The Brooklyn Rail

APR 2016

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Field Notes

A New Crisis Acronym

What are the Brits doing? On June 23 they will vote in a referendum on whether to remain in the European Union, to which they have belonged since 1973. It is rare for a marriage of more than forty years to break up, especially by the decision of the partner that had asked twice for betrothal. Of course, these are relationships between countries, not people. Yet the U.K.-European relationship will be affected even if the U.K. votes Stay rather than Leave, just as if a partner had decided to sleep in a separate room in the same home. To examine the U.K.’s decision, this article reviews some key events in the historical relationship and the unusual position of the U.K. as a European power.

 Many writers in Britain have considered U.K. Prime Minister David Cameron’s decision to call a referendum on E.U. membership to be simply his way of dealing with dissidents in his Conservative Party. After all, big-business opinion, which all major parties in the U.K. follow, is largely in favor of the status quo, even if many Conservatives hate the E.U. Referendums on any issue, let alone a major foreign-policy question, are also rarely held in the U.K. Normally, Parliament makes the decisions and this is a convenient set up for the ruling groups. The decisive part of Parliament is staffed by those voted in by the public (the House of Commons), but the elected candidates are almost all chosen by the ruling parties, who are in turn influenced by the established interest groups and by corporate lobbying. In addition, there is the common feature of modern democracy: in the 2015 general election, the ruling Conservative Party was voted for by barely a quarter of the full electorate—just 37% of the 66% of those eligible to vote who put their mark on the ballot paper.

A referendum on Britain’s E.U. membership has the advantage of being a popular vote. But the reason a possible British exit from the European Union has become a referendum question, not something to be determined by the Mother of Parliaments, is that there is a big enough, although still a minority, dissident opinion among British elites that sees continued E.U. membership as a bad idea. So the decision will be guided by the collective “wisdom” of the masses—who are guided in turn by the cajolery of the rival Stay or Leave factions. Each of these factions, ironically, includes both supporters of trade union rights and proponents of untrammelled business exploitation.

A key issue at stake in the referendum is the position of Europe in a crisis-stricken world. Losing the U.K., the second largest E.U. economy (accounting for 16% of the area’s GDP) would be a blow to longstanding European plans to build a bloc that could compete with the U.S. and others. It would add to the many self-generated problems of European capitalism and could also encourage others to head for the exit, since the U.K. would have set a precedent. Lieutenant General Ben Hodges, head of the U.S. Army in Europe, has even said he was worried about a potential risk to NATO: the E.U. could start to unravel just when it needed to “stand up to Russia.” However, my focus here is on the rationale behind the U.K. vote and that comes down to whether it is in the interest of the U.K. to maintain its current relationship with other European countries. Nobody would suggest that on a Leave vote there would be a collapse of U.K.-E.U. trade and investment deals. These are too extensive to reverse. But, nevertheless, there is a question of where the better prospects lie, inside the E.U. system or outside. I will assess how the U.K. vote could play out, starting first with a historical overview U.K.-European relationships.


Changing relationships

Readers might be surprised to learn that Winston Churchill was in favor of a “United States of Europe” in 1946. This view of a resolute British Empire loyalist is less of a surprise when one realizes that the proposed union did not include the U.K.! After all, there was then an Empire to run and Churchill was mainly concerned with getting some stability on the war-ravaged European continent. Even by 1957, when the Treaty of Rome was signed by West Germany, France, Italy, and the Benelux countries—the six founding members—to set up the European Economic Community (EEC), Britain took no real part in the discussions, being much more focused on economic links with the Empire/Commonwealth. However, later the Commonwealth faded in economic and political importance, and British capitalists became increasingly open to doing more deals with the rest of Europe.

Britain first applied to join the EEC in the early 1960s. France’s President Charles de Gaulle vetoed this application because he thought that Britain could not be trusted as a loyal member of the new European (and, in some respects, anti-American) project. Apart from de Gaulle’s annoyance at the Brits’ frustrating some of France’s earlier colonial plans, in Syria and elsewhere, he was most worried about their U.S. links, most visible in the Polaris nuclear missile deal in 1962.

