By Clive, an investment technology professional and Japanophile
It’s time to play the music
It’s time to light the lights
It’s time to meet the Muppets on the Muppet Show tonight
– As sung by The Muppets Original Cast
We’re just over a month into the UK’s EU in-or-out referendum campaign. A weary nation wonders to itself exactly how much more it is expected to have to put up with until finally, after what seems eons away, on June 23rd the whole matter can be laid to rest once and for all. Except that, of course, it won’t be, whatever the result.
Articles such as this one tend to introduce themselves with a jaunty “here’s what we’ve learned so far” air. Never one to intentionally mislead readers, we can only honestly respond to this with the statement “not much” (and that’s the polite version).
That said, we will bring regular, or as regular as we have the stamina for, updates on the Brexit referendum and there are a few noteworthy observations to be made. We’ll divide them into economics, media and politics. The UK’s Brexit debate currently contains the worst traits of all three.
The Confederation of British Industry (CBI) produced a report from “experts” which made the claim that a Brexit could cost UK economy £100 billion and 950,000 jobs by 2020. But this was the very same CBI that said we should join the Exchange Rate Mechanism, which ended in humiliation for the UK at the hands of the Bundesbank, and also that Britain should have joined the euro which, with the benefit of hindsight, perhaps would not have been the smartest thing to do.
This is typical of the pro-EU business impact analysis which has been produced. It invariably comes from representatives of the corporate, rather than SME, sector. The EU, as a free trade area, tends to benefit bigger enterprises not small ones. Unsurprisingly, then, their proclivities are to support the EU.
As this section is on the economics of a Brexit, in true economist style, on the other hand, we also have the Leave campaign which has also produced its own analysis claiming almost the exact opposite to be true. But as with the CBI’s Leave study, this too is chock-a-block full of assumption and conjecture.
Paid-for think-tank head-scratching often promises more than it delivers, so looking at real business investment decisions, Honda http://www.motors.co.uk/news/general/honda-announces-200-million-investment has made inward investment which it says it will continue to do regardless of whether Britain is inside or outside of the EU, with Nissan and BMW saying Britain should remain in the EU to ensure their continued willingness to operate in the UK – the latter getting itself into some hot water by suggesting in a memo to UK employees they should vote to remain. But all of these big corporate welfare queens are much more likely to be motivated by the availability – or otherwise – of “development grants” from a UK government than any loss of competitiveness which might happen as a result of a Brexit.
While that may seem to place blame for crony corporatism squarely on the shoulders of national governments, the EU is in it up to its neck, too. The EU’s mis-leadership often wonders to itself, inexplicably perplexed, as to why goodwill towards the institution has ebbed away during the past decade or so. Well, when it pulls dumb stunts like this shameless gimmie to bribe Turkey’s industrial and political elites channelled through the European Investment Bank and in the process not hesitating to throw another member state’s interests under a bus in order to further a risky and destabilising geopolitical strategy, you’d think they’d be able to figure out that one for themselves.
This does show a perhaps surprising degree of long-term planning and a willingness to implement a set of EU foreign policy goals with not inconsiderable subtly and patience. Unfortunately the goals, being an attempt to neuter Russia’s eastern flank in a Baltic-Ukraine-Turkey pincer movement, are disastrously miscalculated ones. If the EU has implemented policies guaranteed to loose friends and alienate people, it can’t sit there with a face like a slapped arse when that’s how populations in EU countries react.
Still on the subject of corporate welfare, financial services is probably the main industry which would potentially be impacted by Britain leaving the EU. As with manufacturing, you can find information from a variety of sources claiming that either financial services would shrink in response to a Brexit (invariably said like that would be somehow a bad thing) and the reverse being claimed in other so-called research reports. The banks themselves are fairly tight-lipped on the subject.
It should be noted that, for two of the UK’s biggest Too Big To Fail (TBTF) banks RBS and Lloyds, they are prohibited, because of state ownership of varying degrees, from entering the debate. It also makes it impossible for them to go shopping for different standards of regulatory oversight overseas.
