The vote by a small majority, 51.9% to 48.1%, to take Britain out of the European Union (EU) will have historic consequences for the trajectory of British imperialism, particularly if, as new Prime Minister, Theresa May, ruefully insists ‘Brexit means Brexit’. However, more than a month after the EU referendum vote it remains unclear what Brexit actually means and abundantly clear that next to no contingency planning by the Cameron government or the Brexit camp was in hand to deal with it. After the referendum result was announced, the leader of the Leave campaign, Boris Johnson, somewhat horrified by its totally unexpected outcome, said that there was ‘no need for haste’ to start exit negotiations with the EU. And May has made it clear that she will not invoke the EU’s Article 50 clause this year, which is the pre-condition for starting formal exit negotiations with the EU.1 David Yaffe reports.
Before the referendum, the IMF laid out a bleak scenario for Britain’s economy should the British people vote to leave the EU. It foresaw a ‘negative and substantial’ hit to the British economy, permanently lower incomes and the relocation of financial services and jobs from London and other UK financial centres to European cities such as Frankfurt and Paris. This prognosis looks almost certain to be borne out over the coming months and years. The immediate aftermath of the vote to leave saw $2 trillion wiped off global stock markets, with the pound falling to its lowest level against the dollar for 30 years. While some stockmarkets, including the FTSE 100, soon bounced back, other economic indicators pointed to serious problems ahead. Mark Carney, Governor of the Bank of England, took steps to calm the markets by releasing a further £150bn of lending by relaxing regulations on the banking sector. He indicated that he would consider cutting interest rates from their already record low level and use whatever monetary policy tools he still has available to support the British economy.
The risks ahead
Shortly after the referendum result Standard & Poor’s became the last major ratings agency to remove Britain’s triple A rating, downgrading it by two notches to AA, warning of economic, fiscal and constitutional risks now facing the country. Fitch followed by downgrading Britain’s rating to AA from AA+, having already removed its triple A rating in 2013.
Over the coming period the stark reality of Britain’s diminishing global influence will be exposed. Lord Hill, a top British official in the European Commission who resigned as EU commissioner of financial services after the vote, told the Financial Times that Britain now faces being forced to abide by European banking rules on priorities dominated by the eurozone and reflecting Franco-German interests. In addition, he said, it is unlikely that British-based banks will retain ‘passport’ rights to conduct business and serve clients across the EU while rejecting the free movement of labour from the EU. This reality will significantly undermine London’s status as a leading world financial centre.
Bank stocks plunged, with Lloyds down 21%, RBS 18% and Deutsche Bank 14%. The Euro Stoxx bank index fell 17%, down to levels last seen at the worst point of the eurozone debt crisis in August 2012. On 26 July Lloyds announced that it was cutting a further 3,000 jobs and closing 200 more branches, due to people’s changing banking habits and the effects of interest rates remaining low in the wake of the Brexit vote.
Seven UK property funds have stopped their investors withdrawing their funds in reaction to the EU referendum result, leaving over £18bn, well over half the total funds, locked down in the biggest seizing up of investment funds since the 2008 financial crisis. This will remain in place until fund managers raise enough
cash to meet redemptions (Reuters). Around 45% of commercial property is funded by overseas investors. Some £8bn has been knocked off housebuilders’ shares – 37% of the sector’s total market capitalisation – with Persimmon and Taylor Wimpey losing more than 40% in two days trading after the referendum result. London-centred estate agents Foxtons also saw its shares fall by 25%.
Not too rapid Brexit
Almost immediately following the Brexit result, the President of the European Parliament, Martin Schultz, insisted that the EU wants Britain out as soon as possible, stating that uncertainty is the opposite of what is needed. He said that ‘a whole continent is taken hostage because of an internal fight in the Tory Party’. However, the German Chancellor, Angela Merkel, took a more cautious approach and, while regretting Britain’s decision, she said the EU should not draw ‘quick and simple conclusions’ that could create new and deeper divisions (The Guardian 25 June 2016). This was also her approach when she met May in Berlin on 20 July. Merkel backed May’s decision to wait until next year before starting the formal process of leaving the EU, despite pressure from other European leaders for a speedier exit. She said she would listen to what the UK wants before coming to a decision on its position, while making it clear that she was sticking to the EU rules that ban formal negotiations with Britain until Article 50 is invoked (The Guardian 20 July 2016).
