Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
GLOBALIZATION AND THE FUTURE OF THE FINANCIAL SECTOR: THE CASE OF THE CITY OF LONDON Leila Simona Talani Professor of International Political Economy EIS department, King’s College London e-mail: [email protected] Introduction The aim of this chapter is to assess the future of the City of London in light of the process of globalization. The main question this contribution seeks to answer is whether the leading position of the City of London, both inside the U.K. institutional system and as a leading global financial player, can be threatened by the globalization process. Such an analysis is predicated around different definitions of globalization. Globalization is one of the most hotly debated topics within the social sciences, and certainly one that has captured our imagination when looking toward the future. It is possible to classify positions adopted by scholars into three broad groups, alongside the three traditional approaches to International Relations/International Political Economy (IR/IPE) (Dicken 1999:5): First, those who deny outright the very existence of the phenomenon of globalization (Hirst et al. 1999a; Thompson 1993); second, those who recognize it but tend to give only a quantitative definition of globalization (Held et al. 2000; Holm et al 1995 Holm et al 1995); 3) third, those who adopt a qualitative definition (Mittlemann 2000; Hay et al. 2000; Dicken 1999;2003). This chapter differentiates between different definitions of globalization with the aim of identifying what is the impact of each of them on the City of London. Is there a contradiction between the rise of global finance and the power of domestic financial elites? Is financial globalization making the notion of national financial sectors obsolete and useless as a heuristic category? This chapter deals with the consequences of financial globalization on the City of London in an effort to find out whether globalization limits the power of domestic financial elites, or, on the contrary enhances their role and their bargaining power inside the national polity. Does the economic position of financial capital, and therefore of the City of London improve as a consequence of globalization, leading to a shift in the power relations between different socioeconomic groups which favors the financial sector over any other socio-economic actor? To achieve 1 this aim, the analysis will be conducted by looking at whether and how the different definitions of globalization may impact on the City’s future success. First, the quantitative definition of globalization will be addressed, both from the macro and the micro perspective. Then the discussion will move to how the qualitative definition of globalization entails a prosperous future for the British financial sector. 1 Quantitative definition: The macro analysis. Let us start from a classical quantitative view of financial globalization. This has been well summarized by Cohen (1996): “Financial globalization (or internationalization) refers to the broad integration of national markets associated with both innovation and deregulation in the postwar era and is manifested by increasing movements of capital across national frontiers. The more alternative assets are closely regarded as substitutes for one another, the higher the degree of capital mobility” (Cohen 1996:269). Adopting this definition, capital mobility becomes the constituent element of financial globalization (Obstfeld et al. 2004). In macroeconomic terms, the problem is called the “inconsistent quartet” (Padoa-Schioppa 1994), the “unholy trinity”’ (Cohen 1996) or the “trilemma” (Obstefeld et al. 2004:29), and posits that in an economic environment characterized by free capital movement, national monetary autonomy becomes an alternative to keeping stable exchange rates. The case rests on the argument that complete capital liberalization, (as implied by the quantitative definition of financial globalization) and exchange rate stability, (as necessary, in theory, for international trade to continue unhindered) are incompatible with divergent national monetary policies. The economic explanation for the existence of the “inconsistent quartet” can be found in the Mundell-Fleming model, which links the monetary economic equilibrium—the equilibrium of monetarist variables given by the equilibrium between money supply and demand and summarized in the LM curve—and the real variables equilibrium, the equilibrium between investments and savings that is summarized by the IS curve. The model also includes the equilibrium of the external economic relationships in the form of the balance of payments equilibrium, summarized in the BP curve. 2 According to the Mundell-Fleming model, in a fixed exchange rate regime with full capital mobility, the BP would lie parallel to the “x” axis, so that any monetary expansion would cause the interest rates to decrease and capital, given the assumption of its complete freedom of movement, would outflow until the interest rate reached its original level without any rise in domestic demand. Capital outflows, however, would immediately put the exchange rate under strain, eventually threatening its stability. Thus, any expansionary monetary policy would prove ineffective in stimulating the national economy, while it would eventually undermine the stability of the exchange rate. In other words, there is a trade-off between exchange rate stability and autonomous monetary policy making. In conclusion, according to this model, in a world of perfect capital mobility autonomous monetary policy is inconsistent with stable exchange rates. As a consequence, not only do national economic authorities see their capacity to implement independent monetary and fiscal policies substantially constrained, but financial markets also see their power to destabilize national economies engaging in speculative practices greatly increased. Although in macroeconomic terms this argument is certainly sound, the British case is particularly relevant in highlighting how financial globalization did not particularly decrease the power of the City of London as defined here. The main point is that in the trade-off between the stability of exchange rates and autonomous monetary policy, some domestic actors (notably the City of London) might still prefer the latter, as they have demonstrated in their position toward joining the Euro area (Talani 2000, 2004, 2010 and previous chapter). This happens for some concurring reasons. Some