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Brexit: Britain’s biggest mistake for 1,000 years

A long-term perspective reveals enormity of decision

Matthew Parris (The Times, Oct 15) says Brexit is set to be Britain’s biggest screw-up since the Suez crisis of 1956. It is worse than that. The invasion of Egypt to regain Western control of the Suez Canal was an ill-judged gesture,  from which Britain recovered quickly; Brexit is likely to prove its greatest mistake ever.

England (Britain since the union with Scotland) has led a charmed life. It has been incredibly successful. It has made amazing contributions to the world, above all the agricultural and industrial revolutions. How it developed the ideas that led to these breakthroughs, bringing together science, technology, politics, the rule of law, banking, capital and business enterprise will long be debated by historians. Why, after so many thousands of years, was it just in this island off North-West Europe that the spark was lit that was to transform human societies for ever?

Everything seems to have conspired to make its distinctive political and social culture into a uniquely successful model. There was the Norman conquest, parliamentary control of taxation, Magna Carta, the early adoption of credit and banking techniques, Henry VIIII’s first “Brexit” , the lucky defeat of the Spanish Armada, the age of discoveries and conquest, the rivalry with France, Spain and Holland, the Glorious Revolution of 1688.

Each provided a new stimulus for the English to demonstrate their amazing resourcefulness.

Many of its achievements came through dialogue with European countries. But England did more than adapt imported ideas. It came out winning.

Love it or hate it, the Empire was the natural culmination of its sustained record of achievement. These include innovations in enterprise, government, finance, war, politics, law, corporate organisation, civil engineering, science and technology.

Over 1,000 years, has it made any big mistakes? I do not refer to its morality – the evils of the slave trade, imperialism and so on. In realpolitik terms, it seems to me that England (GB) made very few, if any, major historic mistakes. The Brits can claim that:

We won the wars that really counted.

We built structures to protect individual liberty.

We helped to spread them around the world.

We developed the rule of law.

We brought its benefits to others,

and put it into practice at home.

British ideas (from 1707 with a strong Scottish accent) were exported to the USA. They formed the basis of America’s political and economic philosophy. They shaped the current liberal world trading and economic order.

As it entered the 21st century, the historian Brendan Simms says that GB was still a great power, perhaps the only great power in Europe. It could boast a resilient constitutional model, strong armed forces, the confidence of capital markets, considerable soft power, an important reserve currency  and world-beating professional and financial services. It was a magnet for immigrants, a beacon of hope for millions.

Until Brexit.

Brexit erodes Britain’s strengths

The economy will be smaller and growth lower than it would have been.

From being a bastion of security, I suspect the UK will become a force making for instability. As the costs of Brexit materialise, and the British become again the penny-pinchers of Europe’s beaches,  it is easy to envisage the UK becoming a loose canon powered by anger and acrimony,

Whatever happens, they will blame the EU.  I suspect the US and other leaders will soon start discounting what a British PM says. The country will be seen as erratic, bound up in its problems, a power that cannot be fully trusted.

Did it leave the EU in a huff because others would not let us lead it? Does it cling to grandiose ideas above its station?

The killer argument

The British people have great political maturity – indeed, political genius. Respecting this, I search for an explanation. I hope that they are right and I am wrong. I have not found anything. I cannot see any upside in the prospects ahead.

Some economists claim the fall in sterling will help to rebalance the economy. There may be some such short-term effect. But is there any reason to think the effect will last, any more than the devaluation after the last recession did? Like all the other devaluations of sterling it will soon be eaten up by the familiar cost-price spiral.

Sterling’s fall is a recognition that the economy will be poorer, and a means of forcing adjustment to that diminshed status.

Why did they, we, make this ghastly mistake? The killer argument was that by exiting the EU we would “regain control”.

The Brits will soon learn that we are more under the control of outside forces – not only of financial markets but also of the EU – than before.

We are so dependent on European markets and investors that they could inflict harsh penalties on us. More than half of the UK’s top 10 trading partners (in goods as in services) are EU countries, with Germany, Netherlands, Spain and France dominating. Powerful private companies from the EU control 44% of the stock of UK’s inward FDI.

We trust they will understand it is in their interests not to be punitive. But we are handing them weapons that they did not have before.

A wanton act

While some EU leaders make soothing noises, do not be fooled; our departure is widely seen as an irresponsible act.

It damages the EU when it is weak and when it is facing very difficult challenges. Some Brits hope it will lead to the breakup of the EU. Many British economists have a visceral hatred for the euro and all its works.

The Europeans will have to protect the EU by showing that exit carries high costs. That is why EU countries will have no compunction about making life hard for the UK. And they have the power to do it. The talks will be led by politics, as the Brexit decision was, not by commercial interests.

There will be a new brain drain out from Britain, across the Channel and the Atlantic in search of opportunity.

Many American friends hope that the British will use this to promote free trade and enterprise and “complete the Thatcher revolution”. There is zero probability of this. Prime Minister Theresa May has already buried such hopes, pulling the curtain down on Thatcherism in favour of a new age of state protectionism and intervention.

New brain drain?

Already some British academics say they do not want to live in a country that has wilfully taken away their freedom to study, travel, work and live anywhere in Europe. Demand by UK citizens for German and other EU passports has risen fast.  For the EU is bound to reciprocate if, as is planned, the UK imposes inward immigration controls on the freedom of EU people to travel, live and work in the UK.

