Post-Brexit London’s fate as cultural and financial center

The UK capital perhaps felt the greatest shock when Britain voted to leave the EU. Will the impending split really be ‘economic self-sabotage’ for London, or will the city’s status as a cultural and business leader remain intact?

By Tom Campbell  /  The Guardian

Fri, Jan 27, 2017 - Page 9

On a balmy July evening not more than four years ago, London officially opened the Olympic Games. As with so much else that summer, the opening ceremony projected a city that was full of confidence: Open, diverse, prosperous and good-humored. London had shaken off the financial crisis to retain its status as the cultural and commercial capital of Europe.

Since then, it has dominated rankings of international business competitiveness, overseen the construction of the Crossrail high-speed line, attracted capital and labor from across the continent and enjoyed economic growth far outstripping the rest of the country.

Yet for many Londoners, the summer of 2012 now feels like a different era. For while the reverberations of the Brexit vote in June last year were felt around the world, it was surely the UK capital that felt the greatest shock.

A city with close economic and cultural ties across Europe and home to almost a million EU nationals, London firmly backed Remain — with parts of the inner city registering the strongest EU support in the country. More than a fifth of Europe’s 500 largest companies have their headquarters there, and London Mayor Sadiq Khan subsequently described the prospect of full exit from the EU market as “economic self-sabotage.”

As anyone who has recently spent time in the UK capital can attest, the referendum itself seems to have done little to dent the animal spirits of London’s consumers. Restaurants, shops and bars seem as busy as ever. Tourism numbers have held up and there is evidence that the weakened pound has encouraged more international visitors to stay and spend.

However, London is not Barcelona or Rome. It is a city with a population of more than 8 million, and an economy the size of Belgium’s. Its prosperity has depended not simply on tourism, but on being a leading center for business, finance, education, technology and creative industries.

Will such sectors, so essential to London’s economic and cultural identity, maintain their dominance once the UK is outside the world’s largest trading block?

BUSINESS HEADQUARTERS

There is no part of the British economy subject to more speculation and debate than its financial services sector, overwhelmingly centered in London.

While there are those, including the former governor of the Bank of England, who emphasize the opportunities of being outside the EU’s regulatory environment, the more common view is that these are outweighed by the benefits of the single market — after all, more than a third of the UK’s financial services surplus comes from trade within the EU.

Before the referendum, a clear majority of British Bankers’ Association (BBA) members believed that Brexit would have a negative impact, while one of the City of London’s most senior figures, Mark Boleat, has repeatedly warned since June last year that the industry will suffer.

While the political focus is usually on banking, London’s sector is better understood as a broad range of inter-linked services, covering finance and investment, accountancy, management consultancy, communications, IT and much more. There are, for instance, more than 200 foreign law firms operating in the UK, the majority of them in London.

CENTRE FOR LONDON RESEARCH DIRECTOR

Richard Brown is clear that, while London has always been as global as a European city, EU membership has “played a significant part in London’s growth over the last 25 years, from the way that city institutions have been able to do business across the continent, to the European workers that fill London’s hotels.”

In such highly regulated industries, it is the terms of Brexit that will be so important, but, while concerns are manifold, few are predicting a meltdown in London’s financial and business sector.

The House of Lords European Committee has identified numerous threats, such as the loss of “passporting rights” or ability to trade in euro-denominated bonds, but is optimistic that London’s European position can be maintained.

Along with the BBA and the City of London, the committee warns that if there are regulatory problems, it will be New York rather than other European cities that have the most to gain.

Brown agrees that London will retain its dominance — even if terms are less favorable: “London has an unrivaled agglomeration of financial and other service firms. Some may relocate, some may choose to expand elsewhere, but many will remain in London. Other cities — like Dublin, Frankfurt, Paris — all have a lot to offer, but none is a perfect rival to London.”

Cultural powerhouse

London’s role as a center for commerce has gone hand-in-hand with its reputation as a cultural powerhouse.

