Monday, 16 January 2017

Brexit: From Three-legged Stool to Pogo-stick

Part of the problem we face in defining Brexit is that we were never wholly sure what the EU was. Jacques Delors' memorable phrase, "an unidentified political object", reflected its uncertainty as much as its novelty. The ultimate goals were deliberately ambiguous ("ever closer union") while the many treaties and directives were varied by derogations and far more national customisations than the popular story of "diktats" from Brussels would suggest. The certainty of the EU, like the extent of the Commission's powers, was vastly over-stated by politicians (both pro and anti) and amplified by newspapers structurally averse to subtlety. For ardent leavers and remainers alike, the EU was a "phantastic object", serving to reflect respectively a nostalgic past and a utopian future. If we are to understand Brexit, let alone manage it optimally, we need to first understand the actual historic relationship of the UK and the EU and what might therefore be possible in the future.

While some leavers like to define Brexit in positive terms, such as "taking back control", the reality is negative in the sense that Brexit is what is left after we subtract certain things, such as the single market and free movement. The negotiations will be politically fraught because they will centre on those existing advantages that we lose outright, which will upset remainers, and the concessions and compromises that we will be obliged to make to retain other advantages, particularly for the City and big business, which will upset leavers. There is nothing of real substance to be "gained", though plenty of scope for gestures in the theatrical arenas of "border security" and "meddling judges", which is why a "hard Brexit", with its resignations from the Customs Union and the European Court of Justice, is politically attractive. The government will seek to downplay or even hide the concessions, given that most of its supporters are leavers, while the lost advantages will be dismissed as the privileges of selfish, metropolitan elites.

Some leavers are likely to be disappointed simply because many of the burdens of modernity added over the last 40 years were coincident to, but not consequential on, membership of the EU. Though the European Union was a key enabler of neoliberalism, it was merely the regional coordinator of global tendencies. Not only can we not go back to a status quo ante, but we will find that the world outside the EU looks remarkably similar to the EU. While we have been diverging, the rest of the world has been converging. As a result, Brexit may be as hard as some leavers would like, but it won't be as clean as they expect. This might suggest a transitional deal would be in everyone's interest, but that would mean the UK agreeing to initially continue as-is (same tariffs, same regulations, same contributions) but with the only immediate change being exclusion from decision-making, which would disappoint both leavers and remainers. Political necessity requires substance, which inescapably means a formal end to free movement. Anything less would be an existential threat to May's administration.

The shape of Brexit is unlikely to surprise. As Stephen Bush remarked, "It’s crystal clear what not being subject to the free movement of people and leaving the ECJ means: a hard Brexit, with no continuing membership of the single market. And it’s equally clear that the government’s hope is that it can use its status as a major contributor to the EU budget to buy a measure of the access it needs in order to keep the banks sweet and Nissan chugging out cars in Sunderland". The vexed relationship of free movement and the single market is above all a domestic political problem. As John Curtice notes, "To many in the EU, the British public’s apparent desire to retain free trade while no longer granting freedom of movement will seem like a wish to have their cake and eat it. An alternative view, however, is that many people in the UK – including some who voted ‘Remain’ – reject the EU’s recipe for baking the cake in the first place. For them, freedom of movement as currently implemented in the EU is not a necessary concomitant to free trade".

Curtice's interpretation implies a continuity in attitudes - pro-free trade and anti-free movement - not just since 1991 but going back to the 1970s, but this lacks nuance. When the UK joined the EEC, the cake and the eating thereof were considered to be unrelated: concern over immigration was focused on the New Commonwealth while free trade was seen largely in terms of goods, with only a few sophisticates considering services, never mind labour. The free movement envisaged by the Delors Commission in the 1980s was essentially middle-class - the routine transfer of corporate workers and professionals to aid big business - rather than working class, the continental movements of the latter seen in the 50s and 60s having tailed off by the late-70s. It was the accession of East European states, a move championed by the UK in part as a way of slowing down integration, that revived working class migration, though this didn't have a visible impact on British society until the mid-00s.

What occurred in the 90s in the UK was the rhetorical linking of trade and movement, with foreign (and largely non-EU) labour and asylum-seekers being cast as examples of "unfair trade". This was at root a cross-party attempt to deflect attention from the failure of neoliberalism to revive deindustrialised areas, in which globalisation was characterised as a problem of the movement of labour rather than the movement of capital. It was this idea of "unfairness", which was emotionalised through stories of "benefit tourism" (foreigners are lazy) and wage-undercutting (foreigners work too hard), that helps explain why some Brits have been simultaneously in favour of UK citizens having the right to live and work anywhere in the EU while denying reciprocal rights to other EU citizens. This isn't the persistence of arrogant imperialism but a popular belief that we were doing Europe a favour, by exporting our skilled professionals and setting up retirement colonies in impoverished areas of Spain, while they were taking advantage of our hospitality.

