It is hard to see how the City's prospects could deteriorate much further. The Libor investigation is turning into one of the great financial scandals of the decade, shredding the City's reputation for plain and honest dealing. The main British banks are either semi-nationalised or facing an assault on their integrity. The regulatory system has been exposed as a shambles and the equity markets are stuck somewhere between panic and despair. But London's financial district has always had a genius for re-invention. And the EU's proposed Tobin tax on financial transactions may turn out to be its get out of jail free' card.
The City faces a uniquely challenging moment in its long history. The big investment banks that dominate the London market are facing a grim future. Greater regulatory micro-management is inevitable after the Libor scandal. The crisis in the eurozone has made every type of investment look risky. Mergers and acquisitions are on hold. After a bear market that is now stretching into its 12th year, investors are starting to give up on stocks. There is still money being made but nothing like as much as there was during the boom.
Nor is there much prospect of an immediate upturn. The prosperity of the last 20 years was based on creating more and more debt and then finding new and clever ways of repackaging it. But in the next decade, debt will be paid down, not created. The demand for financial innovation' is about as healthy as the demand for Spanish bonds. The good times aren't about to return. But the City has been a thriving financial centre for 200 years now. Something usually turns up in its darkest hour. Right now, that something might be France's new president, Franois Hollande.
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Why the 'Tobin tax' will be a disaster
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Hollande has already launched an attack on big business. The 75% tax on executives making more than a million euros a year will drive highly-paid Frenchbusinessmen abroad. His new tax on dividend payments might well persuade many more that they need to relocate somewhere else if they are to carry on rewarding their shareholders. London won't attract many of them. Our taxes aren't low enough to make this a haven. The millionaires will go to Switzerland and the firms to Ireland. But France's new transactions tax is a different matter.
On Wednesday this week, France became the first major country to impose a so-called Tobin tax a small levy on every financial transaction that is designed to discourage speculators. Any trade in the shares (or a proxy for shares called a contract for difference, or CFD) of a company worth more than €1bn will be taxed at 0.2%. In total, 109 French companies will be affected, including giants such as Vivendi and BNP Paribas. The money will be used to fund Aids research.
It will probably be the first of many such taxes. The German chancellor, Angela Merkel, has already agreed to similar taxes being levied right across the eurozone. Voters are angry with the chaos of the single currency. The crisis might not be the speculators' fault after all, they didn't put together a monetary system with a creaky structure and composed of wildly incompatible economies but that doesn't mean they aren't going to get blamed for it.
The trouble is, these so-called 'Robin Hood' taxes are purely symbolic. There is no way to stop the trades simply moving to a different financial centre. There are plenty of places investors could go and London has two big advantages here.
One is that we are very unlikely to sign up for any Tobin tax. The levy can only really have an impact if it is charged in every country in the world. If it isn't, it will just shift trades from one centre to another, not reduce their overall number. David Cameron has made it clear that he won't agree to the eurozone imposing any taxes on Britain. So the City will remain outside their scope and given the vast depth of trading know-how concentrated in London, it will become the most obvious destination for investors fleeing eurozone taxes.
The second is that we have lots of experience of avoiding transaction taxes. Britain levies stamp duty at 0.5% on share trading a rather higher rate than France is suggesting. In response, Britain has developed a sophisticated range of ways of trading in stuff that looks a lot like an equity, and behaves like it, but turns out not to be when HMRC comes to take a look at it.
Those CFDs that will be taxed in France are a way of side-stepping stamp duty. Similarly, the entire spread-betting industry allows you to take a position on a share without actually owning it. Certainly, French equity trading by itself isn't big enough to make any great difference. But the eurozone collectively is still a huge economy, with a lot of big companies.
Ironically, an EU-wide transactions tax could make the City the centre of equity trading for the whole of Europe, taking vast chunks of business from Paris, Frankfurt, Milan and Madrid. It would compensate for the relentless decline of the rest of the financial industry and might just keep the City alive until the next boom turns up.
