The sun still rises: London after Brexit

London’s position as global city will not necessarily be substantially threatened by the United Kingdom’s vote to leave the European Union, but it will require some very important adjustments and confident negotiations, starting right now.

Since 1990, London’s global city status has evolved rapidly through its various functions as a hub for the following economic activities: financial services; corporate headquarters and professional services (law, accounting, information, journalism, intellectual property); creative and digital industries; higher education and research, and; of course, tourism, entertainment, and retail. Only one or two other cities globally have rivalled London’s cosmopolitanism and diverse economy.

At the same time, although the world’s media has recently drawn attention to London’s housing and air quality challenges, which are real and will take decades to address, London has made rapid improvements on issues with which other world cities have struggled, like transport, education, and crime. Although, in aggregate, Londoners did not vote in favor of Brexit (60% remain, 40% leave), the UK did (48% remain, 52% leave), and London must now adjust to a post-EU scenario. There are three imperatives for London, moving forward as a global city in the post-EU state:

1.  Global firms and jobs. Some firms that saw London as a platform for serving the integrated EU market will relocate at least part of their headquarters’ functions to other cities within the EU. Cities such Amsterdam, Dublin, Frankfurt, and perhaps Paris, and Brussels may benefit. The total number of net job losses in London may not be high, as corporations will reorganize rather than leave, and less effected sectors will grow. London will remain a good location to service global markets. Promoting London’s competitive position in terms of corporate tax, regulation, and visas is paramount.

2.  Global talent. Foreign-born residents account for 38 percent of London’s population. 100,000 foreign students study in the city’s universities. This highly-educated global talent pool is a major comparative advantage. The EU exit presents the risk that London’s many foreign-born workers and students might find it more difficult to access London jobs and universities. Those who campaigned for the Brexit frequently argued for more control over immigration processes, which is almost impossible to achieve within the EU’s free movement of workers principle. They favored increasing high-skill immigration from all parts of the world, but curtailing the influx of lower-skilled immigrants from EU countries who “over-burden” public systems.  Achieving this will depend entirely upon what post-Brexit negotiations produce. So, how quickly can the U.K. develop a new high-skill immigration policy? It needs to be swift and confident. London’s need for global talent may not align with English national sentiment that often resists immigration. This innate global city vs. nation-state tension must be resolved quickly with measures that spread, rather than concentrate, the benefits of high-skill sectors.

3.  Global capital. London has been the leading European location for foreign corporate and institutional investment for two decades. Will this dry up?  Much of this investment originates outside the EU. It comes from the United States, China, the Middle East, India, Japan, Korea, Malaysia, and Latin America. There is also substantial investment from Germany and the Netherlands. While London’s status as a bridge to the EU somewhat drives investment, London’s good fundamentals as a growing city, with scale, liquidity, global reach, improving transport, and a pragmatic business climate are all part of the equation. In the future, London will also present a diversification opportunity for investors who want to hedge against the EU (i.e. another euro currency crisis), but be part of Europe’s growth story. London may even garner a “first leaver” advantage. The British pound has always served as a currency hedge for the euro, and this function may even strengthen it.

There are other interesting issues to be considered of course.

Could London gain more independence on the back of this referendum, and build a distinctive relationship with Europe? The “one country two systems” approach of Hong Kong and China has its tensions, but cities with state-like powers are common in Europe (e.g. Berlin, Vienna, Zurich). A more empowered city might have more control over its competitive platform and investment systems.

Will there now be another Scottish independence referendum? This would likely now succeed and might provide London with ways to work with both Edinburgh and Dublin (both then inside the EU) in a new triangle.

How will the freedom to act outside of EU rules be exploited to drive global city functions? London wants to be a center for Islamic finance, Chinese corporate listings, and Indian technologies. It also wants to host even more American and Asian universities, and to be part of Africa’s decades of investment. Will this disruption curtail those ambitions?

All of this will require a new strategy for London. But that strategy will take London back to its own roots as a confident trading city, with a pragmatic approach to business and investment, and an openness to global talent. In parlance of Brookings’ Global Cities Initiative, London must maintain the traits that have made it such a “globally fluent” city-region to begin with. Making that equation work in the post-Brexit scenario requires not just a rapid response from London, which we shall shortly see, but also a U.K. recognition that retreating from the EU without long term economic decline requires U.K. cities to thrive globally.