For the others, HSBC and Barclays have got other concerns which regular Naked Capitalism readers will be well aware of. And HSBC’s recent fit of pique against the mildest of toughened regulation, which resulted in it publicly announcing that it was going to review the country where it was registered in with Hong Kong and the US being suggested as possible alternatives, resulted in a slightly humiliating climb down when HSBC was forced to admit that when it looked at the possible alternatives to the UK regulatory regime, they did not stack up. One interesting titbit that emerged was that in any move away from the UK, HSBC would not only lose tax offsets but they would also have to crystallise these in one hit when they were unwound. Other big financial institutions will likely find similar complexities lurking under the hood. So talk of a Brexit-induced mass exodus of financial services is likely to be just that, talk.
It is possible that smaller boutique hedge and private equity funds might consider relocating to an EU base country should Britain leave the EU, but again, like the TBTFs, it is hard to make a convincing argument why this would be the case. And network effects along with social factors are much more important to smaller financial players like private equity.
It is hard to overstate how needy and fragile the egos of many highly (read, over) paid participants in the financial service industry are. The effects of sudden, huge, wealth on the human psyche are outside the scope of this piece but can be illustrated by this example.
A TBTF the author is personally acquainted with found itself with a large amount of surplus office space in a building it owned. The building was definitely classifiable as prime commercial real estate having direct river frontage and excellent transport links to London’s infrastructure hubs (mainline rail termini and within the “Zone 1” of the metro system). Steps away from amenities such as the Tate Modern gallery and St. Pauls cathedral, it was hardly in some sort of cultural backwater either.
To fill the office space, routine and unexciting back office jobs were allocated to that building but this just made it even more of a wasted asset and imposed higher costs on the grunt-work operational teams who had to foot the bill for working in such salubrious surroundings. So the TBTF’s estate management department thought it would be a good idea to relocate the money centre operation (mainly corporate and structured finance) away from an overcrowded building much less conveniently located in the City.
The only problem was that their proposed new office building was outside of the City of London “square mile” and on the south bank of the Thames rather than the north. Managing Directors and senior traders from the capital markets team were given a tour and a sales pitch but, according to people who were there, it was like they were being asked to relocate to a mud hut. It isn’t that there was anything particularly wrong with the building as it was – and the promise of a lavish refurb would lift it into the super-prime category.
It was simply that, in the minds of the traders, being exiled south of the river, outside the City and into the perceived wilderness beyond the Square Mile was akin to career suicide. In the corporate and complex financial products market, the TBTF was already clearly not a top-tier player like Goldman or JPM. But at least with a large City base, it could be seen as a serious participant. Turing 500 whiney, spoiled yet strangely insecure bankers into social pariahs by moving out of the City would send a message, whether intended or not, that the TBTF was throwing in the towel in terms of being a serious player.
When people talk about Wall Street, they are not referring to a few buildings in a narrow geographical area. Wall Street creates, and depends upon the existence of, such things as The Hamptons, The Upper East Side, reasonable proximity to the Beltway and plenty of retail opportunities for bored family members with money burning a hole in their pockets to fritter it. The people who work in the higher echelons of Wall Street aren’t about to relocate anywhere else regardless of how much cheaper it is or due to constraints imposed by anything less than existentially threatening regulation.
The same is true for London as a financial centre. While finance is an extreme case, the same dynamic is present for many other industries. For an established business operating in the UK, being in the EU or being out the EU would not be a reason to either relocate or to stay put. And for a prospective start-up or foreign direct investment, being in an EU country or not being in an EU country comes with an associated mix of costs and benefits depending on the factors specific to the business in question. It’s not like there’s only capital formation in Europe in EU countries, or there’s no capital formation happening in the EU at all. It’s a mix. There are successful EU economies and there are EU basket cases. There are successful non-EU economies in Europe and there are European non-EU countries with low standards of living.
In the absences of a balance-of-probabilities standard of evidence, let alone a beyond-a-reasonable-doubt level of economic certainty about the impacts of whether Britain remains in or leaves the EU, the result won’t be decided on the basis of any economic arguments.
Broadcast journalism has remained balanced on the Brexit debate so, if the regulation of TV news is doing its job properly, it should mean that coverage of the referendum on the main TV news outlets has neither a positive or negative effect on the decision to remain in, or out of the EU. Subjectively, the referendum has not exactly set the airwaves alight as a topic. Without long-form programming to provide deep analysis, we’ve been left with only 5 minute segments way down the news running order specifically exploring what the EU does. So what happens in broadcast media would not appear to have any bearing on the result.
