Second Global Shift as Relocating Clusters in the Financial Industry in Europe - Term Paper Example

The second global shift is relocating clusters in the financial industry in Europe Introduction Change is the only inevitable fact in the human life cycle. So, those who reject change become a part of the dead and decayed. Like many other things, the centers of economic powers are also in the process of rapid and continuous shift. For example, there was a time when UK and some European countries were the sole economic and political powers of the world, but this power later shifted to the USA after the Second World War. This shift of economic activities and power from one center to the other is called ‘global shift’. Although, America is at present economically and politically reigning over the world, but the rapidly emerging economic power of China and Japan is also an undeniable fact; which is the precursor of the second global shift. An emergence of competitors in the shape of China and Japan is adversely affecting the economic power of the USA. The resurgence of Asia especially East Asia is undoubtedly, the most significant global shift in the geography of the world economy during the past 40 years. (Dicken, 2007, p. 43) Another very important fact is the complex geography of the product manufacturing process. “In other words, economic activity is becoming ‘deterritorialized’ or ‘disembedded’.” (Dicken, 2007, p. 18). For example, open boarders today allow some parts of the product being made in one country and it’s assembling being done in another. The purpose of this paper is to highlight the influence of the second global shift on the financial service industry, particularly the European financial services. Moreover, we will examine how this global shift will change the structure of financial groups in Europe. Global Shift ‘Global economic shift’ means a continuous change in the global economic activities, structures and relations from one period of time to the other. First Global Shift The first global shift is the period of time when economic and political power was shifted from Britain and some European countries to the United States. This shift started occurring after the Second World War when United States appeared as a supreme economic and political power. After 1945 the world was dominated by two blocks i.e. the United States with its allies and the Soviet Union with its allies. This division was not only confined to economic differences but to socio-political differences as well. This is when the silent strain between the capitalist and the communist world began. “Hence, the world economic system that emerged after 1945 was, in many ways, a new beginning. It reflected both the new political realities of the post-war period – particularly the sharp division between East and West _ and also the harsh economic and social experiences of the 1930’s.” (Dicken, 2007, p. 34). Second Global shift The second global shifts begin with the collapse of the Soviet Union and the emergence of China and Japan. In this shift, Asia is expected to be an emerging power in the world. Impact of Global shift on EU The second global shift not only added a new chapter in the economic history of the world but also left a massive impact on the EU, because with the new shift of powers, economic and trading patterns of the world were also redefined. The trading disputes over textile export between the EU and China is the clear testimony of this fact. Moreover, the second global shift also casted good effects on the EU by decelerating the economic power of the United States. Undoubtedly, the emergence of East Asia especially the giant China is the most important single global shift of recent times. (Dicken, 2007, p. 68) Financial Centers in Europe Origin The history of the financial centers can be traced backed to the Roman Empire. According to some academics, the Romans were the pioneer of financial market regulation within a comprehensive legal framework. The industrial revolution in Europe and the Magna Charta in England revived the European financial centers. Before World War II, the United Kingdom, France and Germany were the main financial powers and Scotland, London, Brussels and Paris were the major financial centers of Europe. At that time, financial activities were affected by the Gold Standard and the Industrial Revolution. The Industrial revolution started reshaping the world over the past two decades. (Jensen, 2010, p.43) Reasons for Development Financial centers are those global cities of the world that are business hubs to all major world banks, foreign exchange centers and companies. New York emerged as the world’s big financial center after WWI. Due to World War II, the infrastructure of Europe was badly affected. Resultantly, the big financial European blocs started making efforts for the unification and integration of European states. International financial activities only revived in Europe after the establishment of the European Common Market. The economic success of the European Common Market can be judged by the fact that many outside countries want to join it, whilst countries inside it want a closer union. (Landau, 2010, p. 774) In a word, the reason behind the development of European financial centers was the reconstruction of economic structure of Europe. Moreover, an intense competition in capital and goods markets including the technological advancement is another reason for the development of financial centers. “Generally speaking, the intensification of completion for goods, capital and technology on an international scale accounted for the unprecedented growth of the international financial markets.” (Bindemann, 2002, p.5) Present Situation Currently, the number of financial centers in Europe has increased. Today the dominant financial centers of Europe are: Moscow, Istanbul, Vienna, Lisbon, Zurich, Brussels, Milan, Dublin, Paris, Scotland, London and Madrid, etc. Today, Europe is the richest continent of the world, mostly having developed financial centers and institutions. Even the poorest economies of Europe are economically better than that of the other continents. The continent of Europe is the world’s biggest trading area and the focus of foreign direct investment. (Dicken, 2007, p. 42) Future Role By keeping in view the gigantic contribution of the European financial centers in the world’s economy, it is pertinent to say that in future the economic strength of European financial centers will be accelerated. This is because European countries are expanding their relations with the emerging economic powers of Asia. Moreover, the development of Europe-wide financial markets and the introduction of Euro currency is another clear