BOOKS: London sits on its laurels - An over-optimistic analysis of the international power and influence of the capital's financial centre fails to convince Richard Lambert

BOOKS: London sits on its laurels - An over-optimistic analysis of the international power and influence of the capital's financial centre fails to convince Richard Lambert - City State; By Richard Roberts & David Kynaston; Profile Books; pounds 17.99

by RICHARD LAMBERT, editor of the Financial Times
Last Updated: 31 Aug 2010

City State; By Richard Roberts & David Kynaston; Profile Books; pounds 17.99

The past 30 years have been a golden age for the City of London. Dynamic and prosperous, it has stood out in contrast to the rest of the British economy as a European and global leader. While Paris and Frankfurt have struggled to capture some of its wealth, and Tokyo has slipped back as a source of international capital, London has strengthened its position alongside New York as one of the world's great financial centres.

David Kynaston and Richard Roberts, two distinguished business historians, have set out to explore this 'City State', which they argue has never been so powerful as it is now.

Maybe, they admit, the City doesn't have all the answers - it is, after all, a rather two-dimensional place, narrowly concerned with profit and loss. And perhaps it should not be 'unambiguously triumphant' (their italics). But the City could become even stronger in the future, as more and more countries become integrated into the international financial system.

What they don't seriously consider is the possibility that the period since the late 1960s has been truly exceptional in the history of London's financial markets, and that their relative strength is already deteriorating. Here are six reasons why this book may just turn out to be wildly over-optimistic.

Leadership: in terms of raw power, the City's institutional leadership is a shadow of its former self. Its chief spokesman used to be the Bank of England, but that role came to an end in 1997 when the Government took away its regulatory powers.

The securities markets are dominated by international companies, run from New York and Switzerland. The insurance companies have lost their position in the global league tables and are also heading for foreign ownership, while the clearing banks have largely failed to spread their strength much beyond Britain's high streets.

And whatever you think about the eventual impact of the euro, it is undoubtedly creating a major power base in Frankfurt.

Regulation: the Financial Services Authority is increasingly powerful in the City - and a good thing too, most people would say. The old system of multiple regulators, run largely by practitioners, was too complex and much too cosy.

But competition has its advantages, even among regulators. Because it has such wide responsibilities, the danger for the FSA is that it will become more risk averse, more suspicious of new competitors, and more likely to be leant on by Westminster.

Meanwhile, London's global competitors, whose cumbersome regulation gave it such a head start in the post-war period, are getting a lot smarter.

Innovation: this has never been the City's strong point. It's hard to think of any major product that has originated there since the Euromarkets in the 1960s. This will matter more as some of the City's other natural advantages are under threat.

Location will matter less as financial services are increasingly delivered electronically. A growing proportion of business is conducted within giant financial conglomerates, making face-to-face contact with outsiders less important.

Infrastructure is bad, and getting worse: transport is the obvious example. London gained a great advantage in telecommunications when most of its competitors were still served by state-owned dinosaurs. That lead is under threat, too. Its clearing and settlement systems are poor, to put it politely.

Globalisation: because London's strength has been as a global City, it has benefited enormously from the floods of international capital over the past 30 years. But that trend cannot be projected forward for ever: a backlash is already detectable.

This may be too gloomy a response to a rather complacent book. But if the City is to continue to prosper, it will need to find new sources of vigour, competitiveness, and sheer paranoia.

Find this article useful?

Get more great articles like this in your inbox every lunchtime