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London has a good claim to be the most cosmopolitan city in the world. Some one in three of the city’s inhabitants were born outside the UK – the same proportion as New York. Once you include Londoners with a foreign parent, the majority of the city’s inhabitants have roots outside Britain.

Perhaps that is only appropriate. London, after all, was founded by foreigners. It was the Romans who established the city in 43AD on a convenient spot on the river Thames. For most of its history, London has been a magnet for immigrants and refugees from all over the world. But today the city’s prosperity rests, more than ever, on its international connections.

Calculations by the House of Commons suggest that the financial industry now accounts for about 10 per cent of the UK’s gross domestic product – about half of which is generated from the City of London. And the business of the City is overwhelmingly international. One banker, quoted in a recent article in The Economist, commented: “Eighty per cent of the dealmakers in Wall Street, and 90 per cent of the deals they are doing, are American. In the City [of London] 65 per cent of the dealmakers are foreign and 90 per cent of the deals have an international element.” Finance also helps to support a huge number of other industries that are crucial to the London economy, from legal services to real estate. Other key London industries – from fashion to the media – also have a strong international flavour.

International political and economic developments over the past 30 years have hugely expanded the opportunities for a global hub city such as London. The fall of the Berlin Wall and the collapse of the Soviet Union have seen the City re-establish its links with eastern Europe and Russia. Wealthy Russians shape the top end of the property market, sue each other in London’s courts and send their children to the capital’s best private schools.

The emergence of China and India as giant, globalised economies has also had a direct impact on London. The old colonial connections with India – as well as a common language – have meant that many Indian entrepreneurs feel comfortable living and working in London. Colonial connections with Hong Kong and Singapore have also given the City a foothold in the rise of Greater China.

The development of the EU, with the creation of its single market in 1992 and its expansion to the east in 2004, has also driven the internationalisation of London. Free movement of people within the EU means that London is thronged with workers from all over Europe. The Polish builder and the French banker have become stock figures on the London scene.

Important policy decisions by successive British governments have helped London to surf the tide of globalisation. One of the first acts of the Thatcher government, after coming to power in 1979, was to abolish exchange controls – a move that was indispensable to the rise of the City of London. London has also sought to maintain a tax regime that is attractive to wealthy foreigners, even though the “non-dom” tax rules have been made less favourable in the aftermath of the financial crisis.

The globalisation that has powered London’s prosperity and changed the nature of the city can feel like an irresistible force. If globalisation continues apace, then the UK capital’s role as the pre-eminent global city is only likely to grow.

But such a development cannot be taken for granted. Since the onset of the financial crisis in 2008, both the political and financial underpinnings of globalisation have come under unprecedented strain in ways that could ultimately threaten London’s global role.

The most direct threat is the changing nature of Britain’s relationship with the EU. Under the pressure of the euro crisis, users of the single European currency have begun to move towards a much closer fiscal and banking union. Britain is refusing to participate in these moves, and, under pressure from an increasingly eurosceptic Conservative party, David Cameron’s government is seeking a looser relationship with the EU. The prime minister has even promised an “in-out” referendum on British membership of the EU at some point in the future.

The prospect that Britain might actually leave the EU – or even just have an increasingly detached relationship with the eurozone – raises obvious questions about London’s role as a hub for European business.

At present, more currency transactions in euros are done in London than in any other city. But could that last if Britain left the EU? The answer is not clear cut. London is also a significant centre for foreign-exchange dealing in dollars, without being part of the US. And yet, the feeling persists that an EU that is increasingly suspicious of “Anglo-Saxon capitalism” now has the City in its sights. New European rules on everything from bankers’ pay to the regulation of the insurance industry are making London less attractive to footloose international capital.

Other elements of the post-crash world are also weakening London’s attractions as a global hub. Under pressure to reduce immigration, the government has tightened the visa regime. Many foreigners – from students to business people – complain that coming to the UK has become an unpleasant obstacle course. Britain’s overall tax regime is also becoming less attractive, as the government seeks to raise revenue and to respond to popular anger about tax avoidance and abuses in the finance industry.

Yet, when the British government looks at the structure of its economy and the source of its revenues, it is reminded again and again of the importance of London’s role as a global hub. The British also know that emerging markets, particularly in Asia, will have a larger and larger weight in the global economy over the next generation. Those considerations will be central to British government policy. If that policy is constructed intelligently, it should ensure that London’s role as a great world city is protected and developed.

Copyright The Financial Times Limited 2019. All rights reserved.

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