sectors, like financial services, though perfectly integrated at the regional level might still prefer to keep autonomous monetary policy decision-making at the national level. In particular, setting the interest rates at a higher level than other financial centers represents a relevant competitive advantage in attracting short- and very short-term capital. This, of course, is harmful for industrial activity. However, here the issue becomes one of power relations between domestic economic sectors or interest groups. In the context of globalization, the issue is also influenced by the extent to which the industrial sector is actually relying on domestic production as opposed to production abroad (Dicken 2003). Moreover, unstable exchange rates may and do actually represent a substantial source of revenue for the City of London. For example, the volume of foreign exchange trading surged to record levels at the outset of the credit crisis as rate cutting from central banks and high volatility in 3 exchange rates (Fig. 5.3) caused a flight from emerging market currencies to “safe-haven” currencies such as the US dollar (IFSL 2009). Figure 1 Exchange rate volatility since the start of the credit crisis Source: IFSL 2009 Global bank revenues from foreign exchange trading benefited from relatively strong trading volumes since the start of the credit crisis and from higher commissions that resulted from a widening of foreign exchange trading spreads. The UK was the main geographic center for foreign exchange trading with nearly 36% of the global total in April 2009. Average daily turnover on the UK’s foreign exchange market totaled $1,269 billion in April 2009, with a further $81 billion traded in currency derivatives (IFSL 2009). In the UK, the share of the largest 10 institutions rose from 61% to 70% between 2004 and 2007, continuing the trend from the 1998 and 2001 survey. Needless to say, London was the center for foreign exchange trading (see below). Figure 2 Concentration of Foreign Exchange Market in the UK 4 To conclude the discussion of how the British financial sector will gain from globalization at the macro level, it is not unlikely that London will be on the winning side of speculative practices (Guth 1994; Lilley 2000). Following is just one example: In 2008, the Financial Services Authority (FSA) was compelled to pass emergency rules banning the short-selling1 of UK bank shares in the City of London after the practice brought the HBOS share price to a collapse2. Well-known City operators are believed to have profited from short-selling sub-prime mortgages and betting against HBOS3. Hedge funds in the City of London are said to have made at least £1 billion in profits by shorting HBOS shares in June and July 2008, fuelled by City rumors that the bank was in financial distress. At one point in June of that year, a single fund, Harbinger Capital, traded more than three per cent of all HBOS shares, and is said to have made more than £280 from shorting the bank. Harbinger was run by Philip Falcone, a former Barclays trader who earned £1.7 billion in 2007 alone4. 2. Quantitative definition: the micro-dimension, domestic politics and interest group analysis. Who wins and who loses from financial globalization? 1 Short-selling is selling borrowed shares in the hopes that their price will fall and that they can be bought back at a profit later on. 2 The ban was then lifted in January 2009 3 See Guardian, various issues. 4 See The Telegraph, web-site http://www.telegraph.co.uk/news/uknews/2977387/Protect-bank-shares-from-shortselling-ministers-told.html as accessed on June 28, 2010. 5 It is, however, at the micro level (i.e. at the level of sectoral and domestic interest group analysis) that we see how the City of London can gain from globalization. As Cohen correctly states, ”owners of mobile capital thus gain influence at the expense of less fortunate sectors including so-called national capital as well as labor” (Cohen 1996:286). How does this happen? To answer this question, it is necessary to adopt a domestic politics (or inside-out) approach to the international political economy. With respect to this, there are various theories, including the societal actors approach, which identifies the source of power in the preferences of societal and economic forces as shaped by their international and domestic economic situation (Rogoski 1989); the intermediate associations explanation, which stresses the role of such organizations like political parties and interest groups in linking social preferences to state institutions (Katzenstein, 1977); state-centered theories, resting on the assumption of the central role of formal institutions, bureaucracies and rules in defining both interests and policy outcomes (Martin 1993); or economic ideology explanations, which stress the role of economic perceptions, models and values in determining states’ preferences and behavior (Goldstein et al. 1993). The societal actors approach, focusing on the role of sectoral actors and interest groups has proven most effective in proposing useful, testable hypotheses in relation to financial issues. Jeffrey Frieden greatly contributed to the development of a distributional politics approach to exchange rate policymaking from within a two-level game theoretical framework (Frieden and Stein 2001; Frieden et al. 2010, 2005, 2001; Frieden 2009, 2004, 2002, 2001, 2000, 1999, 1998a, 1998b, 1997a, 1997b, 1996a, 1996b, 1994a, 1994b, 1993, 1991). Frieden (1991) proposes a “two-step” model of national exchange rate policymaking based on domestic sectoral interests. The model identifies economic sectors’ preferences vis-à-vis two interrelated dimensions of exchange rate regime (fixed or flexible) and level (appreciated or depreciated). In order to understand this approach, it is important to recall that under perfect capital mobility, adopting a fixed exchange rate, while providing currency stability, implies sacrificing domestic monetary policy autonomy. Two groups of actors directly involved in international trade and payments who are highly sensitive to currency fluctuations and would, therefore, support fixing the exchange rate are the producers of export-oriented tradable goods and international investors. Conversely, two other groups of actors who tend to be highly concerned about domestic macroeconomic conditions and would thus favor the national monetary policy autonomy made possible by flexible exchange rates, are producers of non-tradable goods and services (mainly the public