The Brexit vote has created challenging constitutional issues in relation to Scotland and the North of Ireland. People in Scotland voted decisively to stay in the EU by 62% to 38%. The First Minister, Nicola Sturgeon, while she cannot veto any deal to take Scotland out of the EU, has said that a failure to maintain Scotland’s EU membership could make a second independence referendum as early as next year highly likely – one that could this time be successful, creating intractable constitutional issues for the rest of the UK. The North of Ireland throws up equally difficult questions over the border between the Republic of Ireland and the North of Ireland. 37% (£3.6bn) of Northern Ireland’s goods and services go to Ireland. After the North of Ireland voted to remain in the EU by 55.8% to 44.2%, Sinn Fein claimed that the British government ‘has forfeited any mandate to represent the economic or political interests of the North of Ireland’. On a visit to Belfast on 25 July May promised that Brexit would not lead to a restoration of ‘the borders of the past’ in Ireland. She was unable to tell us how the border could be as open as it is now once it becomes an external EU frontier. It is no surprise that the Prime Minister is in no great hurry to enact the EU’s Article 50 clause for leaving the EU.
Brexit and the unending crisis of global capitalism
Central to the Revolutionary Communist Group’s call for a boycott of the EU referendum was the understanding that: ‘The parasitic character of British capitalism, its dependence on the earnings from its vast overseas assets and particularly those of its parasitic banking sector to sustain the British economy, shows not only its vulnerability to any external financial or political shocks, but also that it is no longer capable of withstanding the economic and political challenge of US or European imperialism as an independent imperialist power.’2 This position had been developed nearly two years before the financial crash of 2008/09. We said then: ‘The British ruling class knows that sooner or later it will have to make a choice between Europe and the United States. Whatever choice is forced on the ruling class, it is certain that any independent role of the City of London will be severely curtailed.’3 The financial crash accelerated this process and the Brexit vote is one of its concrete expressions.
Underpinning this unending crisis of global capitalism is stagnant productivity growth. Labour productivity growth in the major capitalist countries has fallen from around 2% a year in the last part of the 20th century to well under 1% now.4 Recent figures from the Conference Board, a US think-tank, show that growth in output per hour worked in the US slowed last year to just over 0.3% from 0.5% in 2014, well below the level of 2.4% in 1999 to 2006. It is expected to drop by 0.2% this year. Productivity growth in the eurozone, measured by GDP per hour, is set to be a paltry 0.3%. From 1999 to 2006, before the financial crash, growth in output per hour worked in the eurozone was around 1.5%. Japan’s stagnant economy is set to register a meagre 0.4% productivity growth this year. Britain’s output per hour worked fell to an average annual rise of 0.2% between 2007 and 2013 and, after a false dawn in 2015, is expected to show no growth this year (Financial Times 26 May 2016). In 2014 productivity in the UK was 20 percentage points below the average for the rest of the major G7 capitalist countries.
Another feature of this deepening crisis is the low level of interest rates throughout the imperialist countries as they battle to stimulate lending to revive their economic growth. This week Fitch calculated that there is now a remarkable $11.7 trillion worth of sovereign debt in the global market that carries negative interest rates. This increased by $1.3 trillion in June alone and includes $2.6 trillion long-term debt (more than seven years maturity). The amount of bonds with a yield that used to be considered normal, that is above 2%, is barely worth $2 trillion. Most of this negative debt is in Japan and the eurozone, but rate expectations in the UK are falling as well (Financial Times 1 July 2016). Recently Royal Bank of Scotland (RBS) and its subsidiary NatWest have warned businesses they may have to charge them to accept deposits due to low interest rates. This move, if enacted, would make them the first UK banks to introduce negative interest rates, in effect, charging to deposit money. Other British banks have said they would also consider doing the same as interest rates approach zero. These developments are the result of the increasing stagnation of capital accumulation in the major imperialist countries. The result is leading to growing tensions and divisions both between and within nations as globalisation is driven into retreat.
The World Trade Organisation (WTO) reports a rise in the introduction of protectionist measures in leading capitalist economies. Between mid-October 2015 and mid-May this year G20 economies had introduced 145 protectionist measures at the fastest pace since the 2008 financial crisis, a monthly average of just under 21. This trend coincided with the slowdown of global trade, now in its fifth year. Since 2008 G20 economies have introduced 1,583 trade restriction measures and removed only 387. UNCTAD has, in addition, reported that long-term foreign direct investment flows are set to drop 10-15% this year, with cross-border mergers and acquisitions falling 21% in the first quarter (Financial Times 22 June 2016).
The expansionary monetary policies of the central banks have not revived economic growth but have merely pushed up the prices of financial assets, bonds, stocks and housing, making the rich, who mainly own these assets, even richer, and so rapidly increasing inequality in most of the major capitalist countries. Globalisation has increased political and economic polarisation. The populist movements against dominant ruling elites in the major imperialist countries are a response to this development. The Brexit vote is just such another reaction to a political class that is seen to have devastated the lives of millions of working class people who feel that their interests have been abandoned.
Brexit and the British economy
Britain’s unbalanced economy, its critical dependence on its parasitic banking and financial services sector focused on the City of London, its low-pay, low productivity, debt-fuelled recovery from the 2008/09 financial crisis laid the foundation for Brexit. In turn Brexit, however and whenever it is implemented, will see a ‘negative and substantial’ hit to the British economy, with the role of the City of London as a leading global financial centre severely curtailed.