The life chances of millions of EU citizens here as well as millions of Brits living in the EU have been put at risk.  For Prime Minister Theresa May to use Europeans living in the UK as bargaining chips in the coming negotiations is frankly abhorrent. Especially as she has foolishly given away Britain’s biggest bargaining chip of all – the right to trigger Article 50 – by promising to do it within the next six months.

In future, we British will depend on the goodwill of EU bureaucrats to give us permission to visit/work in  the EU.  We shall humiliatingly wait with bated breath to see if  the magic approval form comes through or not.

Did those who voted for Brexit understand the enormity of what they were doing? That they were jeopardising for all time the legally-protected rights of our people to travel to, live, and work in Europe?  If other EU states feel inclined, yes,  they will open their doors to us. if not, they can close them; with no appeal, no defence, no rights protected by law.

Higher hurdles for  exporters

Exporters of services, on which the UK economy depends, will face much higher hurdles. Yes, the US exports services to the EU without being part of it. But the US is in a completely different position. Its services firms followed its multinational corporations abroad and its diplomats can open doors everywhere through its clout. And even with State-level regulations, they benefit from access to a huge internal market.

To be sure, the EU single market in services is far from complete, but it has been making progress and it enshrines key rights for members – notably the rights to sell across EU borders and the right to establish branches or subsidiaries. UK service suppliers depend also on the freedom to travel, live, move, recruit staff from and operate freely anywhere in the EU, on the same basis as EU suppliers. After Brexit, no longer will these rights be protected. EU based suppliers will be able to discriminate against UK suppliers – and nothing will please our EU competitors more than to do so with impunity.

Brexit will handicap UK science, the arts, the creative  industries, education, law, engineering, management consultancy, finance, brokerage, shipping, aviation and other services on which the UK depends to pay its way.  In all these fields the UK is a world leader. In all of them, it runs large surpluses in its external trade.

These are the fields in which the UK has established a comparative advantage, which is largely in regulated services, which require an agreed regulatory framework in order to be provided across borders.

Incomplete and imperfect though it still is, that agreed framework  is what the single market in services aims to achieve.

Build on comparative advantage

The external surplus in services plays a key economic role. Amounting to some 5% of GDP, it goes a long way to offset the gaping deficit (of about 7% of GDP) in our trade in goods (visible trade).  The EU is the biggest market, taking 40% of total exports of services. Now this crucial balancing item in our external accounts is at risk.

The situation is desperate. It calls for a strategy to build on Britain’s revealed comparative advantages by funding appropriate upgrading, education, training and support. Instead, the government has announced plans to spend public money on a huge scale on vanity projects, on dubious highly subsidized Chinese-built nuclear power stations, unnecessary high-speed railway lines, aitport extensions and so on.

Then there is the appalling prospect of policing a border with Ireland, involving new tariffs if we leave the customs union, a “devastating blow” to the economy of Northern Ireland and controls over movement of people between the UK and  Ireland and possibly with Scotland if it secedes.

Brexit will rank as the biggest mistake England (Britain) has ever made.

So why did they (we) do it?

What led the British to vote against their own interests?

Powerful anti-European interests include the popular media and sections of the main political parties representing traditional political elites – the conservative right as well as Labour interventionists.  Libertarians of the Institute of Economic Affairs school and economists committed to floating exchange rates, as well as those who favoured activist fiscal and monetary policies, provided intellectual ammunition. They feared that membership might spell the end of their influence on British policy. Britain’s governing classes feared loss of control.

That is why they played up the theme that the EU was evolving into a “superstate”. There is in fact no possibility of European political union.  The British elites understand that. But it suited their case to lie. They knew the British masses woud never tolerate  being run by a European superstate.

For generations British children have been brought up to glorify the UK’s role in two world wars. Anti-German feelings have deep roots. As past German ambassadors to London have commented, the popular media’s views of Germany bear no relation to the modern country. As Germany’s weight in the EU has grown, so it became easier to arouse British fears.

Meanwhile, it has been common for British governments and, sadly, governors of the central bank (no the present one) to cite the poor economic performance of the eurozone as contributing to Britain’s difficulties.

Successive British governments opened the doors wide to EU  immigrants when it suited them for political or economic reasons  without thought of the difficulties they might cause in the longer term. Thus during the referendum campaign anti-EU spokesmen could play on fears of millions of “Turkish immigrants” being let loose on the UK, swamping its fragile national health service.

The British have never been able properly to monitor immigrants because they do not have and will never tolerate a national identity card system.

When confronted with mass resentment at the failure of British economic policy  – failure to apportion the costs of the financial crisis fairly, resort to policies that made inequality worse,  failure to reform banking – these traditional elites were able to deflect popular anger from the British to the European level.  The mass media were complicit.

The answer: the British have been betrayed by their governing classes.

To save their skin, the British elites used Europe as the scapegoat.

The masses followed. They were tricked. Now they will pay a heavy price.

What will they do when they find out the truth?


PS Note to readers: You may wonder why this post belongs in The Money Trap website. My reason is that the Brexit decision reflected the consequences of the failure of governments, regulators and central bankers to lead the UK out of the financial crisis in a way acceptable to public opinion. The institutions and policies that led to the crisis remain in place. The lack of reform, the failure to hold anybody accountable, has stoked popular anger.