sector) and producers of import-competing tradable goods for the domestic market (Frieden 1991). The resulting cleavages would be as follows (table 1): 6 Table 1: Frieden’s model FLOATING FIXED EXCHANGE RATES DEPRECIATION OF THE CURRENCY EXCHANGE RATES Manufacturing, Export-oriented, small companies big companies Manufacturing, small companies + export oriented, big companies APPRECIATION OF Public sector Financial and THE CURRENCY banking sector Public sector + financial and banking sector Manufacturing, Export-oriented, small companies, big companies + + financial and public sector banking sector The problem with the application of this model is that it is unclear which affects globalization will have on exchange rates, whereas it is implicit in the quantitative definition of globalization that it requires trade and investment liberalization. From this point of view, as early as 1989, Rogowski (1989) had identified which economic sectors would gain from the opening of the markets. Based on the Heckscher-Ohlin theorem5, Rogowski proposes a model of factor endowments which allows the categorization of any country according to whether it is advanced or backwards or whether its land/labor ratio is high or low (Rogowsi 1989:6). Then, applying the Stolper-Samuelson theorem6, he hypotheses that increasing exposure to trade will result in a urban/rural conflict in advanced economies with a low land/labor ratio and in backward economies with high land labor ratio; on the other hand, it would result in a class cleavage in advanced economies with high land/labor ratio and in backward economies with law land/labor ratio (table 2). (Rogowski 1989:8) 5 The Heckscher-Ohlin trade model concludes that a country will tend to export goods intensive in the factor it has in abundance, and to import goods intensive in the factors in which it is scarce. (Frieden and Rogowski 1996:37) 6 The Stolper-Samuelson theorem finds that in each country returns rise absolutely and disproportionally to owners of factors that are required intensively in the production of goods whose prices have risen; and they fall absolutely and disproportionally to factors required intensively in the production of goods whose prices have fallen. (Frieden and Rogowski 1996:37) 7 Table 2: Predicted effects of expanding exposure to trade Land/labor ratio Advanced economy High Low CLASS CLEAVAGE URBAN-RURAL Land and Capital CLEAVAGE Free trading assertive; Capital and labor Labor defensive, Free trading assertive protectionist Land defensive, protectionist RADICALISM Backward economy URBAN-RURAL CLEAVAGE CLASS CLEAVAGE Labor Land Free trading assertive Free trading assertive Land and Capital Labor and Capital Defensive Protectionist Defensive, protectionist SOCIALISM POPULISM Source: Rogowski 1989:8 Building on this model, Frieden and Rogowski were able to project the interest of socioeconomic sectors concerning globalization (Frieden and Rogowski 1996). Assuming that globalization is defined in quantitative terms as “growing global trade and financial flows” (Frieden and Rogowski 1996: 26), by applying the Heckscher-Ohlin/StolperSamuelson approach, the authors derive some interesting propositions about the distributional consequences of globalization. This would imply a rise in the domestic prices of goods whose production is intensive in the given country’s abundant factors and a fall in the prices of those goods intensive in scarce factors. In this context, globalization would benefit the owners of abundant factors and disadvantage those who own scarce factors (Frieden and Rogowski 1996: 37). Therefore, as developed countries are characterized by an abundance of capital and a shortage of unskilled labor, globalization favors capitalists and skilled labor while unskilled labor is at a disadvantage. (Frieden and Rogowski 1996: 40). This is relevant for our domestic politics analysis of who wins and who loses from globalization as the City of London is composed exclusively by capitalist and skilled labor and has everything to gain from liberalization from this perspective. 8 There are, however, two further dimensions that strengthen the argument that the City of London will certainly gain from globalization. First, we must consider that on the basis of this analysis, the power of an interest group to assert its preferences is directly related to its capacity to move, which in turn depends on the mobility of its factor. If an interest group is able to credibly threaten leaving the country, its bargaining power increases. Therefore, globalization reduces the capacity of the government to disregard the preferences of the most mobile factor, which is capital—and financial capital in particular— and increases the negotiation and political power of the owners of such capital: to wit, the City of London (Kehoane et al 1996:19; Busch 2008:8). Moreover, adopting a sectoral rather than a factorial type of analysis, through the application of the specific factors approach (also known as Ricardo-Viner) the result is even more clearly supportive of the view that the British banking sector has everything to gain from globalization (Frieden and Rogowski 1996: 38). This perspective suggests that factors like land, labor or capital are normally used for a specific activity or production, and therefore only price changes in their specific activity or production (not in all of the uses of the factors) will affect them. To apply it to the case of the UK, if capital is used specifically for banking and financial transactions when the terms of trade in banking change, only the banking sector will gain, not all capital. Overall, the application of the RicardoViner variant implies: 1) That the benefits of globalization will vary with the specificity of the relevant actors’ assets 2) That the most competitive sectors will gain more 3) That political pressure will happen at the sectoral rather than at the factorial level. There is no doubt that financial capital is an abundant factor in the UK. Therefore, to the extent to which the City remains competitive internationally, the high degree of openness guaranteed by globalization will improve its position not only with respect to labor but also, more importantly given the approach adopted here, with respect to industrial capital. 