Can London Emerge from Financial Crises with Its Reputation Intact?
Hamish McRAE Business Communicator of the Year, The Independent (London, England)
How damaged is the City? As the decision about Northern Rock is gradually absorbed by the markets, people are switching attention to the secondary effects. Sir Howard Davies thinks that the combination of Northern Rock and the non-doms tax saga has indeed been damaging. He deserves to be listened to. He is now director of the London School of Economics but formerly was director-general of the CBI, deputy governor of the Bank of England and the first head of the Financial Services Authority.
It is difficult, this one, for a host of reasons. One is that "reputation" is such an ill-defined concept. Sometimes it matters enormously, as when Northern Rock's slipping reputation led to a run on the bank. But sometimes it seems hardly to matter at all. You might have thought that China's reputation as a stable country making steady progress towards a more liberal society would have been devastated by the Tiananmen Square riots. Yet the willingness of foreign companies, including US ones, to invest in China was as far as one can see completely unaffected; in fact it gathered pace afterwards.
There is also a distinction to be made between the short-term and long-term effects. There must be some damage for this Government. I gather that a lot of foreign people working in London have been shocked by the change of mood between the Blair and the Brown governments. I heard a series of foreign business leaders heaping praise on Gordon Brown at a Treasury seminar when he was still chancellor. I would be astounded if they would do that now. But that is a short-term effect. They know that this government won't be there for ever and they will recalibrate their opinion as and when the other lot get in.
So while there may be some short-term damage, things will adjust. If, as I expect, the non-dom tax changes end up with the exchequer getting less tax revenue in total, not more, expect policy to change pdq. The trouble is that no one knows the effect of a change in tax policy until after the event. What matters is not what people say; it is what they do.
The longer-term effects are decided by bigger economic forces. China continued to attract inward investment because the economic case for using its vast supply of cheap labour was overwhelming. So the crucial question facing London's financial service business is whether the underlying reasons that attracted it in the first place will continue to have their magnetic influence. Could the business really shift elsewhere?
We don't have up-to-date figures for the industry's output and will have to wait until the summer for 2007 ones. Two things, however, are absolutely clear. One is that this is a London industry. Roughly half of the country's output is generated there, as the pie-chart shows. The other is that until the middle of 2007 at least, financial services were gaining their share of national output and that if you add in associated professional services, such as accountancy and the law, they are now larger than manufacturing (other chart).
So there is mass. But why, you might reasonably ask, does the industry have to be so concentrated? The costs of operating in London are huge - with the partial exception of New York, higher than anywhere else in the world. Yet the business is almost entirely electronic. True, much of the trading has to be done in dealing rooms and the dealers need to be in the same place. …