Why Prime-Minister David Cameron is fighting for the London City and why the UK is so weak without it!

At the end of last year, I have written two stories on the United Kingdom and in particular its Prime-Minister David Cameron: PM David Cameron of the United Kingdom is ‘stuck between a rock and a hard place’ and Sucker-ball league: The great match UK – EU ends in a tie.

Both stories had as main theme how PM David Cameron tried to save the London City as ‘a free port for ‘haute finance’ banking and trading’; a place where the prospective stricter rules for financial institutes within the Euro-zone would not apply. Frankfurt, Amsterdam, Brussels and Paris – all important financial hubs– were not amused by this possible threat to the financial level playing field within Europe.

Of course, it ended in the UK sailing its own course where it concerned the new EU legislation (see the second link). This forced the EU-leaders to design a new legal construct, enabling them to adopt stricter legislation after all, without the required full EU-27 approval.

By ignoring the desire of the wide majority of EU countries for stricter financial legislation, the UK placed itself effectively in the penalty box of the European Union: they are still a member, but a member with a strongly diminished influence. Every attempt of PM David Cameron to push pro-UK legislation in the coming months will be confronted with scornful laughter of the ‘Merkozy leadership’. How long this situation will last, depends on the future behavior of Cameron and the clemency of Nicolas Sarkozy and Angela Merkel or their successors. Keeping a cautious low-profile seems a good advice to Cameron.

Cameron himself turned into the fall-guy: scorned by the EU-leaders and deputy-PM Nick Clegg (Liberal Party) for his anti-EU, pro-City banker behavior and disliked by his own Tories for his (still too) pro-European stance. Summarizing: Cameron crashed and burned in those dreadful days in December.

Since then, there have been rumors that the UK might be invited to become a member of NAFTA (North-American Free Trade Agreement), as the NAFTA offers presumably a much better fit for the UK then the EU does.

How this might end is anybody’s guess, but people should not forget that the countries of the EU are still the UK’s most important trading partners; a void that cannot easily be filled by the North-American countries.

But let’s zoom in on the London City as the economic stronghold of the UK. How important is it anyway?!

Therefore I took the GDP per capita of all British regions in the period of 1995-2009 and compared it to the weighted GDP per capita for the Euro-zone.

Warning:

·    the British data in 2009 is originally in pounds and is converted to Euro’s at the current exchange rate of the pound (€1.20). Later I found out that the historical rate of the pound at the time was €1.12, but I couldn’t change the source data anymore, as it had not been saved properly this morning. This causes the British GDP data for 2009 being slightly too high.  

·    The Euro-zone weighted data is based on the GDP per Capita (source: Eurostat) for the original Euro-zone countries (per 2002), multiplied by my own rough weighting factor. The data for 2009 is based on my estimate, as it was not available through Eurostat. This data must therefore be considered as indicative and not as official European data.

Now that is taken out of the way, we can look at the chart that I made based on this data:

Gross Domestic Product per capita per region in the UK.
All data courtesy of: Eurostat and UK National Statistics Publication Hub

Click to enlarge

What immediately stands out is the huge difference in GDP between the London area and the rest of the United Kingdom in 2007:  

·    More than €20,000 per capita between London and South East UK (the second richest region);

·    A staggering €31,000 between London and the poorest region Wales;

·    Except London, all British regions operate within a bandwidth of €11,000;

·    Only four regions in the UK achieve a better performance than the weighted average of the Euro-zone, including the PIIGS countries (!);

And in 2008 and 2009 none of the British regions, except for London, outperformed the Euro-zone, inclusive the weak countries.

When the London City would be left out of the data, the GDP per capita in the UK would drop by about €4000 in 2009, leaving the country in the lower regions of the European Union.

This information helps to put the behavior of PM David Cameron during December’s European summit, in a historic context. And although Cameron didn’t play his hand very well, I can’t blame him for trying.

With the premise that this article is absolutely not meant to do UK-bashing, the key question is then: why is the UK in general such a weak country in terms of GDP?

To answer this question, it helps to look at the French-speaking Belgian part, called Wallonia.

Both Wallonia and the UK were frontrunners in the industrial revolution and had an enormous potential in the production of raw materials (steel and iron), heavy manufacturing industry and coal-mining in the 19th and early 20^th century.

Where Wallonia has held the head above water with the financial help of the Flanders and Brussels areas in Belgium, the UK went mainly downhill; from being one of the leading industrial nations in the world to being a problem child that can only disguise bad economic results with the excellent results of the city of London.

The British class-society with its huge differences between the wealthy, leading class people and the (underpaid) lower classes led to a counterproductive situation where envy, incomprehension, incapacity and anger were ruling.

This might have led to a creative outburst in the music industry that already lasts for fifty years, but for the British manufacturing industry it has been killing. Visible results of this situation were:

• the sometimes terrible production quality of British products;
• the militant labor unions that saw the companies and employers as enemies, instead of as partners;
• the countless strikes over the last 50 years;

The situation made that the leading British industries almost seized to exist:

The ailing coal-mining industry, that yielded too little profits in the end, has been butchered during the Margaret Thatcher era. This left whole cities in tatters and countless numbers of people unemployed and without a future. To get an impression of this havoc, please look at the beautiful British film “Brassed off”.

Also the British car industry (British Leyland and dozens of other brands) has been butchered in the Thatcher era, eventually leaving only a few brands untouched, albeit mostly under a German (Volkswagen, BMW) or US (Ford, General Motors (GM)) umbrella. See this fragment of the British show Topgear

The textile industry, the ship-manufacturing industry and other manufacturing industries moved largely to the low-wages countries.

Of course, there have been many startups in the United Kingdom since the eighties and some companies and brands have become or remained very successful. However, all in all the British industries have been ailing and the whole country is much too dependent on the London city.

If the country would be a member of the Euro-zone (which it isn’t of course), it would probably be one of the PIIGS. Now it can cover up the difficult economic situation with the achievements of the London City and by devaluating the British pound, when necessary.

Still it would be a shame if the UK would leave the Euro-zone and would become a full member of NAFTA in order to protect its London City.

In case of the UK, the following proverb is applicable: a near neighbour is better than a distant cousin. I hope that the UK and the EU both realize the truth behind this and that the EU can help the British in creating a more vivid economy that is not so dependent on the splendour of the London City.