For print media, while this has a not especially significant influence on voters’ politics (fig. 3 and fig. 4) the Leave campaign enjoys a significant advantage. Listed in order of circulation (including online) below are the main newspapers and their affiliations:
The Sun – Leave
Daily Mail – Leave
Metro – neutral
Mirror – Remain
Guardian – Remain
Daily Telegraph – Leave
The Times – neutral
The Independent – Remain
Express – Leave
Star – Leave
But as with any economic argument for or against a Brexit, it is difficult to make a case for how overall the mainstream media will manage to win anyone over – whichever side they are on. And, dear reader, if our trawl through an almost never-ending onslaught of bionic penises, the Kardashian hydra and miracle celebrity diets is anything to go by, the infamous British tabloid press doesn’t deserve to have any influence over anyone. At least one writer was hurt (in the head) during the making of this article, due to exposure to toxic material.
Perhaps because, as explained earlier, the economic arguments for the UK to either remain in the EU or to leave are best descried as ambiguous, while the politics of the Brexit referendum have provided lots of entertaining spectacle, there’s been a lot less in the way of convincing reasoning being offered on either the Remain or Leave sides. As all of the main parties have allowed members to campaign according to their own personal views, it’s also not as if there can be appeals to tribal loyalties. Politically, each party has either benefitted or been harmed by the referendum. But that doesn’t mean they’ve managed to convince anyone to be pro- or anti- EU membership.
Let’s look at each of the main UK political parties.
While the leadership of the Conservative party is pro-EU membership, the majority of local party activists are against it. Polls put nearly 70% of Conservative voters as being anti EU. This fault line mirrors an underlying ideological divide which has always been an influence in Conservative economic policy – what, exactly, is the desirable level of state involvement in society?
The right wing of the Conservative party believes that the correct answer to that questions is “little, preferably none”. If pushed, it would contend that there is no such thing as society as the left would understand it, only a collection of individuals who should be allowed to form whatever arrangements between themselves that they wish.
The left wing of the Conservative party recognises that there are no such things as free markets and that the state will always have some role in managing commerce.
It is highly unlikely that the right wingers in the Conservative party who favour a Brexit are channelling their inner Zsa Zsa Gabor, who once quipped that “A man isn’t complete until he gets married. Then he’s finished” but, in relation to the Conservative economic policy of austerity, the job of implementing it is not going to be completed, the Conservative right believe, until the UK leaves the EU. Then it’ll be all over for the Britain.
On leaving the EU, so many Conservative Brexiters have been led to think, all that inconvenient bureaucracy around maximum working hours, paid parental leave, rights to join a union, end-of-life product recycling, mandatory energy efficiency standards and similar other libertarian dog whistle annoyances would disappear.
But the EU simply does not work like that. Unlike in the US, the EU has no ability to enact federal laws. Instead, the EU passes Directives which member states must then add to their statutes. This means that what might well have stated out as “EU rules” has become British law. Just leaving the EU alone would not repeal the legislation. Any EU Directive-originated UK Acts or Statutory Instruments would need to be repealed in order to remove the EU Directives’ effects.
Just as austerity as a theoretical concept is not too unpalatable to a lot of the electorate but the specific implications of it such as cuts to welfare, reduced public services and privatisations are inedible, the same will be true for “freeing” the UK from EU “interference”. Politically, trying to get bills through parliament removing consumer protection, labor rights, environmental safeguards or mandatory food standards will not exactly be vote winners. But this is precisely what will need to happen to reduce the UK to some sort of Year Zero pre-EU idyll.
For the Conservative party, it is hard to see any positive outcome, whatever the referendum result. If the vote goes to Leave then unless the government moves to enact some pretty incendiary legislation nothing much will change. More likely is that, emboldened by a Brexit vote, the government will be forced into repealing some Conservative third-rail EU Directives which are either quite popular with the electorate or else decimate the lives of some minorities, such as denying the right to UK residency to EU nationals currently living in the UK. If the vote goes to Remain, then the anti-EU contingent of the Conservative party will not go away quietly and forget all about the idea. Especially if the result is close, they will be more likely to re-group, bide their time for a while then try again.