3. Qualitative definition: everything changes so that nothing will change? Let us now address the question from the perspective of a qualitative definition of globalization. As detailed above, technological change is at the core of the qualitative definition of 9 globalization, bringing about changes in the productive and in the financial sphere (Dicken, 2003:85). It is technology, therefore, that produces financial globalization, defined here as the existence of around-the-clock access to financial transactions all over the world (Dicken 2003: 443). Susan Strange identified the three most important technological changes that have produced financial globalization: computers, chips and satellites (Strange 1998: 24-26): “Computers have made money electronic…by the mid-1990s computers had not only transformed the physical form in which money worked as a medium of exchange, they were also in the process of transforming the systems by which payments of money were exchanged and recorded” (Strange 1998: 24). Chips (microprocessors) have allowed for the credit card revolution and will soon allow for a “smart card” revolution as well (Cohen 2001). Finally, satellites are the basis of global electronic communication (Dicken 2003:85-120). It is impossible not to understand the implications on financial services in terms of increase in productivity; patterns of relationships and linkages between financial firms and clients, and within the financial community; velocity and turnover of investment capital and capacity to react to international events immediately (Dicken 2003:443). But does this also mean that the physical location of financial markets loses significance or that financial elites become disentangled from national boundaries? There is some consensus in the literature that financial globalization has “made geography more, not less, important” (Dicken 2003:59) (Coleman 1996:7). On the one hand, some financial products contain information which is the result of long, well-established business relationships and this remains the case with financial globalization. Equities, domestic bonds and bank loans have indeed a large amount of domestic information embedded within (Coleman 1996:7). Most importantly, however, it is worth noting that despite the significant emphasis on financial globalization, the location of global financial power has remained surprisingly unchanged and concentrated in a handful of urban centers, namely New York, London and, to a more limited extent, Tokyo. This concentration is unparalleled in any other kind of industry and it is also extremely stable (Dicken 2003: 462). In fact, London is the more broadly based financial center and its position does not seem to have changed in the last decade—the decade of globalization. If anything, with respect to many of 10 its main markets and services, its position has improved. Below is a market-by-market comparison between the beginning of the 1990s and the mid-2000s. Money markets: London short-term money markets, through which large sums in pounds and other currencies are lent and borrowed for periods from as short as overnight, to a year or more, constitute—together with the Foreign Exchange and the bullion market, also-called the London Gold Market—the bulk of the prosperous City’s wholesale markets (Shaw 1981); that is, markets trading in large amounts of six-plus figures. The institutions active in the money markets include the hundreds of banks in the City of London which operate mainly through deposits, apart from the Certificates of Deposit market. In 1996, there were over 540 foreign banks in London, more than in any other city in the world. In 2007, the situation had not changed. London had offices, branches or headquarters of almost every major international bank and financial institution in the world, including the European headquarters of over one third of all Fortune 500 firms. In 2007, the financial and professional services sector accounted for around 11 per cent of the UK GDP. The UK trade surplus in financial services was £35.6 billion. In terms of banking, the UK was the world’s largest source of international bank lending, with total banking assets totaling £7.5 trillion in September 2008, and 20 per cent of crossborder lending—the world’s biggest share7. In 2007, London had 250 foreign banks with branches or subsidiaries almost double the number in New York. In 1995, the London Foreign Exchange market was the largest in the world, with a daily turnover of $464 billion in 1995, an increase of some 60% compared to three years earlier and more than the turnover of New York and Tokyo combined (British Invisibles 1996a), and with a steadily growing market share of 30%. In 2007, London still accounted for over 30 per cent of world foreign exchange business and is still the global clearing center for the global trading of gold and silver, trading on average $24.9 billion of gold and £3.02 billion of silver each day8. Capital markets: To start with, it is worth clarifying that capital markets are those markets that buy and sell securities. 7 See UK Trade and Investment Department on line: https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/sectors?_nfls=false&_nfpb=true&_pageLabel=SectorType1&n avigationPageId=/financial_service, as accessed on May 22, 2009 8 See UK Trade and Investment Department on line: https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/sectors?_nfls=false&_nfpb=true&_pageLabel=SectorType1&n avigationPageId=/financial_service, as accessed on May 22, 2009 11 Securities, in turn, may be broadly divided into two categories: shares, which may be both equity and preference, and bonds (Artis 1996)9.Whereas shares may only be issued by commercial undertakings, bonds, which are essentially fixed interest rate securities, are issued by commercial undertakings and governments, local authorities and other public bodies including international organizations, so that it is possible to identify in London both a commercial and a government bonds market. The former is constituted by a national bond market, where both national10 and foreign11 commercial bonds are traded, and by the completely international Eurobond market, which is dominant on the national corporate bond market, where international security dealers distribute issues, both commercial and governmental, denominated in various currencies (primarily the US dollar) to both domestic and foreign investors (Artis 1996). In terms of bonds, at the beginning of the 1990s, the Eurobond business was centered in London with a turnover12 of £2866 billion in Eurobond trading in 1993, an estimated net revenue of £327 million (BBA 1996) in 1991, and a 60% market share of international bonds in 1994 for primary markets (British Invisibles 1996a) when total international bond issues in 1994 equaled $420.2 billion, and 75% for secondary markets (British Invisibles 1996a). In 2007, the UK bond markets were still thriving. The market value of UK government securities (Gilts) totaled £390 billion in March 2007—up 19 per cent from the end of the previous year. As far as the shares market is concerned, London’s Big Bang on October 27, 1986, completely changed the environment in which share trading takes place on the London Stock Exchange. It allowed for a profound re-structuring13 and re-capitalization of the market-making firms which, thanks to the elimination of the single capacity system, replaced the traditional jobbers and brokers (Reid 1988). It also allowed for a significant reduction in costs, due to the elimination of the fixed commission system (Artis 1996). 