Cutting the City of London down to size will shrink Britain too Well, it might seem like that now, but it certainly didn't during the New Labour years, when Britain enjoyed a virtually unparalleled period of growth and prosperity. In no small measure, that was down to the "golden legacy" of economic reform and deregulation from the Thatcher era - and yes, the resulting renaissance in the City. Today, London is once more one of the greatest cities in the world, and far and away the most global and outward-looking of all the mass conurbations. Its position as the world's leading international financial centre has, in turn, made it into a centre for business of all kinds. More multinational businesses choose to be headquartered in London than any other city, in part so as to be close to the bankers who finance them. There is hardly a single financial transaction in the world of any size or complexity that doesn't pass through the City in some shape or form. This enviable position is hard-won, precarious - and jealously regarded by others. It's not all been positive, by any means. Growing social inequality and the City's failure to serve the domestic economy as extravagantly as it has its own interests have given rise to the gravest possible concerns. But when Lord Myners says that the financial crisis has cost the economy such a colossal chunk of its GDP, he should reflect on the fact that there can be no bust without a boom, and that if Britain had never enjoyed the growth that international finance provided - or indeed the ingenuity of people like Mr Diamond - its economy would today be in an even darker place. Would London soon be showcasing itself to the world as host to the 2012 Olympics without the renewed sense of prosperity, swagger and self-confidence that finance helped deliver? It seems unlikely. It has become fashionable to think of the City as far too big and powerful for the economy's own good. But in fact, periods of relative British prosperity have always gone hand in hand with a key position in international finance. At the height of Victorian empire, the City was even more powerful and influential than it is now. It's only in the past 30 years that Britain has been able to begin to reverse the catastrophic period of decline that followed the loss of Empire. Are these gains to be so easily surrendered in our rush to see heads on stakes outside the Tower of London? Punish and imprison the perpetrators by all means. They deserve nothing less. But the demonisation of the City that all too often marches hand in hand with the desire for retribution is most unlikely to serve our economy well. Finance already faces hostility enough from the European behemoth fast being created on London's doorstep - a forced march to fiscal and political union which the Government, oddly, seems to believe is in the national interest. Let's not shoot ourselves in the foot further by conspiring with our European neighbours to move one of our more successful industries off to the Far East. Instead of the race to the bottom under Labour, we seem to be engaged in a regulatory rush to the top - a process which is as wrong for the bust as light-touch regulation was for the boom. At a time when Europe desperately needs its banks to restart and then support growth, it seems intent only on cutting them down to size. As for Barclays, the story doesn't end here. Numerous questions remain unanswered. Who knew what and when? Why has nobody been prosecuted? Which other banks are up to their necks in it? To what extent are regulators - the Bank of England and the Financial Services Authority - culpable in this scandal? Why did they tolerate the low-balling of Libor rates - or, in the heat of the banking crisis, even sanction it in the supposed interests of systemic stability? Most important is the existential question that has haunted this industry since the banking crisis began - what useful social purpose do investment banking goliaths such as Barclays Capital serve, and how do you change them so that they are not just money-making machines for themselves, but also fulfil their proper role in financing trade, business and households on acceptable terms? Restoring public trust in the City requires answers to all these questions. If they are to get the balance right, policymakers need to be at their most thoughtful and considered. Regrettably, there has been little evidence of this in the unseemly gallop to populism and political point-scoring witnessed over the past week. The City, I fear, is already damned to one of its multi-decade periods of decline - with all that means for our tax revenues, public services and living standards.