Dominic Cummings made some interesting remarks about this in his recent brain-dump about the referendum campaign: "In 2000, focus groups were already unhappy with immigration but did not regard it as a problem caused by the EU. By 2015, the EU was blamed substantially for the immigration/asylum crisis and this was entangled with years of news stories about ‘European courts’ limiting action against terrorists and criminals". This reinforces two points: that the "immigration crisis" took its modern narrative form in the mid-to-late 1990s, essentially as result of party political calculations; and that its framing, both as "problematic labour" and an assault on sovereignty, owed much to a press unwilling to blame capital for globalisation's discontents. The latter was exacerbated as media organisations themselves became increasingly global following the relaxation of ownership rules and the growth of the Internet, but Murdoch only explains so much. The real shame lies with the Tory and Labour administrations that facilitated business-friendly immigration rules while publicly decrying the social consequences between 1990 and 2009.

The British political establishment never expected to quit the EU. The assumption was that euro-scepticism, which was instrumentally cultivated in weak form by many pro-EU politicians, could be used to keep the UK in an advantageously hybrid relationship: in the EU but not the Eurozone; equidistant between the US and the EU in foreign policy; and preserving the City's dual role as the world's leading offshore gateway and the EU's premier financial centre. The problem with this strategy is that, like a three-legged stool, its stability depends on the presence of all three legs and that in turn depends on the tacit indulgence of both the US and the rest of the EU. This became increasingly difficult with the push for greater integration in the 80s (supported by the US) and then German reunification. While 2016 has been quickly written-up as David Cameron's folly, a more sober view is that the stool was always going to collapse at some point. It just happened on his watch. In retrospect, the departure from the ERM in 1992 was when the rot set in, even though this helped preserve one leg of the stool (i.e. by heading off British involvement in monetary union) in the short-term.

The referendum might not have happened had it not been for the Liberal Democrats' decision to enter coalition in 2010. The knowledge that the government would not lose a vote on whether to hold a referendum on EU membership, coupled with the feeling that this was being denied by the junior coalition partner, boosted the Conservative rebellion against the government's three-line whip on the subject in 2011. A quarter of Tory MPs voted for a referendum and at least as many voted with the government reluctantly. At that moment it became clear that the Tories would have to eventually accede to the call for a popular vote or face a split. Cameron's miscalculation was to believe that 2015 would produce another hung parliament and thus an excuse to defer the issue again. Theresa May's calculation appears to be that in securing an end to free movement she will earn sufficient popular credit to offset the compromises and contributions necessary to secure the privileged access of the City and big business to EU markets. This isn't as risky a strategy as it might at first look.

The EU isn't interested in knocking the City of London off its perch. Apart from the short-term risks to financial stability that any radical change would entail, it is in the EU27's long-term interest to keep systemic risk in global financial markets safely quarantined in London, where it has been since the late-80s. In the event of another 2008 and the failure of major banks, they would rather the UK bear the brunt of any bailouts. It is hard to believe that after years of imposing austerity on the periphery to reduce the exposure of German and French banks to bad property loans the EU core will blithely take on even greater risk. It is for the same reason that they were always sanguine about the UK not adopting the euro, as this would have potentially spread the liability for a systemic bailout to the rest of the EU via the ECB. While there will be attempts by Paris, Amsterdam and Frankfurt to prise low-risk business away from the City, this will be a gradual erosion of London's market share, not a smash-and-grab.

Similarly, it is in the interest of the EU for London to remain a centre for dirty money and a gateway for offshore tax avoidance, which provides a benefit to many rich Europeans who in turn make donations to political parties. While they will seek to regulate (rather than wholly prevent) domestic access to London's wealth management facilities, they have no interest in providing a competitive concierge service for Russian oligarchs or Chinese princelings. Far better that the money is first laundered in London before some of it is spent on the continent. What this means is that Theresa May will probably be able to preserve the high finance leg of the stool - the privileges of the City of London - and may also be able to secure mutually-beneficial deals for the larger capitals (probably motor manufacturers and possibly pharma). In contrast, the geopolitical leg is crumbling fast. Since 1989, the value of the UK to the US has been as a proxy within the EU. That role is now a dead letter, while the election of Trump means that EU leaders will be unlikely to treat the UK as an honest broker in any approaches to Washington: the Europhile Foreign Office will be seen as irrelevant while Trump's British fans will be seen as unreliable.