9 An equity, or ordinary share, represents a share in the ownership of a company: the equity shareholders jointly own the company and have the right to vote at general meetings. They are entitled to dividends, but only after all other creditors have been paid, and if the company makes a loss, their shares fall. Preference shares do not confer voting rights, and entitle dividends only up to a fixed maximum, but the claims of preference shareholders take precedence over those of equity shareholders. Bonds are fixed interest securities which entitle to regular payments of interests and to the eventual repayment of the initial sum lent. Their claims take precedence over both equity and preference shareholders. They may be issued both by private companies and by governments and other public bodies. 10 National bonds are issued by a resident company, denominated in the local currency and placed on the domestic market. 11 Foreign bonds are issued by a non-resident company, denominated in the local currency and placed on the domestic market. 12 Figures for turnover may be higher than those for the outstanding debt since bonds may be traded over and over again before the deadline. 13 Indeed, on the eve of the City’s Big Bang and in its immediate aftermath a number of mergers and takeovers took place in the City of London, as the big British Clearing and Merchant banks--as well as interested foreign investment firms--saw the opportunity to enter the renewed London capital market. 12 Within a year of the Big Bang, trade in UK shares had doubled, and by September 1987, customer business in domestic British equities was running at over £1.1 billion a day, against £0.6 billion in 1986, with £0.8 billion of further deals taking place among market makers. Moreover, during the first year following the reforms, despite the elimination of fixed commissions, total commission income—far from falling for competitive pressures—increased to £1.16 billion from 0.74 billion in 1985-86, thanks to the notable expansion in volumes traded and the greater activity by higher-paying private investors (Reid 1988). Table 5.3 below shows the funds raised by share offerings in the five years between 1989 and 1994. Table 3 Funds raised by share offerings in the UK 1989-1994 (£ million) Ordinary shares (equities) Gross issues Preference shares Redemptions Net issues Total Rights issues 1989 6187 2949 2636 3551 1062 1990 4402 3114 908 3494 728 1991 11140 9129 135 11005 1137 1992 6426 3227 29 6393 624 1993 16536 10891 - 16534 1529 1994 14865 4926 20 13739 402 Source: Bank of England Quarterly Bulletin, Financial Statistics, various issues Business in international, or foreign, shares14 also soared after October 1986, reaching a 65% market share of foreign equities turnover in 1991. At the end of March 1993, London dealers were quoting firm prices for over 400 European equities and annual turnover had risen to over £150 billion (Artis 1996). In 2007, London had 46 per cent of the share of global foreign equity trading and over 70 per cent of global trading in international bonds. London also hosts Europe’s largest international banking center, with an estimated 41 per cent of all EU financial services and a six per cent share of the global equity market capitalization totaling £42.8 trillion (September 2008). Additionally, the 14 Shares of companies from foreign countries, mainly European, listed in London by specialized market-makers. 13 London Stock Exchange has over 1,500 companies trading on the main market and, in 2007, Initial Public Offerings (IPOs) raised £26.1 trillion. The AIM15 is the most successful growth market in the world, with over 1,600 companies trading. Since opening in 1995, over £60 billion has been raised through IPOs and further issues. The London Carbon Trading Exchange has traded £40 million each day since its opening in 2005. London accounts for 80 per cent of the £4 billion EU Emissions Trading Scheme and 20 per cent of cross-border lending. In the first nine months of 2008, London’s share of European IPOs was 63 per cent of the total value and 32 per cent of the number of all European IPOs16. Even after the establishment of the Economic and Monetary Union (EMU), the City of London did not seem to have lost its position with regard to its competitors in the Euro-zone. On the contrary, it acted as the off-shore center of Euro-zone capital. In 2007, inflows from the Euro area were £1020 billion and outflows were £981 billion. The impressive amount of these figures, much higher than the British GDP, not only graphically demonstrates its role as the financial center of the Euro-zone, but more crucially its enduring position as a global financial center (Bishop in Bishop et al. 2009:31). Derivative markets: The “derivative market” deals in financial futures and traded options which allow investors and financial groups to hedge against the adverse effects of market swings. In the United Kingdom this trading is carried out in the London International Financial Futures Exchange (LIFFE), established in the City of London in 1982. A financial future is a contract to buy or sell a specified quantity of a given financial asset, like a government bond, on a future date at a set price. A traded option, instead, gives the purchaser the right, but not the obligation, to buy (call option) or to sell (put option) a specified amount of a given financial asset at a set price within a specific period of time. For this right, the purchaser pays a premium to the seller of the option (Artis 1996:185). LIFFE, which was the largest such exchange in Europe, with a total volume of 148,726,421 contracts in 1994, accounting for 17% of market share that year—a steady growth from previous years. In 2007, the UK’s share of cross-border derivatives turnover was 47 per cent. In 2007, 1,224 15 AIM is the London Stock Exchange's international market for smaller growing companies. On AIM you will find a wide range of businesses ranging from young, venture capital-backed start-ups to well-established, mature organizations looking to expand. For data see http://www.londonstockexchange.com/engb/products/companyservices/ourmarkets/aim_new/About+AIM/ as accessed on May 21, 2009 16 See UK Trade and Investment Department on line: https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/sectors?