London: A Financial Empire

Metropolis Magazine (Israel and France), 2003

Interview re-translated from English to Hebrew back into English

The typical English businessman in a grey suit and bowler hat rushing to his office in the City has been replaced in recent years by a large number of financial consultants from all over the world who have settled in London. What is it about this city that makes them dream of a successful career there?

Adam Seitchik

I worked in Boston for a long time as an investment strategist. My job was to invest institutional clients’ money in accordance with the financial situation and the fluctuations of the world market.  In 2000, I received an offer from Deutsche Bank to work in their London office. I said to myself that these days, in the business global village, there were no borders and Deutsche Bank’s investments and clients were spread all over the globe.  London, an important financial center, captivated me. The work seemed exciting.  I accepted the offer. In 2000, I began working in London for Deutsche Bank’s asset management group as their Chief Global Strategist. It was just when the high-tech bubble was beginning to burst and the world was going into a recession.  But London was doing well.

Ideal Position

Only after I had lived and worked in London for several years did I understand why it had become such an important world economic center. It begins with history. Until the middle of the twentieth century, Britain was a mighty empire, which ruled in various places in the world.  It had a commercial tradition and a great deal of experience in activity in different countries.  Often, economic success in a particular country, especially if it is not a Western one, depends on connections and an acquaintance with the leaders and the culture in that country. (Something similar can be said about Madrid of the sixteenth century, which intermediated between Europe and South America and sent its people to take over and trade on the new continent. The Spanish Empire owed its wealth in that period not only to its geographic position, but also to the willingness of its inhabitants to lay down stakes in distant lands for the sake of making a profit.)

Beyond the historical background, it seems to me that there are several other practical reasons that contributed to London’s transformation into a financial center. First, from Heathrow Airport it is possible to reach virtually every place in the world within 12 hours, without stopovers, except Hawaii and Australia. Second, London is more geographically central than New York. In fact, New York is quite an isolated city.  It’s a long way from there to Moscow, or Asia.  London has an ideal geographic position, between Europe and the United States and midway between the US and Asia.

A third reason is London’s connection to Hong Kong, which has long been the financial center of Asia.  Hong Kong is a place full of energy, where it is very easy to set up a business, and it is involved in many of the deals that are made in Southeast Asia. Britain held Hong Kong until 1997 and even though Hong Kong is now under Chinese control, it is permitted to play largely according to Western rules. Hong Kong is a free trade zone in every sense of the term, and Britain still has free access. What’s more, in Hong Kong they speak English, so that the Asian financial center is London’s home court.

A fourth reason for the success of London, seemingly banal, is that in London they speak English, the language of international communication.  It is easier for England to communicate with the US than with countries like Italy and France.  Language is connected to mentality and the creation of an appropriate business environment.  It is no problem for the English and the Americans to instantly communicate and create optimal synchronization between them.

Thatcher vs. the Unions

The English have a problem of identity. They are not sure how much they really want to be Europeans.  They swing like a pendulum between the US and Europe. This ambivalence of identity actually works in favor of London in the world financial market.  It can’t be denied that the British have a long tradition of identifying with the Americans and every British prime minister takes this into account.  The synergy between the British economy and the American economy is fuelled by the fact that the US is the economic power, and Britain has an interest in cooperating with it. On the other hand, the US needs London in order to reach Europe.  London, like Hong Kong, has an ability to connect different worlds.

For the last two decades of the twentieth century, the boom years, London feasted, apart from a brief decline in the late 1980s.  Everything looked rosy: the end of the inflation of the ‘70s, the drop in the interest rates, the deregulation in the 1980s under the governments of Margaret Thatcher and Ronald Reagan, the end of the Cold War, and the opening of the markets of Eastern Europe. These factors helped cause the development of a huge financial sector in London.

To illustrate: things reached the point that between 1995 and 2000 where the number of new full-time jobs in London exceeded the total number of full-time jobs in Frankfurt, which is considered an important financial center.  There is an enormous difference between London and Frankfurt, and even Paris. In Frankfurt and Paris, it is nearly impossible to fire employees due to labor laws, the socialistic character of the system, and the influence of the labor unions. That is why employers hesitate before they accept new workers.

When Margaret Thatcher was in power, Britain underwent an immense change. Thatcher caused a drop in the power of the unions, mainly in the sphere of industry, and as a result, a decrease in their influence on the labor market. We won’t get into the debate as to the benefit that strong unions bring to a country.  One thing is clear: Thatcher’s measures indeed caused a loss of jobs in the first stage, but they gave Britain and London a more flexible and efficient job market than that of the rest of Europe.

Euro or Pound?

Britain decided to put off its entry into the euro currency zone and today it prefers to retain the pound. But it still reserves the option of entering the euro.  It will do so when it discerns that its currency no longer benefits its economy.  The Labor government chose a middle path in the framework of a policy of concerning itself as much as possible with the welfare of the worker together with enabling the market to be as flexible as possible.

The European economy is changing today.  It is becoming more flexible and is opening up to various markets.  A strong argument in Britain in favor of adopting the European currency was that if Britain distanced itself, it would not be able to operate freely in the European market and would not have the influence it had always had on the European economy.  Even if there is some truth to this argument in the long run, the present situation does not prove it.  London and its banking system are thriving in part because of capital flows to and from continental Europe.

London has reached a critical mass from the standpoint of the combination of factors such as flourishing tourism, which brings the capital millions of visitors, an economic network that is reaching out to all parts of the world, and flexible systems that simplify procedures.

The Future Lies with the Young

There is another important factor that works in favor of the English.  The real estate market is always influenced by the consumer behavior of the young.  In a country that has experienced demographic growth and whose young population has grown up and is finding jobs of their own, the young will not continue to live in their parents’ homes. They will buy apartments.  When the system of financing the purchase of the apartment is composed of a large down payment, the apartment market will not develop with the desired speed.  But if the policy of the banks is to give loans for housing, the apartment market will develop rapidly, drive the economy, give rise to the creation of additional jobs, and improve the young people’s ability to return the loans.

In a service economy it is as important to encourage the consumer to buy as to support businesses.  This is, of course, a government policy and not only a result of bank culture. In London, a city in which people tend to invest their money more in real estate than in the stock market, the banking system grants loans for housing and the setting up of a business with relative ease.  Every bank is entitled to grant a certain amount of loans for high-risk projects, and to receive a higher interest for them.

In practice, a high-risk mortgage from a British bank looks like this: the applicant signs a document in which he declares that he has a job and that he can repay the loan. After signing, he receives the funding. In that sense, the British definitely enable people to take a chance and also to cope with the consequences. Encouraging appropriate risk taking leads to a dynamic economy, sure of itself and of the monitoring systems it has created. That is one reason why London will remain one of the two most important financial centers in the world into the foreseeable future. It does not need to be a colonial empire.  London has become a financial empire.