“Can the City of London flourish if the UK stays in the

European Union?“

Background material for presentation to Freedom Association – 2nd March, 2011

How will Britain remain prosperous and influential

in the 21st century?• The question matters because we need to be able to

set the rules, insofar as they affect us. • UK’s national output is worth about £1,400b. and is

roughly 3% - 4% of world output, although the number depends on statistical conventions.

• UK growth of 2 ½% a year and EU growth of about 2% a year is less than global average (about 3 ½% a year) over the last decade.

The UK's trade in international business services, mostly located in London and the South-East

0

20000

40000

60000

80000

100000

120000

140000

£m.

Exports

Imports

The compound annual growth rate in the 21 years to the peak in Q4 2008 was 15.0%

Main "industrial" categories of financial employment in the City of London, 1995 - 2001

1995 2001 % change

International banking 16100 23000 43Foreign exchange trading 24300 20000 -18Domestic banking 26900 15000 -44Securities trading etc. (UK) 14400 15000 4Securities trading etc. (International) 13500 36000 167Derivatives 9000 16000 78Corporate finance 8100 11000 36Fund management 10400 13000 25Insurance 24600 29000 18Professional services 20000 28000 40Other activities 27800 39100 41

195100 245100 26

Source : Lombard Street Research Ltd. Growth Prospects of City Industries

1. About 60,000 of the 240,000 people in the Square Mile in 2001 were in “international banking” and related activities (FX & derivatives).

2. These are the areas vulnerable to closure of international inter-bank markets and regulatory increases in capital requirements.

We know that these activities – perhaps 20% - 25% of City-type financial services employment in London – boomed from mid-2002 to late 2007, and we must expect that they are now in medium-term retreat.

These are rapidly growing, high-value-added activities in which Britain is/was a world-beater, even though by early 21st century most of the organizations were not British.

The change in the year to Q1 2010 was 19.6%, the largest % fall in the history of this series.

How much do these activities matter to the UK?

1. In 2009 the UK’s exports of services totalled over £160b., about 11 ½ % of GDP.

2.Of these almost £100b. were ‘financial services’, ‘insurance’ and ‘other business’, where ‘other

business’ included many financial-related services.

3. Financial service exports as such were £44b., over 3% of GDP. (In 2008 they had been 3 ½% of GDP.)

The London economy 1.

• Roughly speaking, about 1.2 million people in highly-paid service industries occupy about 225m. sq. ft. of space in central London.

• Of the 1.2m., perhaps 500,000 – 600,00 are in ‘banking, insurance & finance’, with – say – 400,000 – 450,000 in high-value-added international financial services.

• These people produce about £50b. - £55b. of exported international financial services and another £10b. of value added for domestic financial services.

The London economy 2.• The value added per person in international financial

services is probably in the £100,000 - £150,000 per annum area, with pay running at about £55,000 - £60,000 per person on average.

• The balance of the 1.2m. people (550,000 – 700,000 people) are in a range of service industries, helping both international and UK companies. Their output per head may be a bit lower than in financial services, but is well ahead of the UK average. They are responsible for perhaps £50b. of service exports and another £15b. or so of value added for UK companies.

The London economy 3.

• So office employment in central London represents about 4% of total UK employment and accounts for about 8% of UK output, with perhaps 75% - 80% of this output taking the form of “international business service” exports.

• They occupy about 210m. – 240m. square feet of office space, with the exact figure depending on borough coverage, chartered surveyor estimates, etc.

The UK approach to financial regulation 1.

• Key question, “what is in our national interest?”. Not “what is the global interest? or the interests of Europe?”.

• We need to be able to set the rules of international business service industries.

• We need to ensure that these rules are fair and liberal, easy to integrate with and accompany English law, etc.

The UK approach to financial regulation 2.

• The English/British tradition has been ‘self-regulation under the law’, with the law itself evolving by judge-made precedent (i.e., ‘the common law’). This is acknowledged as flexible and evolutionary.

• European legal traditions are very different. In the financial sector the tradition is of regulation by, in effect, an ‘external agency’, i.e., by regulators who have their own interests at heart.

Examples of direct threat

• 1. Directive on alternative investment vehicles – private equity funds and hedge funds, and

• 2. Pressure for increases in banks’ capital/asset ratios, which is not a specifically EU-related threat, but is to a degree outside UK control and certainly affects the City of London

• We must stop Brussels interfering in economic activities which are important to our nation’s prosperity.