THE CITY OF LONDON IN RETREAT: THE EU’S ATTACK ON BRITAIN’S MOST SUCCESSFUL INDUSTRY Presentation to Bruges Group meeting 24 th September 2014, by Professor Tim Congdon CBE

Is the slowdown cyclical or structural?

The UK financial sector and the world economy Britain was the pioneer of modern industrialism, but – as an offshore island - it is not a natural centre for the location of manufacturing industry. High-value-added-per-person services are probably a better specialisation for the UK in the 21 st century, and in the late 20 th century the UK was the world leader in international financial services. However, the UK’s exports of such services are only about 0.1% of world output. Massive scope for growth continues.

The UK financial sector and the world economy In 2009 Lord Turner, then chairman of the Financial Services Authority, said that much financial service activity was “socially useless” and the sector was therefore too big. He argued that a contraction of finance could occur without loss to the economy. At that time exports of financial services were about 4% of GDP. It would be hard to imagine anyone in a position of public trust and responsibility saying anything more inept, inappropriate and destructive.

A proposal from the European Commission

The European Commission is proposing/advocating a change in regulation/tax which would lead to a drop of 75% in a certain kind of financial activity, mostly located in one member state, i.e., the UK.

Is this what the Eurozone’s architects and leaders want? “…if the Eurozone has a collective interest in anything, it is to stop the City acting as its main financial centre.” - quote from Wolfgang Munchau, a columnist in the Financial Times, 4 th March, 2013

London’s position in the UK economy London accounts for over 22% of the UK’s output. The proportion of UK output accounted for by London has been rising for many years, reflecting the UK’s specialization on international business services, esp. financial services, in a ‘globalizing’ world. Output per head in London is well above the UK average.

The dynamics of London’s economy Output per person in London has been above the national average for many decades, reflecting the location of senior executives and professional support staff in the capital city. International business services the UK’s most obvious specialization in the last 50 or so years. Logically, workers move to London from the rest of UK to benefit from higher productivity & incomes. That should over time cause regional equalization of incomes.

The London/UK differential Chart below taken from Lombard Street Research’s 1998 and 2003 reports for the City Corporation

The dynamics of London’s economy The rise in the output/income differential between London and the rest of the UK is unexpected, as equalization of incomes should be the result of labour mobility in a small nation like the UK. Various interpretations: strong underlying growth in demand for international business services so that the adjustment is still incomplete, widening gap in skill levels between workers in London & rest of the UK, planning shortages so that space cannot be provided for all the people who want to move to London, etc. How much does London depend on financial services? Some puzzles in its recent prosperity.

Two major background debates Should the UK economy be rebalanced from services, especially financial services, towards manufacturing? – The debate about rebalancing If UK officialdom wants to de-emphasize financial services, how is London to adapt? – The debate about the re-invention of London