Though London’s economy has been hit hard by the global recession, the city stands firm alongside New York City and Tokyo as one of three global financial centers and remains unrivaled as the business capital of Europe.

From a macroeconomic standpoint, world cities are often classified by their scale of international business—for example, the level of trade that takes place with other countries, the number of foreign tourists, and the number of workers that come from overseas. However, world-class cities are also valued for their cultural, historic, and architectural qualities, and for their physical infrastructure. In this respect, “London has the whole package,” observes Giles Wilcox, head of London-based property consultant Savills’s European investment team. “It is a key financial hub due to its size, liquidity, and transparency, as well as a truly cosmopolitan city that attracts a diverse mix of people.”

In Europe, Paris commonly ranks next for similar reasons, although it is not in tune with the financial world in the same way London is. Madrid and Barcelona are also potential growth hot spots, while Stockholm provides appealing business prospects. Frankfurt is Germany’s financial powerhouse, Brussels is the administrative center of the European Union, and Zurich is favored for its low taxes. Rome stands out for its cultural merits, yet Istanbul also has a great deal to offer, given its large and growing young population. Each city showcases a unique attraction and is important in its own right, but it is a combination of several of these characteristics that render London a world-class city.

Oxford Economics, a U.K. economic forecasting consultancy, predicts 3.4 percent growth in London’s gross domestic product (GDP) from 2010 to 2012, which will be exceeded in Europe only by Stockholm and Frankfurt. From 2012 to 2020, the consultancy predicts London will be the fastest-growing major European city, with accelerated GDP growth of 5 percent in 2012 and average annual growth of 4 percent over the eight-year period. With its heavy reliance on financial and related services, London has seen its employment levels fall 8 percent between 2008 and 2010 and its GDP shrink 4.5 percent.

The city, which alone accounts for 19 percent of total U.K. GDP, is likely to see a robust recovery, with levels of growth that outstrip the rest of the country and most comparable cities around the world. Furthermore, real disposable income is expected to grow at an annual average rate of 3.5 percent over the medium term, while employment growth, at 1.5 percent, is likely to be higher in London than in any other European city.

A key part of London’s success is its accumulation of a large, well-resourced, and skilled pool of financial and business services. High rewards attract the best talent from around the world, creating a cluster of efficient businesses and a highly productive regional economy. The benefits associated with this make for an attractive base for firms of all kinds.

For businesses, being situated near contacts, suppliers, labor, and clients is an advantage that outweighs the appeal of lower land prices and communication costs elsewhere. In addition, London offers a flexible regulatory environment, a transparent legal system, a relative lack of corruption, and a moderate tax burden by western European standards, as well as solid links to the E.U. and other markets, a convenient time zone, and use of the English language.

Financial gains are by no means the only factor that makes London an attractive place to work and live. Its cosmopolitan nature, its cultural and historic qualities, plus the rights granted to E.U. residents— among others—who move there, make London an iconic city and a clear choice for many businesses. Consequently, the city has become synonymous with well-known corporate headquarters such as Canary Wharf and 30 St. Mary Axe, known as the Gherkin.

“London will remain the capital of Europe and will sustain a major presence in global financial markets because it is where people want to be,” says Stephen Peers, head of West End transactions at London-based property agent Drivers Jonas. “For this reason it won’t be usurped by Paris or anywhere else.”

Also expected to drive London’s growth are the 2012 Olympic Games, which will provide the host city a massive tourism boost and generate thousands of jobs. Furthermore, it is estimated that the U.K. economy will gain about £7 billion ($10.8 billion) through the procurement of various goods and services for the Games from domestic sources. For example, steel for the Olympic Stadium comes from Bolton, and from South Wales for the London Aquatics Centre, plus about £1.7 billion ($2.6 billion) worth of contracts—covering everything from 900,000 pieces of sporting equipment to 17,000 beds for the Olympic Village—are still to be awarded to U.K. companies by the London Organising Committee and the Olympic Delivery Authority.

The lasting legacy for the capital in terms of infrastructure investment and regeneration is another element that will support London’s position as a world-class city. U.K. residential property investment expert London Central Portfolio (LCP) reports that host cities typically receive a 19 percent greater uplift in capital values, such as house prices, than does the host nation overall, and that the affluent areas in those cities benefit most over the long term.