This will likely continue to do lasting damage to the Conservatives. It could not be happening to a nastier party.
The Labour Party
Labour has been lucky so far in benefitting from the referendum. In some respects, it has made its own luck. A broadly pro-EU party with an ambivalent-at-best attitude to the EU leadership might have resulted in the same divisions as are afflicting the Conservative party. But Jeremy Corbyn has demonstrated some of the political acumen he learnt navigating the choppy waters of socialist politics on the left wing of Labour by supporting a leadership party line of being in favour of remaining in the EU, allowing individual members to campaign as they see fit and personally doing nothing more substantive to actually further the Remain cause than to go around the country stirring up apathy. That’s all quite skilful.
The luck has come due to the ability of the Conservative party to fill the void in our lives left until the new season of Game of Thrones starts by providing an ongoing referendum-induced saga involving regal intrigue (Queen Elizabeth II, rumoured Brexiter), ambition (Chancellor George Osbourne), betrayal (former welfare minister Iain Duncan Smith) bizarre-o religious weirdness (Stephen “Pray Away the Gay” Crabb, his replacement), tits (Home Secretary Theresa May) and bestiality (London Mayor Boris Johnson). They’ve given us everything but the dragons. That said, there’s still a few months to go yet so we don’t want to be premature.
Because the Conservatives have provided enough material to keep even the 24-hour news cycle fully fed, Labour has avoided the charge of being ineffective in the referendum campaign on either side of the debate. It has been squeezed to the margins. But that’s like being squeezed out of the race to become the Republican candidate for the presidential race; it really is a blessing in disguise.
The Labour party leadership has noted and wised up to the fact that by crushing any prospect of Keynesian responses to the financial crisis in Spain, Portugal, Ireland and – of course – Greece, turning the entire euro project into an exercise in Bundesbank hard-money corporatist dogma and being willing to fight a US proxy cold-war in the east of Europe, the EU has shown itself to be no friend of the left. We’ll chalk that one up as a success, of sorts.
The Scottish National Party (SNP)
Just when one might reasonably be forgiven for throwing one’s hands in the air and forever despairing of politics the world over, up pops the SNP and reminds us that it is possible for a political organisation to successfully seize huge popular support, electoral success, not-that-bad operational competence in government and – brace yourselves – a genuine left-of-centre economic policy.
The SNP lost the referendum on Scottish independence in no small part due to not doing its homework on the future currency. It will not make that mistake again. What it needs now is another independence referendum where it can learn from previous failure. This requires a plausible excuse.
A vote by England to leave the EU would be perfect. This is why the SNP is MIA in the referendum debate. Where it does get asked in the media to comment, the response is typically that it is very sincere in wanting to fight a campaign stressing the positive reasons for remaining in the EU and will join the Remain group in putting forward strong messages supporting an “In” vote. And once someone, anyone, comes along and says what those positive reasons and strong messages are, the SNP will be right behind them. It then holds up a picture of tumbleweed rolling across the desert.
Alright, we made that last one up. But this accurately describes the SNP’s approach. Given that the SNP does not want to leave the EU and certainly does not want a majority of voters in Scotland to vote Leave, it must tread carefully. The best outcome for the SNP would be a good dollop of Scottish votes to Leave, perhaps enough to tip the balance in favour of a Brexit (thus triggering a call for a new independence referendum), but not in sufficient numbers to make a majority of Scots vote to leave the EU (thereby undermining the case for an independence vote).
Perhaps in the next few months we can look forward to a more forensic examination in the referendum debate about what membership of the EU means for Britain or what the EU’s direction of travel over the next 5 to 10 years might be. So we’d be better able to work out what to keep ourselves hitched up to or, alternatively, want to unhitch ourselves from.
Far more likely, though, is we’ll get more of what we’ve had already – a rather chaotic ensemble cast whose backstage antics are far more interesting than, but completely incidental and unrelated to, the main performance.
All of which leads us to echo the following sentiment:
Statler: Wake up, you old fool. You slept through the show.
Waldorf: Who’s a fool? You watched it.
Lyrics © Sony/ATV Music Publishing LLC, Warner/Chappell Music, Inc., Walt Disney Music Company, Universal Music Publishing Group