Soon after the Brexit vote, Chancellor George Osborne fatuously declared: ‘Our economy is about as strong as it could be to confront the challenge our country now faces.’ He then went on to ditch his last remaining target for a fiscal surplus in 2020, and announce that he was planning to cut corporation tax again to 15% before being unceremoniously dumped on 13 July as Chancellor by the new Prime Minister. The new Chancellor, Philip Hammond, will immediately face a deteriorating situation.
The first major survey of business activity and confidence after the referendum showed British business activity has suffered its sharpest reverse in July since the height of the global financial crisis in the spring of 2009. According to Markit, which gathers data for its purchasing manager’s index (PMI), the service sector, comprising around 80% of the economy, was hardest hit, showing the biggest fall on record. The PMI fell from 52.3 in June to 47.4 in July, an 88-month low. Anything below 50 shows a contraction in activity. Manufacturing dropped to its lowest level since February 2013. Its PMI fell from 52.1 in June to 49.1 in July. This snapshot of July’s PMI figures indicates an economy at a level associated with a recession.
11.8% of the UK’s economic output comes from financial and related professional services. In 2014 this contribution amounted to some £190bn. 2.2 million people work in this sector. £1.1 trillion assets in the UK are held by EU banks – 17% of total banking assets in the UK. 155 foreign banks are authorised to take deposits through a UK branch (The CityUK). The total assets of the UK banking system amount to around 450% of nominal GDP. As the Financial Times (1 July 2016) has argued: ‘Unless there is rapid political manoeuvring to reverse the process of Brexit, there is one certainty – parts of the City of London’s fabric will start to unravel.’ This will undermine the standing of the City of London as a global financial centre and have a very damaging impact on the British economy.
Several large banks, including HSBC, JPMorgan Chase and Goldman Sachs, have already begun to take steps towards a potential shift of some operations from the UK to Dublin, Paris and Frankfurt. A key issue, as has been mentioned already, is ‘passport rights’ for banks based in the UK to conduct business and serve clients across the EU. Paris is laying out a red carpet for bankers. Through French Prime Minister, Manuel Valls, it has announced that it will offer Europe’s ‘most favourable’ fiscal regime for returning expatriates and foreign executives. This will include an income tax break of up to 50% and the right to exclude overseas assets from wealth tax calculations for eight years, rather than the previous five.
Frankfurt, already home to the European Central Bank, the EU’s insurance regulator, as well as 200 foreign banks, wants to be a major beneficiary of the Brexit vote. The City’s social democratic mayor told The Guardian (19 July 2016) ‘…now this sovereign decision, which everyone believes is irreversible, has been made we say we’re ready and willing to provide bankers with a new home’. If the proposed merger of the London Stock Exchange and Deutsche Borse still goes ahead, the joint headquarters would be most likely in Frankfurt. Paris and Frankfurt are both bidding to house the European Banking Authority, which is currently based in London.
The fundamental split in the Conservative Party that led to the EU referendum is still very much in place. Leading Brexit politicians have been given the job of leading Brexit negotiations. Liam Fox, Secretary of State for International Trade, David Davis, Secretary of State for Exiting the European Union and Boris Johnson, Foreign Secretary, have all been handed the poisoned chalice of fronting the exit process before a definite Brexit policy (Brexit-lite or hard Brexit) has been laid down. The Prime Minister will chair the all-important Brexit committee, so keeping control of the overall process. If the negotiations go badly, the hardline leading Brexit politicians would get the blame. Already Liam Fox has been slapped down for suggesting the UK should leave the EU customs union, a key component of the EU single market, because of his belief that it would make it easier to negotiate new trade deals with non-EU countries. Essentially Fox wants to leave the single market completely, while May and Hammond want to negotiate a trade-off allowing single market access while limiting EU migration – which would effectively require remaining in the customs union.
The future trajectory of British imperialism and the City of London, its financial arm, is at stake. There will be much political trouble ahead. Meanwhile the British economy will continue to stagnate and millions more British people will be driven into low-paid jobs and confront failing public services and increasing poverty. Our task remains to build an anti-imperialist movement which will start the process of destroying the capitalist system that has long outlived its historical role.
1. See Carol Brickley ‘The Brexit crisis’ on our website for our immediate response to the referendum result.
2. ‘EU referendum: the position of communists’ in FRFI 251 June/July 2016, http://tinyurl.com/z7cpcz7
3. See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January at http://tinyurl.com/88po6dx for a discussion on the parasitic character of British capitalism and the importance of the City of London for the British economy.
4. See David Yaffe ‘Capitalism in Crisis: stagnant, predatory and corrupt’ in FRFI 245 June/July 2015 on our website at http://tinyurl.com/oxrmf5c for a discussion of globalisation in retreat and the significance of a stagnant productivity of labour with references to earlier articles on this topic.
Fight Racism! Fight Imperialism! 252 August/September 2016