative Party (see article), Brexit threatens to rupture Britain’s financial links with the European Union. If Labour wins the next election under Jeremy Corbyn, Britain will also end up with its most left-wing government since 1945, one that is deeply hostile to capital and markets. Either outcome would make the eu poorer and damage London’s position. Together, they could change the workings of the global financial system.

London’s prowess is something to behold. It hosts 37% of the world’s currency dealing and 18% of cross-border lending. It is a hub for derivatives, asset management, insurance and investment banks. Relations with Europe are particularly intimate. The City generates a quarter of its income from the continent, and Europe gets a quarter of its financial services from London, often the most sophisticated ones. French or Italian firms go to London to meet investors or organise a takeover. When the European Central Bank buys bonds as part of its monetary policy, the sellers are very often asset managers and banks domiciled in Britain. Some 90% of European interest-rate swaps are cleared through the City’s plumbing.

The City’s history is long but serpentine. In 1873 Walter Bagehot, The Economist’s then-editor, wrote of its “natural pre-eminence”. In fact decades of decline lay ahead. A revival began in the 1960s when the offshore market for dollar lending boomed. Another lift came with the stockmarket deregulation of Big Bang in 1986 and again after 2000 when London became a centre for trading the euro and emerging markets. Even the financial crisis of 2008 did not do much damage to the City’s standing abroad. Today the magic formula has many parts: openness to people and capital, the time zone, proximity to subsea data cables, and posh schools. But, above all, it relies on stable politics and regulation, close ties to America and seamless ones to Europe. Brexit and Mr Corbyn threaten this formula in three ways.

The first is by ripping up the legal framework, as the eu cancels the “passports” that let City firms operate across the continent. Activity may move in search of certainty. The second is by the remaining 27 eu members adopting an industrial policy that uses regulation to compel financial firms to move to the euro zone. As Amsterdam, Frankfurt and Paris jostle for business, this fight is turning ugly. And the last is from within Britain—if a Corbyn government takes the country back decades, with nationalisation at below-market prices, a financial-transactions tax, a tough line on mergers and acquisitions and possibly even capital controls. If a Labour government also attacks private schools and second homes, London’s giant pools of capital will disappear faster than a trader’s cocktail.

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