Nevertheless, Britain’s interest in the EEC did not diminish. It was encouraged by an attraction to a faster growing market in Continental Europe at a time when its Commonwealth economic relationships with former dominions and colonies were not paying off. By the early 1970s, the time was right for another application to join, one that was accepted as the other European countries had by then become more open to having the U.K. as a partner. In 1973, the U.K. Parliament made the decision to join under the Conservatives; under the following Labour Government, a 1975 popular referendum ratified this, by 67% to 33%. At that time, British radicals denounced the EEC as a capitalist plot. Instead, many of them advanced the “alternative” of restoring trade deals with the Commonwealth. They failed to mention that this was just a different kind of capitalist plot.

Back in the 1970s, the British economy was uncompetitive, crisis-ridden, and dogged with high inflation, large external trade and public spending deficits and a falling currency. In some respects, plus ça change [The more things change, the more they stay the same].But then, by comparison, the EEC looked like a shining beacon of prosperity. Well, at least the other six members up to 1973 were generally doing better than Britain, although they were also hit by economic crises. Being a more integrated part of a “European” economy also looked likely to give a brighter future for the UK. Trade between member countries was growing strongly and was likely to continue to do so, given falling constraints on internal trade that would boost the internal market, a common tariff on imported goods from outside the EEC, and an expanding membership. By 1993, the EEC had been renamed the European Union and had twelve member countries, while others were waiting in the wings for accession to what was the most attractive regional club.

More European holidays for the Brits, cheaper transport links, and the introduction of some interesting continental food and drink into the questionable British diet (with French and Italian wine now widely available on supermarket shelves!) helped consolidate a less insular popular opinion and a more favorable British attitude to the E.U. This also affected the opinion of the labor unions and the left wing of the Labour Party. In the early 1970s, they were anti-EEC. Under what was to be four successive Conservative governments, with three dominated by Margaret Thatcher from 1979, the unions and the left wing warmed to Europe. A key event was when they applauded the labor-oriented rhetoric of the President of the European Commission, Jacques Delors, at the 1988 annual conference of the Trades Union Congress.

Despite being an implacable defender of British sovereignty, U.K. Prime Minister Margaret Thatcher nevertheless signed the E.U.’s Single European Act in 1986. The Act set out plans for a single European economic market and at the same time codified closer European political cooperation. British businesses liked the first part, and were less happy about the second. But the two parts came as a package, so the deal was done.

U.K.-European “cooperation” went further by 1991 – 92, but this time there were limits set by the interests of British capitalism. This period was critical for establishing the later euro exchange rate system, the economic and financial rules for becoming a member of it, and the obligation of E.U. member states to eventually join the system. In February 1992, the Maastricht Treaty set the foundations, and the U.K. government response was striking. It rejected many regulations that favored workers’ rights, and made sure to get an “opt out” from the social and employment rules in the negotiations. Above all, it got an agreement whereby it was not obliged to join the future euro single currency. (Some of the “social chapter” opt out was later amended by the 1997 Labour government.)

As an aside, it is worth noting a little remarked upon deal that helped Britain secure its exemptions from the Maastricht Treaty’s general rules. The U.K. agreed with Germany that the E.U. should recognize Croatia as a political entity. This recognition of a German area of interest exacerbated political conflict between Croats and Serbs in the former Yugoslavia. It helped spark the ensuing Yugoslavian civil war and was a reminder of how the costs of deals between the major powers are often paid for by others.


Break points

This closer, though still tense, U.K.-E.U. cooperation was undermined by a political-economic upset. A turning point was when the Conservative government decided in 1990 to join Europe’s Exchange Rate Mechanism (ERM). While E.U. politicians generally saw the ERM as a glide path into the later euro system, Britain’s membership of it was quite clearly only for tactical reasons. The British government’s aim was to use the ERM to stabilize the value of the pound sterling while at the same time it was able to cut domestic interest rates to help stimulate the British economy. Less than two years afterwards, a relatively weak U.K. economy put downward pressure on the value of sterling in the ERM. Sterling was pushed to the lower limit of the system, given the contrast between the U.K. and the strongly growing Germany economy, which was still being boosted by the reunification of the West and East of the country in 1990.

It soon became clear that there was little political support among ERM members, especially Germany, to prevent the value of the pound sterling dropping below permitted levels. One big problem was that the other ERM members had played no part in deciding those levels; the decision on the exchange rate for sterling within the system was just announced by the U.K. Treasury over a weekend. By contrast, most key decisions on running the system had been made after agreements between the major countries. The U.K. government ended up spending billions from the U.K.’s foreign exchange reserves to prevent a drop below the ERM limit and to defend its policy, including raising interest rates sharply. It failed, and made George Soros (in)famous in the news media as a successful hedge- fund currency speculator. Sterling left the ERM in September 1992 and slumped in value, but U.K. interest rates were cut again.

