It’s been nearly three years since I moved back to London from Shanghai. For its part, London, the city in which I studied, pretended I had never really left. Not much had changed in 2012 and 2013, so I quickly got back in to my London life.
Since then, the city has been doing well. During the past three years, I have watched London’s population grow to over 8,6 million, a new peacetime record. I have observed the completion of the Walkie Talkie and the Cheese Grater, two stellar new skyscrapers in the City of London, and learned that there are more than new 400 high-rises under planning here in London – a sign of the huge architectural change that the city is undergoing.
I have heard it called “the greatest city on earth”, a description that ex-mayor Boris Johnson used when advertising the city to foreign investors. I have seen the night skies illuminated by numerous red lights, a testimony to all the construction work going on in London. I have seen house prices rise ever more (they are now at levels beyond most people’s reach) and noticed Chinese, Kuwaiti and Russian billionaires pouring money into London real estate and assets.
These are all indications that London is an attractive, thriving international city that stands out in comparison to other European cities. Londoners of course don’t compare their city with the likes of Berlin, Frankfurt or Paris. It’s New York and Hong Kong that they refer to when talking about other great, international cities.
However, a vote for Brexit could fundamentally change London. Over time, the capital could lose some of its great attractions for people, businesses and investors for whom London has been an easy entry-point into the continent, a bridgehead into Europe. “We would survive – but we would be diminished as a country and as city”, London’s new mayor Sadiq Khan said on Thursday.
Standing below a 1.5 ton piece of art (the so-called “flying table”) hanging from the ceiling in the “Second Home”, a co-working space in London, he explained to around 200 guests the potential consequences of a Brexit for London. According to Khan, the son of Pakistani immigrants, the capital has always been an open city, a city that welcomed otherness, new ideas and different approaches. “A Brexit would have serious consequences for London as a city”, Khan said.
That not only refers to the huge amount of continental Europeans who are working in London, thanks to the freedom of movement (I am a beneficiary as well). It also refers to those businesses in London that are doing business with the continent and that will be in limbo after a Brexit-vote on the 23rd of June, given that it is far from clear what kind of economic relationship the UK and the EU would have after a vote to leave.
One of the sectors that might be hit hardest is the financial industry. It creates around eight percent of national GDP and contributes around 13 percent of UK corporation tax receipts. Of the over than one million jobs in the British financial industry, one third is in London, in the City and in Canary Wharf – right across the street from where I work. In contrast to countries like Germany, under Margaret Thatcher the UK decided that services and banking, not industrial production and manufacturing, would be the basis of the UK economy. That has led to a significantly different structure than that of for example Germany where manufacturing still plays a much more important role.
The centre of this economy is London, Europe’s leading financial hub. Other financial centres, such as Luxemburg, Paris or Frankfurt, look pale against the dominance of London. “Nearly 40% of European assets under management are managed here. We’re home to around 40% of the world’s foreign exchange trading and 50% of derivatives trading”, Jonathan Hill pointed out last Monday at the London School of Economics (LSE).
The EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union was quite clear in his assessment. “Last year, London was once again rated by the Global Financial Centres Index as the world’s most competitive financial centre – hardly a sign (by the way) of a City drowned or strangled in red tape as is sometimes claimed”, the Brit stated.
The key to London’s success is not just its historic role as the leading trading hub for Europe, but also the Single Market and the EU-passporting regime. Thanks to this, British firms and banks can do business wherever they choose in Europe. From their base in the UK, they can provide services and capital to 27 other EU-countries. “They can lend freely into the single market, and they do”, Lord Hill stated. In 2015 alone, British banks lent over one trillion euros and took deposits of over one million euros across the EU.
The scheme also works the other way around. It not only provides access to the EU, but also to the UK, and to the City of London in particular. Due to that, 20 percent of banks operating in the UK are headquartered elsewhere in Europe. American, Asian and African banks use London as their European headquarter and trade into Europe from here. “Half the world’s financial firms have chosen to base their European headquarter in the UK”, Hill said.
As a result of this integration, the surplus from Britain’s trade in financial services has more than doubled – from 23 billion pounds in 2014 to 58 billion ten years later. “This (…) is a success story of which we should be proud, and which we should be keen to keep”, the Commissioner reiterated.
It is exactly this which is at stake. According to economists, London risks losing some of its weight as the leading financial centre in Europe. A country that did not join the Euro and still uses the pound, the UK has nevertheless been able to attract a lot of transactions denominated in Euro. In case of a Brexit, this could change – why bother going via London if the UK does no longer use the passporting system?
As a consequence, many banks could move at least some of their business to continental Europe in order for them to make sure that they are able to access the single market. “There are 75 foreign banks in London”, a female CEO of a financial fund told me last week, “just guess how many of them would move?”
It’s a tricky question, given that many banks have gone quiet on this recently. However, a few have stated what they are planning to do. HSBC for example would relocate around 1000 bankers to Paris whereas Deutsche Bank has announced that they would move parts of their business from London to Frankfurt, should there be a vote for Brexit.
“The American banks would move to Dublin, the German ones to Germany, the French ones to France”, the CEO of the fund mentioned earlier explained to me. Add to that the uncertainty – it will take at least two years if not longer for the UK to negotiate it’s exit – and you end up with a pretty bleak short term outlook for the City of London. PwC estimates that there will at least be 70.000 to 100.000 fewer jobs the British financial industry by 2020, should there be vote for Brexit.
The problem with this is that it could take years, if not decades until we are able to investigate the size of the damage that a Brexit would do to the City of London. There are not just European competitors like Frankfurt, Paris and Dublin that want to increase their share but also international financial centres like Hong Kong, New York and Singapore that might benefit from a gradual decline of the City.
I don’t have a crystal ball. I am not a forecaster. But I do think that British voters should be aware that these days, nothing is carved in stone anymore. Not even the role of the City of London.