“Global interest in the 2012 London Olympics will turn the spotlight on the capital,” notes Naomi Heaton, LCP chief executive. While urban regeneration of the East End, one of London’s most disadvantaged areas and home to the Olympic Stadium, will provide much-needed affordable housing and facilities for key workers—police, nurses, firefighters, and the like—the agenda for the prime areas of London’s affluent West End will be quite different. Home to such icons as Buckingham Palace, the West End is being targeted by the government to become a showcase of everything the U.K. has to offer, including high-quality transport facilities, as demonstrated by the extension of the London Underground’s Jubilee Line.

More specifically, New West End Company—run by major retailers and property owners in the West End—in partnership with the Westminster City Council and Transport for London, is leading a £40 million ($61 million) joint action plan to revitalize key West End areas, including Oxford Street, Regent Street, and Bond Street, before the London 2012 Summer Olympics. The plan involves new wayfinding signs to help visitors, traffic improvements, wider pavement, and better lighting. This past November, a new diagonal pedestrian crossing aimed at easing congestion at Oxford Circus was unveiled as part of the plan. “Londoners are on a mission to ensure that this will be the greatest city in the world by 2012, and the effects of the investment in central London will endure long after the Games are over.”

However, potential failure by the government to push on with transport system improvements could threaten this goal. Public spending restraints may prevent some upgrades from being realized, though many improvements are already in place or well underway, such as upgrades to the Underground rail network.

According to Neil Blake, director of economic analysis at Oxford Economics, a transport threat to London’s long-term economic potential would be failure to proceed on Crossrail—a project to build a major new railway for London and the South East, starting service in 2017—which is expected to fundamentally regenerate retail and business districts throughout central London. The Greater London Authority has calculated that Crossrail will have generated £20 billion ($31 billion) for the U.K. economy when it is completed, and that by 2026 it will generate annual benefits of £1.24 billion ($1.91 billion). Demolition work has begun for the new railway despite various concerns that have plagued the project, including government responsibility to provide funding for such a large infrastructure effort when its finances are already stretched, and the political sensitivity of pouring money into London projects when regional projects are on hold.

“The subprime crisis that triggered the global financial meltdown produced a seismic shock for all three global financial capitals [London, New York City, and Tokyo],” notes John Rigg, head of international investment and central London capital markets at Savills. “However, concerted central bank action and the fall in sterling, combined with London’s intrinsic attractions, are driving a rapid recovery, particularly in its investment market. London is unique, and it is up to the government to ensure that any new medicine for the financial services industry does not kill the patient.”

A further risk to London’s prosperity is the drift of economic power to the Asia Pacific region, as well as potential significant policy mistakes by the government. Taxation, transport infrastructure, and the regulatory environment are areas where political intervention could damage London’s prospects. For example, E.U. proposals to regulate hedge funds could push them to safe havens like Switzerland, which is not part of the 27-nation E.U. bloc, or to the emerging markets of Asia. This would constitute an enormous capital drain from the economy. There already have been signs of flight by high earners since the U.K. government announced an increase in the tax rate on those earning more than £150,000 ($232,000) a year to 50 percent from 40 percent, effective in April.

“Looking ahead, footloose capital and financial activities may well drift gradually away from cities across the Western world as a whole towards those in the Asia Pacific region,” notes Neil Blake, director of economic analysis at Oxford Economics. “But London will remain a leading global business and financial center for the next decade and beyond.” Because both financial and nonfinancial businesses typically want a major presence in Europe despite their presence elsewhere, “the question of location often boils down to where within the continent,” he says. In this context, London is likely to remain the preference.

“To ensure that we have a stock of business and residential space that is fit for purpose, we need to encourage investment into redevelopment and refurbishment of London’s office and residential stock,” adds Mat Oakley, head of the Savills research department. “Too much caution by developers, banks, and the authorities could be as damaging to our global position as too little investment into training or transport.”

Nonetheless, the expectation that London will witness a strong recovery during the upturn supports prospects for office demand and will help reignite the development of new pre-let offices by 2012, Drivers Jonas predicts. Even the risk that growth of the financial services sector will be weaker than in the past should not impede London—with its combination of available skills, capital, market access, and flexibility— and its ability to bridge the growth gap.

These considerations support Oxford Economics’ forecast that despite various risk factors, London looks set to reemerge as the fastest-growing major European destination and one of the fastest-growing major European destination and one of the fastest-growing global financial centers, outpacing recovery in New York City and Tokyo in the medium term.