The political circus that has accompanied the British Tory Party’s internal negotiations appears to have ended. It has dominated the Brexit landscape since the historic decision two years ago. However misguided, misinformed and manipulated that referendum may have been, the simple reality is that a narrow majority won the day.
The tumult in UK politics was inevitable as realists faced down idealists, the latter captured in Boris Johnson’s choice of imperial language in his resignation letter. The truth is that while political theatre, which the media adore as fodder to extend stories, can appear to lead outcomes, in practice the gravitational pull of hard economics eventually asserts itself. This iron rule repeats over and over again as the Greeks, Argentinians, Venezuelans and Turks have learned. The British are awakening from the theatre of phoney EU negotiations about cherry picking to grim economics that Brexit will be very damaging regardless of its shape. The only way it cannot be damaging is to drop the exit entirely, which is unlikely to happen absent a top political leader rallying support for same. Corbyn isn’t it as explained below.
As business and industrial leaders have been inserting their business planning into political debate, elected members of The Commons are coming face to face with the price in job losses and economic disruption that will accompany an exit. The fearful consequences cannot be openly acknowledged but fear is the currency of political change for moderate Brexiteers increasingly alarmed at the reality gap between zealots and the slew of hard economic news coming from employers and unions alike.
Nothing causes a U-turn in politics quicker than the sight of impending job losses and anger among constituents. It may be why the recent intervention by Airbus, representing the jewel of the British industrial crown and by its car manufacturers and retailers, combined was a tipping point and why the British PM at Chequers Court chose to face down those who want to exit the EU without a viable plan.
Chequers Court, Buckinghamshire, 40 miles North West of Downing Street, the British Prime Minister’s country estate and location of last week’s cabinet agreement on Brexit.
So, it’s Back to Basics
Since the advent of globalisation in the 1980’s the world has shifted from vertical silos to horizontal supply chains. The wiring underneath the global economy was revealed in dramatic fashion after the global financial crisis, when we awoke to a world where defaults on US mortgage debt threatened to collapse banks in Europe.
In the world of silos, before globalisation, indigenous industry and services could be secured behind tariff walls and discrimination against foreign competition through localised rules. Everyone played this game but it retarded global growth. Deregulation drove economic prosperity and especially helped the emerging market economies to modernise and grow. One of the notable winners is Ireland, which behaves more like an emerging economy than a mature one as a leisurely drive into Northern Ireland reveals. It is hard to believe that Northern Ireland was, until globalisation, more prosperous than the Republic.
Not everyone gained. Excessive power has transferred to wealthy elites and embedded minorities, not just in emerging economies, but in the US economy. Workers have been bypassed as the extreme monetary policies that have accompanied credit cycle breakdown has acted as a transmission vehicle to the balance sheets of the richest in society. Badly managed countries like oil rich Venezuela, now experiencing hyper- inflation, is in chronic shape, so too Argentina and Greece, which will take decades to recover from their impoverishment.
Hard Left idealists like UK Labour leader Jeremy Corbyn favours a future that goes back to a failed past, one where much of industry is State owned, where jobs are buttressed by trade union power, where taxes are levied on wealth creators and higher income earners to deliver a nirvana of public services. This has been tried and failed for the simple reason that the State has proven itself to be a lousy competitor and can only be sustained by affording it monopolist powers that can only survive in a world that retreats to silos. Corbyn hates the EU because of its strict rules against State aid and against socialisation of non-essential services. This is offensive to the Labour leader’s creed, that everybody should own everything, equally.
Politically, the failing Tory Brexit zealots seek to blame the EU bogeyman, demonise negotiators and pour scorn on opponents by raising the old imperial spectre of betrayal, rather than face hard economic logic. The EU is founded on four immutable and integrated principles, free movement of People, Capital, Goods and Services. These cannot be cherry picked not just as a matter of principle and cohesion for the Single Market, but because it reflects economic reality.
Consider the supply chain; an England-based car manufacturing plant owned by a multi-national manufacturer must produce a family saloon at a price and at a quality that sells and makes a profit, otherwise its business model is burst. In assembling the car, it relies on a global supply chain for parts, electronics, batteries, rare metals, microchips, etc., arriving to the plant using just-in-time practices to control costs. That supply chain has been built upon the negotiating power of the EU, so replacing it with superior trade agreements is fanciful and would take very many years. When cars roll off the production line for export they are supported by an integrated global financial services industry that organises FX transactions, secures derivatives to shore up trading risks, buys insurance and supports the complex cross-border business of the multi-national. A great many jobs exist in the localised SME sector several times those directly employed in what is the multiplier effect of multi-national hubs in a modern economy.
Then there’s the compliance and regulations, the rule books that none of us ever see. These ensure that products adhere to EU health, safety and quality standards. In a recent visit to Ireland’s only engineering compliance business run from a unit well away from urban noise and bristling with sound eradication technology, I came face to face with one tome, 800 pages describing sound radiation compliance for new industrial devices. It was a vivid reminder that there’s no leaving, that the egg once it has been scrambled cannot be put back into the egg shell. Britain cannot replace decades of compliance and regulations with new models, not without taking a similar amount of time and then face the huge challenge of selling different British standards to global buyers against competition from EU goods.
What about Services?
On Jan 3rd this year the EU introduced a 1.5 million paragraph tome that reconstructs everything from esoteric parts of the securities market to common or garden variety retail investment products. Called MiFID II, it is being followed by equivalent changes in life and pensions called IDD. These recast a huge part of the EU financial services market. You cannot do business with its citizens without ruthless adherence to these rules, overseen by national financial regulators and subject to recurring inspections
The hard economic reality is that, you cannot escape the EU. You can negotiate a new form of relationship that’s for sure, but it will be one inferior to ordinary membership. You cannot immunise yourself, not if you want to do business with 508 million people in the world’s richest markets. If you wish to compete on different rules and compliance standards yet still do business within the EU, you will need to run duplicate systems everywhere. Your biggest growth industry will be compliance.
Ready, Fire, Aim
It’s hard to believe but after, not before making the decision, the Due Diligence on leaving the EU was commenced. It is still ongoing. Last week marked a pivot to a Due Diligence founded on common ground within the Tory party but it remains fanciful. It has been greeted with lukewarm enthusiasm by the EU only because it has pushed the negotiations, past the looney phase. Now the serious stuff starts, but don’t be surprised, if at the end of it, Brexit is suspended for a decade and eventually abandoned, helped by demographics as zealots lose the contest between a return to empire and their mortality while younger Brits impose their Pro-EU views.
The clock is ticking down to the 29th March 2019, the last day Britain has to notify the EU of any intention to remain, after which a new membership application would be required. Britain is unlikely to U-turn at this stage, but don’t be surprised by how the mood music swaps to reasons to buddy up with the EU in an outer ring of alliances. Britain looks like it will end up being one step removed from the EU imperial capital, Brussels, but poorer, isolated and less powerful for it.
Short-term, any Brexit is not in Ireland’s national interest and losing Britain at the top table means the loss of our most powerful ally, however a softer Brexit beats a chaotic one every time. Once the dust settles on the shape of Brexit, Ireland can start focusing on how to turn disadvantage into opportunity, how to become a beacon for mobile capital and investment throughout the world, replacing the UK as the bridge to Europe. Strange as it seems Britain will become the poorer neighbour on its current trajectory, with a currency weakened by its economy and travelling there in the future may have the same feel as travelling to Northern Ireland, a sense of going back in time. The Empire days, in that sense, are coming home.
Eddie Hobbs, July 2018.