Martine Azuelos (CERVEPAS), Cynthia Ghorra-Gobin (CNRS-CREDA)
Given the importance of the United Kingdom’s European Union membership to the present and future of its financial services industry, it comes as no surprise that in the run-up to the referendum on Brexit to be held on June 23, 2016 financial market operators have voiced concern that a leave vote would endanger London’s status as a global financial hub and more particularly its interconnectedness with New York. The Brexit hypothesis thus invites us to reconsider the New York – London nexus.
The first two global cities
Since the publication of The Global City by Saskia Sassen twenty-five years ago, social scientists have referred to the expression of “global city” to identify cities which are considered an important node in the global economic system. According to her view, if the global economy refers to flows of knowledge, capital, goods and people, it also needs to be enacted in strategic geographic places such as cities. Those cities are then performing the global system of finance and trade.
A global city interacts with different territorial scales (local, national, regional, and world) and is also recognized for maintaining strong linkages between local and global affairs. In her book, Sassen ranked New York, London and Tokyo as the first three in the world urban hierarchy. Today the first two are seen as the most integrated in the global economy, given the influence of Wall Street and the City.
Each of them services clients operating well beyond U.S. and UK territory, which is one major reason why they attract big global players in the world of finance. These players have built a presence in London for reasons which have less to do with the interest they have in the UK’s domestic economy than with Britain’s membership in the European Union and its time zone, which means that its trading day begins when the Tokyo market closes and ends a few hours after New York opens. And they have built a presence in New York not only because of the sophistication of its stock exchanges, but because of the size and dominance of the U.S. economy, its integration with its two NAFTA neighbors, and the number of transnational corporations headquartered in the U.S.
The centrality of finance
Finance has been the driving force accounting for the deepening and speeding up of globalization since the 1980s, with Britain and the United States as key drivers in this momentum. Deregulation, which both countries initiated in the 1970s and was then gradually implemented in most other economies, turned finance into a global industry in which New York and London developed into interconnected financial hubs.
The two financial centers flourished under the favorable political and legal environments which domestic reforms and financial globalization created. From the late 1970s economic policies implemented across the Atlantic promoted free markets, free flows of capital, and deregulation of financial markets. This not only increased the role of financial institutions in the domestic economies but also strengthened the transatlantic interconnection of financial markets and institutions.
Finance fueled growth in Britain and the United States from the early 1980s to the outbreak of the subprime crisis in the US in the summer of 2007. But this crisis and the wider and deeper financial crisis to which it led in 2008 exposed the perils inherent in the system which both countries had been instrumental in advancing.
The crisis followed a very similar pattern on both sides of the Atlantic, and from 2008 to early 2010 the policy response was also very similar, particularly in massive public support provided to the banking sector, and easy monetary policy (‘quantitative easing’ or QE). During this period there was also day-to-day multilevel bilateral consultation among politicians and public officials across the Atlantic, while Britain and the US worked hand in hand in international organizations such as the IMF, or the G8 or G20.
The New York – London financial nexus
Global cities or metropolitan cities have created relationships with other metropolitan areas. They share their experience concerning policies geared towards climate change adaptation programs (like C 40), social inequalities, and architectural planning projects for enhancing their territories. This relational experience is responsible for the creation of an “intermetropolitan space” which is not limited to local politicians but includes researchers from universities, economic actors, artists and media specialists.
This “intermetropolitan” space -which refers to the creative class (Richard Florida) and many other actors- may be studied through the lenses of airport connections, the organization of common events such as symposiums and conferences, the travel of artistic exhibitions, and the network of economic agents involved in trade. The New York-London air route is the world’s busiest long haul route (defined as a route more than 3000 miles). Thus, in the twelve months to June 2016, there were close to 2 million seats scheduled each way between London Heathrow and New York’s J.F. Kennedy airports (Source : Airline Weekly).
Their interconnection is built on transatlantic flows of professionals, on the transactions they conduct thanks to continuous use of information and communication technologies ( ICTs), on the flows of finance, insurance, auditing, tax and consulting services these transactions consist in, as well as on transatlantic investment in the industries generating them.
Each of the two centers has a competitive advantage in some lines of business, and they also complement each other. Thus the New York stock exchanges (NYSE and NASDAQ) are pre-eminent for stock trading. In 2014 they accounted for 41 per cent of the funds raised globally in IPOs, and 4 out of every 10 hedge funds in the world were based in New York. Meanwhile London’s dominance remains undisputed in currency trading, international insurance and over-the-counter interest rate derivatives.
The Metropolitan Century and the Brexit challenge
The New York – London financial nexus illustrates the fact that the ‘special relationship’ between the United Kingdom and the United States is not merely a thing of the past, as many have argued. The coining of the portmanteau word “NYLON” (or NYLon or NY-Lon) suggests the strength of this interconnection, which has built on expertise developed throughout decades of UK/US cooperation and competition in the spheres of banking, market finance, insurance, auditing, tax, and consulting and fund management services. The two cities have become closely-knit financial hubs.
According to an OECD report published in 2015 under the title of “The Metropolitan Century” (http://www.keepeek.com/Digital-Asset-Management/oecd/urban-rural-and-regional-development/the-metropolitan-century_9789264228733-en#page122 ) the 21st century is going to be the century of large agglomerations. In this metropolitan century, New York and London are playing a crucial role, given this financial interconnectedness.
However their interconnectedness and complementarity, and the way in which they relate to the global economy, explain why the prospect of a potential British exit (“Brexit”) from the European Union has cast a shadow on the future of the nexus and raised anxiety among financial market operators. Giants in the world of finance such as KPMG, Goldman Sachs or JPMorgan have repeatedly voiced concern, while President Barack Obama has made it clear that for the United States Britain is stronger in the European Union and that Brexit would weaken the special relationship between the two countries.
Brown Gordon, Beyond the Crash. Overcoming the first crisis of globalisation. New York : Free Press, 2010.
Florida Richard., The Rise of the Creative Class. New York: Basic Books, 2002.
Sassen Saskia, The Global City: New York, London, Tokyo. Princeton University Press: 1991.
Wójcik Dariusz, « The Dark Side of NY–LON: Financial Centres and the Global Financial Crisis », Urban Studies, 50, 13, 2013, pp.2736-52.