Not long afterwards, the U.K. economy recovered as did the value of sterling. The political lesson learned was that Britain was better off outside a system dominated by other European countries, where it would have more room to decide policy. These events tempered the enthusiasm of pro-E.U. elites, encouraging those who came to be called “eurosceptics.” This term encompassed not only those against the U.K.’s possible membership of the euro exchange-rate system, introduced in 1999, but also those more fundamentally against the U.K.’s membership of the E.U. No longer was this latter group made up only of nostalgic Empire loyalists; it had a wider following. Perhaps “Europe” was not such a good economic-political alliance for British capitalism after all.



Deciding to avoid a decision

By the mid-1990s, British policy makers began to realize that they might have even bigger issues with the E.U. The 1957 Treaty of Rome included a pledge, capitalised as the objective to achieve EVER CLOSER UNION. British government strategy was to avoid this “closer union” dimension that would restrict its freedom of maneuver. In the early period of the U.K.’s EEC membership, that did not seem to be much of a problem. Such political dreams usually come to nothing. But it did become a problem in the wake of the Maastricht Treaty and the unification of West and East Germany. That was why the U.K. government worked hard to get its “opt outs” from the Maastricht Treaty, but there were longer lasting strategic problems too.

If the major continental European countries were now to become “unified,” that would probably mean with Germany as the principal power and deciding force. That would likely still be true if the U.K. joined the Eurosystem, since its ability to create a counterweight in an alliance with France, or with other countries, was far from certain, given the many rivalries between them. But if the U.K. did not join the Eurosystem, then the euro member countries might develop even more independently and challenge British interests in trade and finance.

In such a dilemma, the classic British compromise diplomacy came to the rescue under the Labour government from 1997 – 2010. There would be no outright rejection of the euro, which would have cemented the U.K.’s position as being outside the European project. Instead, there would be a conditional agreement to join at some indeterminate point in the future. This was summed up in the Labour government’s “five economic tests” on whether joining the euro would be in Britain’s interests. These tests were posed as an objective, neutral assessment of the potential economic costs and benefits, ones that could change over time and lead to a decision to join the Eurosystem. However, they left plenty of room for a political judgement, and it was clear that the fundamental political decision was No.


European problems in a wider world

Membership commitments of the E.U. and the euro are different, but related. The E.U. is the total twenty-eight-country grouping, within which nineteen countries are members of the euro exchange rate system. From being a pole of economic and political attraction up to the 1990s—Austria, Sweden and Finland joined in 1995—there are few rich countries lining up to join the E.U today. This is not because the list of rich regional countries has been used up; Switzerland and Norway are still available. It is because only poorer nations, like Turkey, Albania, and Serbia, would see strategic political advantages in E.U. membership and also some likely funds from its development programs. The richer European countries who are not E.U. members want to retain a degree of independence in their policy making. If they chose now to join the E.U. that would imply putting themselves on course to join the euro system. Given its recent disastrous economic history, such a decision would make as much sense as walking across a six-lane highway with your eyes closed.

Economic trouble—stagnant growth and high unemployment—has strengthened anti-E.U. sentiment in many countries. This has increased support for new political parties, such as the U.K. Independence Party, and longer-standing ones, such as the Front National in France. Adapting to these new challenges, the established parties in many countries have also become more nationalistic and anti-immigrant. One of the principal election pledges of the Labour Party in the 2015 vote was to impose more “controls on immigration.” In the poorer countries, anti-E.U. views have often reflected popular frustration at how what once looked like hopes of a better future in the rich man’s club have been dashed by the economic crisis. The refugee crisis, with many hundreds of thousands of people trying to escape turmoil in the Middle East, North Asia, and Africa, has added to the nationalistic mood in Europe, especially in those countries directly impacted, such as Greece and Hungary.

