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Sir Jon observes that concentration in the financial sector has increased with financial globalisation and with the revolution in information technology; so that there are more financial centres now and the largest have become very large. He also observes that while historically, the clustering of financial activity has tended to follow trade and commerce, London has emerged as a global financial centre over the past 50 years even though the UK’s importance in the global economy has declined. [...]
There could be a number of reasons for this, according to Sir Jon. First, that London has become the financial centre for the whole of Europe, though its revival pre-dated the EU’s market in financial services and its share of non-EU related business is markedly greater than EU business. Another is that modern financial markets are so large that the surplus generated by trade or manufacturing activity is less relevant now than before and that once financial flows start to move through a financial centre, the ensuing returns to scale and specialisation generate greater financial flows through the centre. [...]
Finally, Sir Jon turns to the challenges for Europe’s financial markets posed by the UK’s exit from the European Union. The arrangements governing the trade of financial services and the integration of financial markets between the UK and the EU will be one of many issues to be determined by governments during the negotiations. Nor do we know how the financial sector in the UK and elsewhere in Europe will respond to the outcome. “What I think is clearer is that this is not a zero sum game”.
Sir Jon notes that it is possible that some wholesale financial market activities currently carried out in London and elsewhere in the UK are in future carried out elsewhere in Europe. However, the scale and scope of broader international activity here suggests that clustering effects such as labour market externalities, specialised inputs and knowledge transfer have become even more powerful in a world of financial globalisation.
“It is conceivable that given time these effects and the benefits they bring in terms of more efficient allocation of capital and risk could be replicated elsewhere in Europe. It is in my view more likely that if they are lost in London they would be lost to Europe – for the foreseeable future at the least. Fragmentation of wholesale financial markets activity in Europe, to the extent it occurs, is likely to have a general cost to European economies, including the UK. And to the extent that the transition to whatever new arrangements will apply is not orderly and smooth, the costs and risks will be greater.”