Brexit means that financial services will once more be promoted as an engine of national growth amid assurances that the prudential lessons of 2008 have been learnt - something Theresa May and Philip Hammond should be able to find common ground on with Mark Carney. The determinant of relative success will be the absence of a major Sterling crisis, which will further amplify the influence of the City on political decisions (so don't expect austerity / sound money to go out of fashion) and lead not to stability but volatility. Our one-legged stool will be more like a pogo-stick. The irony of Brexit is that it isn't taking us back to the early 1970s so much as the early 1990s. Euroscepticism then was driven not merely by a wariness towards "social Europe" and the prospect of German hegemony but by a sincere belief that the Thatcher "revolution" had positively altered the nation's economic prospects and that it could thrive as an independent power in the new global order. It proved to be an illusion that was ultimately shattered on Black Wednesday.


  1. "Theresa May ... may also be able to secure mutually-beneficial deals for the larger capitals (probably motor manufacturers and possibly pharma)."

    My question would be: if we leave the customs union, why would any car manufacturers stay? Surely JIT sub-assembly manufacture makes it impractical. I don't see a way to negotiate around this.

    1. The aim will be to secure continuity with current terms but outside the Customs Union. Given investment in existing EU-wide supply-chains for car components, this will make sense to both sides and to UK-based foreign manufacturers.

      Longer-term, some UK-based manufacture (for export to EU) will likely shift to the continent but this will coincide with building new production lines. For this reason, the deal May will get will be time-limited, probably in the order of 7-10 years.

  2. How would you get continuity outside of the Customs Union? I guess you could maybe designate certain factories as bonded warehouses or analogous?

    1. To judge from May's speech today, the aim is another hybrid relationship in which systemically important industries that depend on pan-EU supply chains will remain within the scope of the CU, presumably by means of an industry-specific associate status.

      This would then allow the UK to negotiate independent trade deals for goods and services that fall outside this scope, which would in turn allow the Tories to claim they have "taken back control" of trade, even those these non-CU areas might turn out to be marginal to overall GVA.

    2. I just read that a partial CU doesn't have legs. Against WTO rules.

      And isn't the CU adjudicated by the ECJ, which is another Brexit red line?

    3. The hybrid strategy may not work, however May certainly appears to be assuming that a fudge is possible, otherwise she would have announced the UK's intention to quit the customs union, along with the single market, today. I suspect her calculation is that pressure from big business on the EU27 will be enough to secure a compromise, whatever the legal fiction.

      There is a sort of precedent in the partial CU of the EU with Turkey, though I don't think this is really relevant for the UK given the difference in the economies and their political trajectories. A bespoke deal for specific industries, and probably time-limited too, strikes me as more likely.

  3. In this story the city continues to rule the roost, because it remains in everyone's interest. But doesn't it get harder to sell this engine if growth to the wider population if public concessions must be made to protect it. Is it really business as usual for the city?

    1. I think that is why May & co are so keen to deliver what they believe "the people" want, i.e. an end to free movement and the ECJ. Of course, this won't satisfy the tribunes of the people - the press - given the non-European basis to popular xenophobia and the antipathy to "meddling" judges generally. The irony is that in furthering the City, we are actually empowering a global elite rather than a national champion.

    2. One problem with Brexit is that it makes you yearn for Osborne's "rebalancing the economy" and Northern Powerhouse" even though it was PR guff.

    3. There has been little public outcry about the City's preponderant influence over UK economic policy after all this time, so I doubt it will be under too much of a threat. Plus, the diplomatic struggle over the terms of exit will allow the City to wrap itself in the flag and disguise its selfish aims.

  4. Herbie Destroys the Environment21 January 2017 at 11:00

    The EU project was always going to hit the rocks as far as the UK is concerned and maybe it is fatally wounded, and was always destined to end this way. If by the EU project we mean a genuine United States of Europe. The truth is that the EU had gone as far as it could and still remain palatable to people fed on a daily diet of right wing populism and neo liberal policies. So what we have now is probably as far as EU integration can go in the current epoch. A sad statement of failure in my opinion.

    The idea that by going it alone we gain 'sovereignty' or get our country back is of course garbage on stilts. Look at the reaction to Corbyn's idea of changing public sector procurement rules to favour companies where the ratio between top and bottom is 20:1 (still an obscene gap by the way), "You can't do that because the rich will not invest in the nation!". So we have clearly not got anything back and this country, being a smaller and hence more dependent economic entity has now opened its legs to the rich and wealthy and said, "Do with us as you please".

    Britain is now a submissive sissy that must pander to the whims of every rich interest, getting your country back, shut the fuck up you racist morons!