evidence of this fact. But the centrality of London as Europe’s dominant financial centers is debatable as Bindemann Seifert et al Harrschar-Ehrnborg states, “The turn of the twenty-first century saw the re-emergence of public and academic debates about the centrality of London, as Europe’s pre-eminent international financial centre (IFC) and the wider reconfiguration of European financial geographies.” (Bindemann 1999; Seifert et al. 2000; Harrschar-Ehrnborg 2002). Importance of Financial Centers The existence of financial markets has originated from the human need of trading assets cross-border; which is only possible with the presence of famous banks and stock exchanges in big and developed cities with good infrastructure and availability of sea ports. In fact, the international network of the financial centers is expanding. (Sassen, 1999, p. 75). London and Paris are two big European financial centers and both lie on major rivers. Financial centers are important for many reasons such as the following: They facilitate the process of borrowing and lending abroad and for payments among countries. They serve as a clearinghouse because major banks, brokers and security dealers are located there. They perform the function of intermediaries between distant regions. They serve as a store of value and medium of exchange. They provide a place to international lending and borrowing. Comparison of two financial centers In this part of the paper, a comparison is made between Frankfurt and London as two main financial centers. Frankfurt is one of the largest city and financial center of German, whilst London is the capital of the United Kingdom and is one of the greatest financial centers of the world. London, being the capital city of the United Kingdom is the financial hub not only of the UK but of the whole world. However, there is no recorded history describing the process that transformed Frankfurt into an international financial center. According to intellectuals and historians though, economic activities in Frankfurt started thriving in the late 1960’s. Frankfurt is one of the hubs for the development of financial technology. (Grote at al, 2002, pp. 412–423) Although, Frankfurt is becoming one of the finical hubs of Germany, but according to academics, it has lacked the politico-economic structure that is available to London in the UK. They believe that London is the hub of all financial and business activities of the United Kingdom; whereas Frankfurt is just another big city of Germany. London is the dominant financial center of Europe, whilst Frankfurt is one of the fastest growing financial centers of this continent. There are few perceptions that Frankfurt might take the position of London in future. (Beaverstock.et al, 2001, p. 1) In order to make comparison between these two financial hubs, the following empirical data can be used: The above statistics show that London is a more important world’s financial center than Frankfurt. In short, by looking at the empirical statistics it is pertinent to say that Frankfurt can be one of the biggest financial hubs of Germany, but cannot outpace the status of London in the present array of international financial centers. London is one of the dominant financial centers of the world, while the expansion of Frankfurt is confined to the Europe only. (Beaverstock.et al, 2001, p. 5) Emerging financial centers in Asia and Eastern Europe The emerging financial centers of Asia are: Shanghai, Beijing, New Delhi, Islamabad, Ho Chi Minh City, Tokyo, Osaka, Karachi, and Kuala Lumpur, etc. On the other hand, the emerging financial centers of Eastern Europe are: Warsaw, Prague, Bucharest, Budapest, etc. Impact on European financial centers Although, European financial centers are economically strong enough; yet the emergence of financial centers especially Moscow, Shanghai, Beijing, Tokyo and Singapore can take some of their economic power away. Especially the emergence of Japan after the World War II is a real danger for Europe in the fields of automobiles and electronics. In fact, the great powers of the Far East have to consider Japan’s response before making any moves in the region. (Kennedy, 1989, pp. 677) Similarly, the rapidly expanding economy of China is one of the biggest threats to European financial centers because they are grabbing European markets by offering cheap and high quality products. This is the reason behind the current trading disputes between European powers and China. Outsourcing services Outsourcing is a form of agreement that involves an exchange of services and payments. It is a kind of agreement in which a company assigns its activities and people, to a third party. (Kearney, 2004, pp. 49-55) This kind of agreement is widely prevalent in Asian countries; China especially is the best location for outsourcing providers. Companies seek outsourcing services for many reasons. They aim to lower the cost and increase the expertise and to get access over improved and latest technology and labor, etc. The emerging Asian and Eastern European financial centers have increased their outsourcing services which will benefit Asia and Europe both, in their areas of comparative disadvantage. Threats and opportunities European financial centers have to face the following threats: With the establishment of Asian financial hubs, the European financial centers have to lose their share in international financial markets. Asian financial hubs can make their strongholds in European markets. The rapidly increasing trade graph of China is a clear evidence of this fact. International trade trends will change. Following are the opportunities: Cultural and social integration and transfer Increase in global welfare. EU reactions Due to the emerging financial Asian centers, the trade pattern of the world is also reshaping, thus creating many trading and financial distributes between the Asian and European economic powers. Conclusion Concluding the above discussion, it is an undeniable fact that the world economy has become very volatile. As economic conditions are heavily based on socio-political circumstances of the world, so the economic future of the world will be defined by its political pattern. Although, the financial centers of Asian countries are developing rapidly, the core competences will still reside in the European financial centers because social and political instability in Asia still needs decades to settle. The countries that are bogged down by indigenous socio-political problems and pathetically poor leadership could hardly adjust to in the short-and medium terms. (Rajan , Rongala, 2008, p. 189) Reference Amen, M. M; Archer, k; Bosman, M.M. (2006). 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