City of London and the EU Feb04

London is a financial centre of global importance and a major contributor in terms of output and employment for the UK economy. London’s position as a premier financial institution in the EU is due to its major competitive advantage based on a highly skilled and flexible labour force; its ideally located time zone between the USA and Japan; its use of English as an international language of business; the relative low levels of corporate UK taxation; the availability of low cost communications technology and the effective but not overly onerous regulatory environment. Employment in City-type activity is beginning to recover and it is estimated that about 311,000 people were employed in the sector ending December 2003. Financial services account for 11% of London’s total GDP, twice the national average, while employment in the sector, at 8% of the total, is also twice the UK average.

It is estimated that the EU GDP in 2003 was £22bn higher because of a direct contribution by a cluster of global finance companies based in the City. London’s fund management and insurance industries make a substantial contribution to the employment and output of the Square Mile. As an insurance centre of world importance, UK insurers hold over £1000bn of long-term assets and over 20% of the equities on the UK stock market. London’s unique ability to insure any risk supported by a concentration of experts, law and accountancy services and a practical regulatory regime allows the London Market to write a gross premium of £25bn each year. London accounts for 23% of all premiums written worldwide in the insurance of marine and aviation risk

About 54% of City-type activity in the EU is conducted in London. The UK’s volume of cross-border lending or assets under management is greater than that of Germany and France combined. The City institutions are responsible for 45% of global (and almost all of EU) foreign equity turnover. Daily foreign exchange activity in the UK is equivalent to 35.3% of GDP – eight times as great as the 4.4% figure for the rest of the EU. Without London as a financial centre, there would be a net loss of 200,000 jobs throughout the EU, especially in the Benelux countries, Germany, France, Italy and of course the UK.

The EU is equally important to the City as around 33% of London’s turnover in international banking, international equities, bonds, corporate finance and derivatives originates from clients in EU Member States other than the UK. Over 75,000 of the City-type jobs in London depend on business from the EU. The EU remains a major destination for export of business services constituting 40% of total City-type export in revenue terms. The City hosts offices of many EU-owned banks and they employ almost 30,000 staff in London contributing more than £2.25bn in tax revenues to the UK exchequer every year.

The foreign exchange market has benefited from the introduction of the Euro. Foreign exchange contracts (£/$; $/€; $/Yen) in London amount to £350bn daily. Historically, London had a much lower share of transactions involving currency pairs of the euro legacy currencies as these types of transactions were more common on the Continent. Elimination of EU national currencies in favour of the Euro affected the London foreign exchange market much less than that in Paris and Frankfurt – in fact London’s foreign exchange market has grown at the expense of these markets. Bank of International Settlements statistics indicate that the share of issued international bonds and notes denominated in the Euro rose from 34% of total issued in 2001 to 40% in 2002. After the US Dollar, the Euro is the second most traded currency (41% of all transactions) in London’s foreign exchange market.

Neither the introduction of the Euro nor the European Central Bank (ECB) in Frankfurt has diminished the City’s strength as the world’s leading financial centre. In view of the City’s dominance in the EU, why should the UK not insist on a seat with a vote at the ECB?