_nfls=false&_nfpb=true&_pageLabel=SectorType1&n avigationPageId=/financial_service, as accessed on May 22, 2009 14 million futures and options contracts were traded in London. Trading on LIFFE17 totaled 949 million contracts in 2007 and 814 million in the first nine months of 200818. Over 43 million contracts were traded in London on the European Derivatives Exchange (EDX) in 2007. In the 1990s, the City of London had a strong Over-The-Counter (OTC)19 derivatives market. The Bank for International Settlements inaugural OTC market survey showed that London was the top booking location for contracts in 1995. With 30% of the market share, London was at a considerable distance from the other financial centers (BBA 1996:21). In 1991, the City estimated net revenues from OTC interest rate contracts traded in the UK at £284 million; exchange traded instruments on LIFFE were estimated at £363.4 million in the same year (BBA 1996:27). In 2007, the City of London was the world’s most important marketplace for over-the-counter (OTC) derivatives with 43 per cent of global trades20. Asset management and legal services: In the 1990s, fund management was a highly lucrative service offered by the City's merchant banks thought to contribute nearly one half of the banks' profits in aggregate (Reid 1988). In 1996, London was the world's second largest fund management center after Tokyo (British Invisibles 1996b); and the UK management industry serviced over £1,500 billion of institutional and private client investors, its success owing much to the surging growth of the United Kingdom pension funds, but also to a favorable regulatory environment and to the pool of highly skilled labor (BBA 1996). In 2007, London was the fastest growing market for assets management with $400 billion of assets under its management at the end of that year. This accounted for 80 per cent of hedge funds managed in Europe and 20 per cent of the world’s hedge fund assets. The value of global hedge fund assets peaked at $2,250 billion at the end of 200721. With respect to professional services, in 2007, exports of accounting services increased by four per cent to reach £1,012 million. Moreover, the UK is a leading international law center, home to the largest three legal companies in the world and over 200 foreign firms. This sector contributes £14.9 billion to the UK’s GDP. International law firms based in London account for nearly 50 per 17 The London International Financial Futures and Options Exchange (LIFFE), a futures exchange based in London. LIFFE is now part of NYSE Euronext following its takeover by Euronext in January 2002 and Euronext's merger with New York Stock Exchange in April 2007. See http://www.euronext.com/landing/indexMarket-18812-EN.html as accessed on May, 19, 2009. 18 See UK Trade and Investment Department on line: https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/sectors?_nfls=false&_nfpb=true&_pageLabel=SectorType1&n avigationPageId=/financial_service, as accessed on May 22, 2009 19 These are all the operations in financial derivatives which are carried out outside the organized Exchange. 20 Ibid. 21 Ibid. 15 cent of UK law firms’ gross fees. The UK is the top center for international arbitration with 98 per cent of commercial cases handled by London law firms on behalf of international parties. Management consultancy within the financial sector generated £2.8 billion in 200722. Insurance market: In the 1990s, London was one of the largest insurance markets in the world, with premium income accounting for around six per cent of the global total. London was the world's largest international insurance market, with a net premium income of £10.5 billion in 1993; while for longterm business, the UK industry was the largest in Europe, ranking second for general business (British Invisibles 1996b). In 2007, the UK was the world’s leading market for international insurance, with UK worldwide premium income totaling £262.6 billion. The UK financial sector was responsible for 25 per cent of insurance business written in Europe and the UK accounted for 11% of the global premium income with £262.6 billion in premiums in 200723. Conclusion So, will globalization undermine the hegemonic position of the City of London? The most likely answer is no. The analysis thus far proves that its role and bargaining power inside the national polity will increase, as its economic position is very likely to improve in the future thanks precisely to globalization. This will be the case no matter which definition of globalization we take into account, and regardless of whether the analysis is carried on at the macro or at the micro level. Starting from a quantitative definition of globalization, at the macro level this implies a trade-off between national monetary autonomy and stable exchange rates. As exchange rate stability is necessary for trade liberalization, countries will need to renounce their macro-economic autonomy and integrate their monetary policy-making through global agreements and institutions. However, the decision by the UK government not to join the EMU demonstrates that, in the trade-off between the stability of the exchange rates and autonomous monetary policy, some countries, and especially some domestic actors (notably the City of London), might still prefer the latter. The reasons are many. Primarily, financial services have everything to gain from being able to set the interest rates at a higher level than the other financial centers and to keep the level of domestic regulation under control as this represents a relevant competitive advantage in attracting short- and very short-term capital. Moreover, unstable exchange rates may and do actually signify a 22 23 Ibid. Ibid. 16 substantial source of revenues for the City of London. Finally, the City of London is most likely to be one of the main winners of financial speculative practices. From the micro