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Is London still the financial capital of Europe?

It can be argued that London has always been a trailblazing kind of city, and one that has perennially sat at the forefront of innovation and commercial growth.

This reputation is well-deserved and remains valid to this day, with London still the world’s highest net exporter of financial services and rivalled only by New York as a thriving, global financial hub.

Still, the spectre of Brexit continues to loom large over London’s financial market, with the UK’s capital no longer as dominant or attractive to investors as it once was.

In this post, we’re going to take a much closer look at the history of London as a financial market hub, while asking whether it will remain in its position of influence in the future?

Tracing London’s roots as a financial innovator and disruptor

The rise of London’s financial services sector reflects a much broader evolution of the city’s economy.

More specifically, 91% of the capital’s economy is now service-based, with financial services accounting for the vast majority of this.

This contrasts sharply with the city’s growth and development in its formative years, which began in earnest when the Romans formed a settlement there in 47AD.

Commerce and merchant trading flourished under innovative Roman leadership, with its numerous ports drawing traders and entrepreneurs from across the globe.

Like New York, London shone like a beacon to immigrants in search of a better life, with the capital city’s population increasing from approximately 60,000 in the 1520s to more than a million by the end of the 18th century.

With the majority of immigrants classed as craftsmen and merchants, London was at the forefront of the industrial revolution and built an economy based on the production and exchange of goods.

However, it can be argued that London’s slow and gradual evolution began in 1694, when the iconic Bank of England (BoE) began as a private corporation that was owned and operated by merchants.

This saw surrounding cafes and coffee houses used as makeshift offices by traders, with these entities later evolving and expanding into institutions such as The London Stock Exchange.

How the EU became a catalyst for London’s financial revolution

In 1975, 67.23% of the UK’s adult population voted to remain in the European Common Market, which was a burgeoning trading union that (despite subsequent denials to the contrary) laid the foundations for further political integration between members and the formation of the European Union (EU).

At the time, Britain was known as the ‘sick man’ of Europe, with its economy hamstrung by rampant inflation, high interest rates and a crippling lack of productivity.

However, Common Market and then EU membership served as a catalyst for exponential economic growth, with this largely driven by financial services.

In October 1979, Britain opted to remove controls on foreign exchange transactions, many of which had been in place since World War II.

By 1986, London’s own financial markets and frameworks were deregulated, with this so-called “Big Bang” removing fixed rate commissions and opening the marketplace to international corporations.

Then came the proactive switch to electronic trading, which helped to cement London’s status as an innovative financial leader and eventually introduced forex arbitrage software and similar programs for the benefit of traders.

Subsequently, the average daily turnover of the LSE increased from £500 million in 1986 to more than £2 billion just nine years later, with a number of small and established UK brands acquired by larger overseas companies.

Between 1996 and 2008 and prior to the financial crash, the UK enjoyed largely uninterrupted and exponential economic growth, with this built largely on London’s open, tech-led and deregulated financial services space.

The impact of Brexit and changing economic times

While there’s no doubting London’s past and continued influence as a global financial player, the shadow of Brexit continues to extend over the capital’s markets and services sector.

Certainly, consultancy firm EY confirmed that assets worth nearly £800 million were moved from Britain to remaining EU financial centres in the build up to Brexit, while the subsequent restrictions imposed on the freedom of movement (which is a pillar of EU membership) has dramatically curtailed London’s access to top foreign talent.

In recent times, there has also been a steady stream of businesses seeking listings in New York rather than London, and this trend looks unlikely to change significantly going forward.

Even before Brexit, the UK was facing a challenging economic future, with a 2016 study by PwC revealing the region would fall to the 10th largest world economy by 2050.

This is part of a wider trend that will see developed nations lose ground and market share to emerging regions such as China, India, Indonesia and Brazil, with the former two nations both home to burgeoning financial services hubs.

In Europe, Dublin, Luxembourg, Frankfurt and Paris continue to compare for London’s positions as the world’s financial capital.

So, while the UK capital remains number one for now, it’s no longer as dominant as it once was, while there’s no guarantee that it will retain its status in the longer term.

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