LONDON may be Europe’s commercial capital, but not all Britons are thrilled about that. In a poll conducted in 2014, two-thirds of non-Londoners reckoned that London had a positive impact on the British economy as a whole, but fewer than a third thought London’s strength was good for their city. London lures skilled workers and productive companies away from other parts of Britain. It also lures workers and firms from across Europe—something that makes many Britons, both in London and beyond, bristle. Indeed, London’s mop-topped mayor, Boris Johnson, this week joined the campaign to persuade Britons to withdraw from the European Union.

London dominates Britain, accounting for 23% of its population and about a third of its economic output. The city grew to enormous size in the 19th and early-20th century, when it served as the political and economic hub of a global empire. The post-war decline in its population, a result both of the loss of empire and of policies intended to curb its growth, ended in the 1980s, when the globalisation of finance rejuvenated the city’s main industry. Greater London is the fifth-largest metropolitan economy in the world, according to the Brookings Institution, a think-tank. It is the EU’s largest city, by both population and output.

Yet London should arguably be bigger than it is. It is Europe’s most important financial centre, and one of its biggest hubs for information industries and professional services—the European analogue to New York city. But London accounts for just 4.5% of the EU’s output, after adjusting for variation in the cost of living, and just 2.9% of its population, whereas New York accounts for 8.1% of America’s GDP and 6.3% of its population (see chart). Were European integration ever to yield something like a United States of Europe (and Britain ever to be part of such an enterprise), London would probably swell in size and importance.

Why should that be the case? Economists have touted the benefits of cities since 1826, when a German one named Johann Heinrich von Thünen tried to explain why farmers gather in villages rather than living by their fields. Paul Krugman, in a paper published in 1991, homed in on the role of “increasing returns to scale” in driving the growth of cities. Because it is expensive to move people and goods, customers want to be where producers are and vice versa. As cities grow, increasing returns kick in: the more people who live in a particular place, the more attractive that place becomes to others. Mr Krugman focused on clustering in manufacturing. Two trading regions with a slight imbalance in population would naturally evolve into a developed core and an underpopulated periphery, he argued. In the paper, which the Nobel committee cited when awarding him the prize for economics, Mr Krugman pointed as an example to Europe, where industrial activity is concentrated in the north-west.

Manufacturing no longer drives urbanisation in the rich world. In 2009 Edward Glaeser and Joshua Gottlieb of Harvard University surveyed recent research in order to distil the nature and causes of the “wealth of cities”. Although manufacturing firms have grown less likely to concentrate together in dense areas, thanks to the falling cost and hassle of shipping, firms in knowledge-based industries like technology and finance have become more prone to clustering. In cities with lots of skilled workers, productivity tends to rise with population density. The authors reckon that it is now the advantage of associating with other clever people, and the intellectual stimulation and exchange that results, that gives the biggest cities their magnetism.

City sticker

Congestion slows cities’ breakneck growth: housing and transport infrastructure seldom keep pace with demand. As a result, rather than a single metropolitan goliath, economies tend to develop a series of cities distributed by size according to “Zipf’s law” (named after George Zipf, an American linguist). The largest city tends to be twice the size of the second-largest, three times the size of the third-largest, and so on. American cities roughly follow this pattern. In the less-integrated EU, however, there is instead a jumble of big cities and a dearth of medium-sized ones.

Deeper integration would push Europe toward a more American distribution. London would probably be the main beneficiary, given its particular strengths. Europe’s financial markets remain highly fragmented. Its stockmarkets are about half the size of America’s, despite the similar size of the two economies; European corporate-bond markets are about a third of the size. Few Italian firms, for instance, turn to their country’s relatively small equity or bond markets for funding. Instead, they simply borrow from Italian banks, which tend to have their headquarters in Milan. The EU is currently trying to rectify that by making it easier to borrow, lend and invest across its internal borders, in the hope of reducing funding costs for European firms. If such efforts bear fruit and Britain remains a part of the union, firms based in London would help more foreign companies issue shares or bonds there, at the expense of other European financial centres. Easing the cross-border provision of services, another thing on the EU’s long-term agenda, would likewise prove a boon for London.

That prospect would naturally discomfit continentals. Just as New York rose head and shoulders above Philadelphia and Boston as the American economy grew and integrated, Paris, Frankfurt and Milan could all expect to cede ground to London in a close-knit EU. But London’s boosters might also blanch at the growth deeper integration might bring. It would mean more building, for starters. Greater London added 23,000 new housing units in the year to September, less than a third of the new units approved in New York last year. Were London to follow the example of New York, its GDP and population could eventually eclipse that of the rest of Britain, lengthening the political and cultural shadows cast across the rest of the country. Mr Johnson is angling for a promotion to prime minister; ironically, a vote to remain could make his current job one of the most desirable in Europe.

Visit our Free exchange economics blog