point of view, when adopting a factorial approach globalization favors capitalists and skilled labor and therefore, undoubtedly the City of London. Furthermore, if an interest group is able to credibly threaten to leave the country, its bargaining power increases. As a consequence, globalization reduces the capacity of the government to disregard the preferences of the most mobile factor, which is capital and financial capital in particular, increasing the negotiation and political power of the owners of such capital: the City of London. Finally, adopting a sectoral instead of a factorial kind of analysis, to the extent to which the City remains competitive internationally, the high degree of openness guaranteed by globalization will improve its position not only with respect to labor but also with respect to industrial capital. From the qualitative point of view, around-the-clock access to financial markets all over the globe does not threaten the geographical allocation of financial power. This remains surprisingly stable and concentrated in three centers: New York, London and, to a more limited extent, Tokyo. This concentration is unparalleled in any other kind of industry and it is also extremely durable. London is the most successful of these centers and its position does not seem to have been affected by globalization. If anything, and with respect to many of its main markets and services, it has improved. 17 Bibliography: Andrews, D.M., (1994), «Capital mobility and state autonomy: toward a structural theory of international monetary relations», in International Studies Quarterly, N. 38, p.193-218 Andrews, D.M., (1993), "The global origins of the Maastricht Treaty on EMU: closing the window of opportunity", in Cafruny, A. and Rosenthal G.G., (1993), The state of the European Community: the Maastricht debate and beyond, Longman: Lynne Rienner Publishers Artis, M.J., (1996), The UK economy, 14th edition, Oxford University Press BBA, British Banking Association, Association for Payment Clearing Services, London Investment Banking Association, (1996), Preparing for EMU: the implication of European Monetary Union for the banking and financial markets in the United Kingdom. Report of the EMU City Working Group, London: BBA, APACS, LIBA, September 1996, Background Papers, Money Markets Bishop, G., (2009), “Britain’s Eternal Vulnerability: Sterling”, in Bishop, G., Buiter, W., Donnelly, B and Hutton, W., (2009) 10 years of the Euro: New Perspectives for Britain, Published by John Stevens, Sarum Colourview, London Office British Invisibles, (1996)a, Key facts about the City of London, London: British Invisibles British Invisibles, (1996)b, Invisibles facts and figures, London: British Invisibles Buelens, F., (1999), Globalization and the Nation State, Edward Elgar Bulmer , S., (1983), "Domestic politics and European Community policy-making", in Journal of Common Market Studies, Vol. XXI, No. 4, June 1983 Busch, A., (2008), Banking Regulation and Globalization, Oxford University Press Cerny, P. “Reconstructing the Political in a Globalizing world” in Buelens, F., (1999), Globalization and the Nation State, Edward Elgar 18 Cohen, B.J., (2001), “Electronic money: new day or false dawn?, Review of International Political Economy 8: 197-225 Cohen, B.J. (1996). ‘Phoenix Risen: The Resurrection of Global Finance’, World Politics, 48(2): 268–96 p.269 Coleman, W.D., (1996), Financial services, globalization and domestic policy change, Macmillan Dicken, P., (2003), Global Shift: reshaping the global economic map in the 21st century, Sage Publications Dicken, P., (1999), Global Shift, transforming the world economy, Paul Chapman publishing Frieden, J., Leblang D. and Valev N., (2010), "The Political Economy of Exchange Rate Regimes in Transition Economies." Review of International Organizations 5, No. 1 (March, 2010), pages 1-25 Frieden, J., (2009), "Global Governance of Global Monetary Relations: Rationale and Feasibility" in Economics Vol. 3, 2009-6 (March). Frieden, J., and Lake D.A., (2005), "International Relations as a Social Science: Rigor and Relevance", in Annals of the American Academy of Political and Social Science 600 (July): 136-156. Frieden, J., (2004), "One Europe, One Vote? The Political Economy of European Union Representation in International Organizations", In European Union Politics 5, no. 2: 261276. Frieden, J., (2002), "Real Sources of European Currency Policy: Sectoral Interests and European Monetary Integration", in International Organization 56, no. 4 (Autumn): 831-860. 19 Frieden, J., (2001), "Making Commitments: France and Italy in the European Monetary System, 1979-1985", in The Political Economy of European Monetary Integration, edited by Barry Eichengreen and Jeffry Frieden. Westview: Westview Press. Frieden, J. with Stein, E., (2001), "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," in The Currency Game: Exchange Rate Politics in Latin America, edited by Jeffry Frieden and Ernesto Stein. Baltimore: Johns Hopkins University Press. Frieden, J., Ghezzi, P., and Stein, E., (2001), "Politics and Exchange Rates: A Cross-Country Approach to Latin America", in The Currency Game: Exchange Rate Politics in Latin America, edited by Jeffry Frieden and Ernesto Stein. Baltimore: Johns Hopkins University Press. Frieden, J., (2000), "The Political Economy of the Euro as an International Currency", in The Euro as a Stabilizer in the International Economic System, edited by Robert Mundell and Armand Clesse. Boston: Kluwer Academic Publishers. Frieden, J., (1999), "Actors and Preferences in International Relations", in Strategic Choice and International Relations, edited by David A. Lake and Robert Powell. New Jersey: Princeton University Press. Frieden, J., (1998)a, "The Euro: Who Wins? Who Loses?", in Foreign Policy 112 (September): 2440. Frieden, J., (1998)b, The new political economy of EMU, Oxford : Rowman & Littlefield Frieden, J., (1997)a, "Monetary Populism in Nineteenth-Century America: An Open Economy Interpretation", in Journal of Economic History 57, no. 2 (June): 367-395. Frieden, J., (1997)b, "The Politics of Exchange Rates", in Mexico, 1994: Anatomy of an Emerging Market Crash, edited by Sebastian Edwards and Moises Naim. Carnegie Endowment for International Peace. 