It is this kind of prospect for Europe that has led British policy makers in recent years to shift their attention elsewhere. This has opened up a more non-E.U. perspective. One particular focus of U.K. interest has been China. In early 2015, the U.K. was the first Western power to join the China-led Asian Infrastructure Investment Bank. This move annoyed the U.S. government, but led several other U.S. allies, from Europe to Australia and South Korea, to do the same thing. Britain has also made strong efforts to attract Chinese financial business to help boost trading for the City of London, including making it easier for Chinese banks to set up in London and, in October 2014, issuing the first Chinese renminbi-denominated sovereign bond by a foreign government. In addition, Britain has been at the forefront of attracting inward Chinese direct investment and also building up a business in Muslim “sharia” finance, further showing that there are interesting prospects outside a stagnant Europe.


The U.K.’s Brexit vote

Opinion polls in the U.K. have been treated warily since they badly predicted the outcome of the May 2015 U.K. general election. Most polls showed a neck-and-neck race between the Conservatives and the Labour Party, showing the likelihood of some kind of coalition government including the smaller Liberal Party or the Scottish Nationalists. In the event, the Conservatives won outright. Recent U.K. opinion polls on the Brexit referendum have also been quite close, although with the “Stay” option usually in the lead. Nevertheless, it is interesting that for those actually betting money on the outcome, rather than responding to a telephone or online poll, the probability of the U.K. staying in the E.U. has recently been estimated at around 70%, although this is subject to variation.

The majority of business opinion, and the formal opinion of the major political parties, with only minority dissension, is for the U.K. to stay as a member of the E.U., despite most of the parties complaining about the E.U. and wanting to see changes. In late February, Prime Minister Cameron claimed to have secured the relevant changes to prevent E.U. rules from constraining British “freedoms” in long-winded, late-night negotiations with his European counterparts. His effort reflected a concern of the British establishment that future European political decisions could work against British interests. The bigger picture he fought for was to try and ensure that the U.K. would not be bound to follow any moves towards political union and would have safeguards against financial regulation being imposed on the City of London by the euro group of countries (basically meaning France and Germany).

That was a matter of big power strategy. The smaller, more squalid picture, was based upon a more narrow, nasty bias against migrants from the E.U. It was to restrict in-work benefits for new arrivals from the E.U. for up to four years and scale back child benefits for workers whose children remain abroad. Cameron had initially wanted to do this for all migrant workers, around one million in the U.K., but faced opposition from East European states, the source of most of those receiving such benefits. These workers are often low-paid, which British capitalism has benefited handsomely from them in the past—both being heavily involved in opening up Eastern Europe to exploitation and in attracting cheap labor, often highly skilled, to work in Britain for low wages. But this episode illustrates how even hard-line, “free market” capitalist policies will adapt to popular anti-immigrant sentiment. This has occurred, even though the political agenda in Britain has moved on somewhat from any problems the low-wage “Polish plumber” might be causing for the job prospects of British workers to the question of a disaffected Muslim population.

British government immigration policy often gets complaints from businesses that want to attract employees from non-E.U. countries and who have to jump through more costly hoops to get the relevant status. It has also limited the ability of British educational institutions, which have become ever more commercial, increasingly resembling expensive hotels that aim to attract foreign tourists, into the English-speaking imperium. But there is nevertheless an upside to this restrictive immigration policy. As in other major countries, it keeps national, patriotic sentiment in line—we claim to protect you, so that you will fight for and support us.

The Brexit referendum is erected on this British establishment self-serving edifice. The vote is not about people deciding their future; it is about the best strategy for British business in a troublesome world. It will have no effect on the exploitation of ordinary people, except perhaps on the particular form that it takes. British policy, decided by British governments, has been prominent in undermining workers’ rights, so it is especially absurd to cast a “Leave” vote as being somehow a progressive move against reactionary European policies—on austerity or anything else. My view on the referendum is to abstain, and I have a vote. This is not because I think the debate is irrelevant. On the contrary, this article is a contribution to the debate. It is because neither of the “Stay” or “Leave” options offered in the vote represents a better alternative. It is a delusion to pretend that they do. My view instead is to try and set a good example and show that you do not have to accept what you are given.


Tony Norfield

TONY NORFIELD has a Ph.D. from the School of Oriental and African Studies in London. He was previously Executive Director and Global Head of Foreign Exchange Strategy at a major bank in the City of London and publishes notes on developments in the world economy on his blog: Economics of Imperialism. His new book, The City: London and the Global Power of Finance, was published by Verso in April. He wrote about Brexit before it happened in the April Field Notes.


The Brooklyn Rail

APR 2016

All Issues