Download CONCLUSIONS: GLOBALISATION AND THE END OF THE NATION

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):
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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)
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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
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