Paul Owens, director of the World Cities Cultural Forum, which provides data on more than 30 cities across six continents, says the reputation is well deserved.

“London’s cultural offer is unique not just for its size but for its diversity and dynamism. It combines renowned museums, art collections and institutions alongside global media and entertainment industries, a substantial base of artists, start-ups and creative entrepreneurs and a thriving night time economy,” he says.

The latest figures confirm the robust health of London’s creative sector, with a workforce of half a million and a turnover of £34 billion (US$43 billion) that is growing at twice the rate of the economy as a whole, but this predates a referendum result that was almost unanimously opposed by the sector: A survey undertaken by the Creative Industries Federation showed that 96 percent of its members backed Remain.

While there is little evidence of how the result has impacted so far, there are anxieties across London’s creative industries, from former Victoria and Albert Museum director Martin Roth citing the referendum as a factor in stepping down, to advertising giant WPP chief executive Martin Sorrell, who has warned of Brexit uncertainties hitting revenues.

For Owens, the implications of Brexit would seem to be at odds with many of the factors that have made London’s creative industries such a success.

“There’s no doubt the decision to leave the EU poses a threat to London’s creative economy. The sector has prospered on diversity, free movement of artistic talent and international supply chains. London’s cultural assets are considerable, but it is likely to be diminished over the next decade unless there is a suitable policy response,” he says.

While some argue that leaving the EU offers the prospect of new trading opportunities, Owens is not convinced this will bring much benefit to London’s creative businesses.

“When it comes to creative industries, the likes of China are still relatively small trading partners,” he says. “The UK’s total exports of creative goods to China were about £200 million in 2012 — just 3 percent of what we export to the rest of Europe.”

RESEARCH AND EDUCATION

London is Europe’s undisputed center for research and learning. There are almost 400,000 students at the capital’s 40 universities and educational institutes, giving a combined turnover of more than £7 billion.

Its art and design colleges are renowned across the world, while in the area of life sciences, London’s dominance was cemented with the recent opening of the Francis Crick Institute in King’s Cross, which, when fully operational, will employ more than a thousand scientists and become the largest biomedical laboratory in Europe.

Former Goldsmiths College warden and University of London vice chancellor Geoffrey Crossick attributes London’s success as resting on “its ability to benefit from the UK’s global reputation and augment it with very high quality university institutions as well as some world-leading specialist arts institutions. Something special was then added: The fact that London was seen as one of the world’s most culturally exciting, cosmopolitan and multicultural cities.”

For Crossick, the decision to leave the EU is a major blow to London’s higher education sector; 90 percent of those employed in British universities were thought to have backed Remain.

Once again, immigration is a crucial issue. As many as a quarter of students in London are non-British, generating significant revenues for universities, with many research students drawn from EU countries. The regulation of student visas was a fraught political battle when British Prime Minister Theresa May was home secretary, which has reached greater intensity as reducing immigration becomes central to government policy.

However, the more immediate threat relates to research.

Modern academic research is an inherently collaborative activity and increasingly funded through transnational programs. EU funding is especially important — the Horizon 2020 program, which covers science and innovation, will allocate some £70 billion between 2014 and 2020.

The UK has been a substantial net beneficiary of such funding — particularly in London universities, with Imperial College and University College London both in the European top 10 in terms of grant revenues, between them delivering well over 300 EU-funded projects at any one time.

Following widespread concerns, the chancellor announced that successful UK applications to current EU programs will have their grants underwritten by the government. However, the future is uncertain, and depending on the UK’s future status in the EU, its leadership role risks being lost.

London-based institutes have been at the forefront not only of undertaking research, but also of shaping strategies and determining funding competitions.

As Crossick points out, academic colleagues in Europe do not see Brexit as an opportunity for their own institutions — rather, they are anxious that “the quality of European research as a whole will suffer from the loss of UK researchers and the UK research environment.”

