Reinvention keeps City vibrant despite its harsh environment

London Briefing: The financial district of London, the "City", is relatively small in terms of geography (although a bit bigger than its other name, the Square Mile) but disproportionately large in terms of its impact on the wider economy.

There are more highly paid people packed into the city than any other comparable part of Europe; only New York, globally, comes close. And the City's contribution to the London economy runs far deeper than mere wages and salaries, of course.

Financial services contribute an enormous amount to Britain's balance of payments.

According to the latest data, Britain is running a current account deficit equivalent to 3 per cent of GDP. In the past, such deficits have led to periodic "sterling crises"; it is a mark of how much things have changed that the currency is so stable.

The balance of trade in financial services (including insurance) is running at around a £13 billion (€18.9 billion) to £14 billion annual surplus - roughly equivalent to the overall surplus on services (the biggest negative item is a huge negative balance on tourism).

That is quite handy when we consider that the overall current account deficit will probably run to nearly £40 billion for 2004, thanks to an enormous and growing imbalance in manufactured goods.

London's property market displays a unique seasonal pattern around City bonus time: a small number of traders and bankers receive such large sums of money that the effects can be seen in mortgage redemptions and purchases of second (and third) properties. Estate agents are as anxious about the City bonus round as retailers are about Christmas trade.

The City used to be a dumping ground for the upper classes who couldn't get their sons into the army, professions or the civil service. Deregulation changed all that and, while the accents can still betray a route that encompassed Eton and Oxford, the City is the nearest thing that Britain has to a genuinely meritocratic career structure.

Background and who you know can help get a foot in the door, but these days that is about as far as it goes.

It is often a harsh environment: "you eat what you kill" is the reward structure and would not appeal to those of a sensitive nature.

The advent of the euro was supposed to threaten London's status as Europe's financial centre. Arguably, its role has actually been enhanced. Some would argue that London is now the financial capital of the world.

Just why Frankfurt and Paris have never taken off mystifies many Europeans. Perhaps first-mover advantage does mean something after all.

But the lighter regulatory touch still counts for a lot, as do the wider attractions of London. Try getting a meal or drink in Frankfurt after 7 p.m.; and while Paris looks beautiful, it is full of people who have a vague sense that financial services are part of a sinister Anglo-Saxon plot.

The City is characterised by change. In Anthony Powell's famous description of 1950s London, he called the City "the acceptance world", a reference to both a type of financial transaction and an institution that has long since disappeared from the lexicon.

The City has a remarkable, and unique, ability to reinvent itself: few of the jobs that exist today would be recognised by the City gents of old.

Its overall ability to cope with change is cold comfort to those who suffer its dark side.

Last week was typical. Deutsche Bank employs more than 8,000 people in London, and rumours were circulating that Britain would bear the brunt of 6,400 worldwide job cuts by the German banking giant. The old joke has it that the only way French and German banks can embark on cost-cutting is to fire their London workforce, such is the prevailing state of European labour market regulation.

But the City is as vibrant as ever. Hedge funds are colonising Mayfair, which means we have to be even more elastic with our geographical definition of the City.

Canary Wharf has stretched the boundary eastwards. The Corporation of London frets that too may offices in the Square Mile are vacant, but it shouldn't worry too much. The City works to its own rhythms, not necessarily those of the commercial property cycle.

The City comes closest to Schumpeter's vision of creative destruction: nobody has a clue what the financial district will be doing in 20 years, but let the market operate and we can be sure that it will be doing something in a world-class way.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.