20 Frieden, J., (1996)a, "Economic Integration and the Politics of Monetary Policy in the United States", in Internationalization and Domestic Politics, edited by Robert O. Keohane and Helen V. Milner. Cambridge: Cambridge University Press. Frieden, J., (1996)b, "The Impact of Goods and Capital Market Integration on European Monetary Politics", in Comparative Political Studies 29, no. 2 (April). Frieden, J., (1994)a, "Exchange Rate Politics: Contemporary Lessons from American History", in Review of International Political Economy 1, no. 1 (Spring). Frieden, J., (1994)b, "International Investment and Colonial Control: A New Interpretation." International Organization 48, no. 4 (Autumn). Frieden., J. (1993), "The Dynamics of International Monetary Systems: International and Domestic Factors in the Rise, Reign, and Demise of the Classical Gold Standard", in Coping with Complexity in the International System, edited by Jack Snyder and Robert Jervis. Westview: Westview Press Frieden, J., (1991), "Invested interests: the politics of national economic policies in a world of global finance", in International Organization, 45 (4): 425-451 Garret, G., (1998), Partisan Politics in the Global Economy, Cambridge University Press Garret, G., (1993), "The politics of the Maastricht Treaty", in Economics and Politics, Vol. 5, No. Gilpin, R., (2000), The challenges of Global Capitalism: the world economy in the 21st century, Princeton: Princeton University Press Gilpin, R., (2001), Global Political Economy: understanding the Global Economic Order, Princeton and Oxford: Princeton University Press Goldstein, J. and Keohane, R.O., (1993), Ideas in foreign policy, Cornell University Press 21 Guth, M.A., (1994), Speculative Behavior And The Operation Of Competitive Markets Under Uncertainty, Avebury Ashgate Publishing, Aldorshot, England Haas, E.B, (1958), The Uniting of Europe: Political, Social and Economic Forces, 1950-1957, Stanford, CA: Stanford University Press Hay, C., and Marsh, D., (2000), Demystifying Globalization, MacMillan Held, D., McGrew, A., Goldblatt, D. and Perraton, J., (1999), Global Transformation, Polity Press Held, D. and McGrew, A., (2000), The global transformations reader, Polity Press Heritier, A., (ed) (2002), Common Goods: Reinventing European and International Governance, Rowman and Littlefield Publishers Hirst, P. and Thompson, G., (1999a), (2nd ed), Globalization in Question, Polity Hirst, P. and Thompson, G., (1999b), “The tyranny of Globalization: myth or reality?” in Buelens, F., (1999), Globalization and the Nation State, Edward Elgar Holm, H.H. and Sørensen, G., (1995), Whose world order? : uneven globalization and the end of the Cold War, Publisher: Boulder : Westview Press IFSL, (2009), Foreign Exchange 2009, web site: http://www.thecityuk.com/media/2193/CBS_Foreign_Exchange%202009.pdf as accessed on June 28, 2010 Katzenstein, P.J. (ed.), (1977), Between power and plenty: foreign economic policies of advanced industrial States, Madison: University of Wisconsins Press Katzenstein, P.J., (1976), "International relations and domestic structures: foreign economic policies of advanced industrial States", in International Organization, Vol. 30, winter 1976, pp. 1-45 22 Keohane, R.O, (2000), “Sovreignty in International Society”, in Held, D. and McGrew, A. (2000), The global transformations reader, Polity Press Ch.9 Keohane, R.O and Milner, H.V., (ed) (1996), Internationalization and domestic politics, Cambridge University Press Keohane, R.O. and Nye, J.S., (1977), Power and interdependence, Boston: Little Brown Lilley, P., (2000), Dirty dealing : the untold truth about global money laundering, London : Kogan Page Martin, L., (1993), "International and domestic institutions in the EMU process", in Economics and Politics, Vol. 5, No. 2 Moravcsik, A., (1993)a, "Preferences and power in the EC: a liberal intergovernmentalist approach", Journal of Common Market Studies, vol. 31, No. 4, December 1993, p. 474 Moravcsik, A., (1993)b, "Integrating international and domestic theories of international bargaining" in Evans, P.B., Jacobson, H.K., Putnam, R.D., (1993), Double-edged diplomacy: international bargaining and domestic policy, Berkeley: University of California Press Milner, H., (1992), "Theories of cooperation", in World Politics, Vol. 44, pp. 427-495. Milner, H., (1993), "The assumption of anarchy in International Relations theory: a critique" in Baldwin, D.A., (1993), Neo-realism and neo-liberalism:the contemporary debate, Columbia University Press Mittleman, J.H., (2000), The Globalization Syndrome: Transformation and Resistance, Princeton: Princeton University Press Obstfeld, M and Taylor, A.M., (2004), Global Capital Markets. Integration, Crisis and Growth, Cambridge university Press 23 Overbeek, H.W., (1995), “Globalization and the restructuring of the European Labor Markets: the role of Migration”, in Simai, M., (ed), (1995), Global employment. An international investigation into the future of work, London Tokyo: Zed Books and United Nations University Press Overbeek, H., (2000), "Globalization, Sovereignty and Transnational Regulation: Reshaping the Governance of International Migration", in Gosh, Bimal, ed (2000), Managing Migration: Time for a New International Regime, Oxford: Oxford University Press Padoa-Schioppa, T., (1994), The road to monetary union in Europe: the emperor, the Kings and the Genies, Oxford: Clarendon Press Palan, R., (2003), The offshore world, Cornell University Press Patterson, A.L, (1997), “Agricultural policy reform in the European Community: a three-level game analysis”, in International Organization 51, 1,Winter 1997, pp. 135±165 Putnam, R., (1988), "Diplomacy and domestic politics", in International Organization, Vol. 42, pp. 427-460 Putnam, R.D., (1993), Double-edged diplomacy: international bargaining and domestic policy, Berkeley: University of California Press Reid, M., (1988), All-change in the City, London: MacMillan Press Rogowski, R., (1989), Commerce and coalitions: how trade affects domestic political alignments, Princeton University Press Rosenau, J. N., (1967), Domestic sources of foreign policy, New York: The Free Press Shaw, E.R., (1981), The London Money Market, London: Heineman Strange, S., (1998), Mad Money, Manchester: Manchester University Press 24 Talani, L.S., (2000), Betting for and against EMU, London: Ashgate Talani, L.S., (2003), “Avoiding the “G” word in reinventing European and International Governance”, International Studies Review, March 2003 Talani, L.S., (2009), From Egypt to Europe, I.B.Tauris Thompson, G., (1993), The economic emergence of a new Europe?, Edward Elgar Wooley, J.T., (1993), "Linking political and monetary union: the Maastricht agenda and German domestic politics", in Economics and Politics, Vol. 5, No. 2 25