SILICON ROUNDABOUT

In recent years, the “silicon roundabout” of Old Street and the wider east London area has grown into Europe’s largest technology cluster. Some 40,000 technology businesses — one fifth of the UK total — are thought to be based in inner London, and the city is rated the best environment for digital start-ups in Europe, with levels of venture capital activity higher than anywhere outside of the US.

There is no doubt that in the days following the referendum, the mood among a business community known for its optimism and energy was one of anxiety and gloom. Stories of investment deals abruptly collapsing were compounded when a German political party sponsored a van to drive around east London with the message “Dear start-ups, keep calm and move to Berlin.”

TechCrunch editor-at-large and veteran commentator on the London tech scene Mike Butcher described how the “Brexit hangover” in the weeks after the result had left entrepreneurs “bewildered” and “reeling.”

Nerves have steadied since the summer with little immediate sign of a slump in hiring or investment.

In November last year, there was a major confidence boost when Google confirmed a new UK headquarters housing 7,000 staff in King’s Cross, but concerns are still prevalent, particularly around restrictions on free movement.

It is estimated that a third of London’s technology workers, including many company founders, are born outside of the UK. The mooted skilled visa and work permit systems are difficult to reconcile with a sector characterized by project work, rapidly changing occupations and the need to hire specialist contractors at short notice.

Karen Clements, deputy managing director at consultancy Low Europe, which advises many technology businesses on their overseas strategies, is concerned by the referendum result and subsequent national policy announcements, despite its apparent strengths.

“London’s success has largely come from its business connections to the continent’s markets and skilled workforce. If these are damaged, then it is hard to see how it won’t suffer,” she says.

OPEN FOR BUSINESS?

As commentators have observed, the Leave campaign was a coalition of contrasting world views, united in opposition to the EU.

There was undoubtedly a libertarian strand which saw Brexit as a chance to embrace free trade, and for London to model itself on the likes of Singapore or Hong Kong, but of more significance electorally were strong protectionist impulses: Hostility to immigration in particular, but also to foreign ownership and finance — all of which have been essential to London’s economic dominance.

If these impulses prevail, then it is difficult to see how the city can retain its global standing. If London is not “open for business” to the rest of the world, then it is not really in business at all.

While the question of the UK’s relationship with the EU and rest of the world dominates UK politics, there is also a profound shift of relations between national government and the cities and regions. London, after all, is a city whose electorate diverged strongly from the rest of the country, and while its EU nationals were unable to vote in the referendum, many of them work in sectors crucial not just to London’s economy, but to the UK as a whole.

As successive mayors often point out, London generates a huge surplus to the Treasury, and is responsible for almost 30 percent of the national tax revenue. Whatever national politicians may think of London, it is hard to see how they can do without it.

For some years now, leading urban thinkers such as Benjamin Barber, David Adam and Saskia Sassen have been anticipating growing political tensions as world cities grow in economic and cultural importance and find themselves constrained within nation states, increasingly at odds with the more conservative policies of central governments. The relationship between London and the UK in the aftermath of Brexit is a prime example, and in the US, President Donald Trump is already facing fervent opposition from the largest cities and their leaders.

In the weeks following the referendum, a petition demanding that London declares independence from the UK and remains in the EU received almost 200,000 signatures. While never a serious proposition, it is indicative of the febrile political climate: Sadiq Khan has led a “London is Open” campaign and new policy ideas such as a “London visa,” in which EU nationals are allowed to live and work exclusively in the capital are gaining traction.

The Centre for London’s Richard Brown agrees that a “regionalized immigration solution” is needed for the capital, while also insisting that “London government needs more powers over skills, planning and the tax system.”

However, with a national government that has made reducing immigration a priority, such powers are unlikely to be ceded easily.

Arguments about the economic dominance of London and its relationship with the rest of the country are almost as old as Britain itself, but they have been hugely exacerbated by the referendum. If last year was the year which saw small town conservatism victorious and a resurgence in nationalism, then forthcoming ones are likely to bring a heightened sense of civic identity, and a liberal fight back.

Greater political conflict seems inevitable, and London’s status as the commercial and cultural capital of Europe will largely depend on the outcome.