Viva la Revolución!
Project Fear never stopped; from the original Cameron Remain campaign to the recent Brexit forecasts from the Treasury, IMF and Bank of England, each seeking to outdo each other in painting the darkest possible future. Though, the numbers don’t stack up; esteemed Professor of Economics, Paul Krugman suggests that the scaremongering with the economics is really motivated by other, non-economic, ideals that wouldn’t ‘stick’ in the same way. Ex-Bank of England Head, Mervyn King, agrees that the post-Brexit projections don’t seem based in any real form of evidence. Independent scholars, outside of both the EU and UK, suggest that the benefit of access to economies outside the EU and cutting-edge technology, will force greater productivity and effectively provide benefit to the UK that will at least offset the loss incurred from leaving the Union.
Yet, so many business leaders and prominent professionals are pro-Remain; with 1400 lawyers signing a petition, Branson, Sugar et al all high-profile Remain advocates. I pondered the question, ‘what are they seeing that the average person isn’t? Indeed, what are they seeing that I can’t see?’
A brief history of the EU
Originally, formed as an Economic Community in the 70’s,the attraction for the UK was that our businesses needed to become more aggressive and our management was sub-standard. Becoming part of the European business club, so to speak, would help to drive higher standards through the need to be competitive; it worked. However, a fundamental change occurred at Maastricht in the early 90’s, post Thatcher; the EU premise shifted from an economic basis with a small element of social implications to a Social entity based upon the economic benefits that had been created. This was then extended to accommodate currency unification, though the primary focus of change was towards social integration. I believe that this shift in focus, will be its eventual downfall.
Even though geographically, a United Europe looks ideal, the fact is that most countries in the region have developed over a 2000-year period, each with individual values and their own particular approach. Just considering Southern Europe from Northern Europe, the differences are significant, without even having to consider the nuances on a country-by-country basis. The attitude towards life, work, social minorities to name a few, were vastly different. The notion that it would it be appropriate to turn the collective into a uniform element is, in my view, nonsensical.
The consortium today is made up of two groups; the Providers, of which there are 10 nations and the Takers that are the other 18. Situations currently in Hungary and Poland are good examples of how the smaller countries can enjoy membership without being held to account for issues such as widespread minority abuse. These stresses are starting to appear more frequently, particularly from the new entrants in 2003, who originally focused on maximising their opportunities (funds) when joining the EU, but are now resisting being held to account when the requisite cultural changes aren’t being seen.
Leadership at the top of the EU is a constant source of concern for many voters in its member nations; it is completely and utterly unaccountable. Whether this is with regard to never producing the accounts for external consumption or numerous allegations of corruption. A refusal to publish pay rates for its elected officials and the leaked document that showed over 10,000 EU officials take home more than our Prime Minister, coupled with expense rules such as the first €100K for each senior official is not required to be accountable, all add to the mistrust. Aside from the financial concerns, there is also a real issue regarding the fact that whatever they decide is appropriate, for whatever social reasons, has no way of being challenged. This is not only unacceptable within a democracy, but it is also incredibly dangerous when such imbalances exist between those nations who benefit as part of the union in comparison to those who don’t.
Germany is the country that benefits most from the Euro; before its introduction, the German Mark was one of the strongest currencies in Europe and indeed the world. With the introduction of the Euro, Germany ‘locked in’ at a weaker price, enabling their export appeal to increase. In the first decade after introduction Germany more than doubled exports, from just under 500billion Euros, to over a trillion. In addition the common currency prevented devaluation in weaker economies, resulting in their debts [to Germany] staying high while their exports dwindled, and buying goods from stronger economies [like Germany] remained attractive. Flawed since its introduction, the Euro took away control over interest rates and exchange rates, while simultaneously increasing control over debts and deficits.
Understanding the backdrop of discontent
Ordinary people have a huge disconnect with the people making these decisions, as a direct result of not being able to elect or control them. As opposed to the feeling (whether always true or not is another matter) of being able to elect and control representatives within their own country, through the understood channels of democracy. This perceived inability to either elect the representatives or challenge their edicts, results in a significant portion of Britons feeling as though we have become impotent within the EU; we are merely one of the largest contributors, yet being told what to do; which is obviously contrary to the national psyche and our perceived heritage. Add to this the overwhelming economic challenges to the vast majority of the UK’s working population and it’s unsurprising that we have chosen another way, even if that other way is unknown; many deemed that it can’t be worse than what they’re already experiencing.
The Remainers suggest that even though the EU has problems, these should be addressed from the ‘inside’, but the fact is that that Cameron tried to do this and failed. The UK did have a number of opt-outs that worked for a long time but, increasingly, every progressive step by Brussels seeks to diminish the opt-outs in order to increase the power of central control. One could argue this is democratic if the changes were led by people who were voted in, but they weren’t.
This state of public unrest has not come about from the Brexit issue though, it’s been brewing for several decades. If you consider the status quo say, 40-50 years ago, there was a greater economic similarity between the various segments of society across most nations; the vast majority weren’t well off. While a few had significant wealth and, of course, the aristocracy were always separated from the masses, the working and middle classes in the 60’s and 70’s were much closer economically. Perhaps cars and colour televisions were differentiators, but the actual economic divide was not so large. What has transpired since the millennium is an escalation of a phenomenon that started in the 90’s where people took advantage of the increasing speed of economic development across the World. As China and the rest of Asia started to develop quickly, coupled with South America, an economic engine emerged that would be 100 times bigger than it had ever been before. This gave an opportunity for people to exploit these developments to generate wealth on an unprecedented scale. The 90’s therefore saw the levels of selfishness and abuse start to emerge, the most obvious being in Russia with the ownership of the state being handed to around 1000 people as a result of the political collapse, which was obviously to the detriment of virtually the entire population.
Similarly, this was seen in different guises across many other nations as well, with a rapidly developing segment of the ‘haves’. In business, corporate greed became far more apparent, exampled with multipliers of Managing Director wage vs. worker wage rising from 14 times to a now not uncommon level of 250 times. The big bang occurred, and whereas city members were once proud of their integrity and ethos, a business culture had developed where the sole measure was wealth creation. Greed became acceptable among the people who had been in the top element of society. This acceptability became normality, which translated to a right. By the time we arrived at 2008 with the economic meltdown, although traditionally we would have expected a collapse, followed by a rebalancing that involved everyone suffering collectively over say, a three-year period, where a restabilising of the economy occurred prior to starting again. Instead, we saw that the top 5% of workers, the ‘haves’, were protected while everyone else bore the cost of the actions of the few.
In almost every country one may consider, there is now a vast divide between those that have and those that don’t. Whether you look at our domestic scenario or say Greece or Italy, people at the top rip off the state, avoid obligation, don’t want to pay taxes and think that’s clever. There is no balancing mechanism for this and for example, in this country we avoid taxing people by the wealth they have i.e. we tax just their income as opposed to property portfolio and overall wealth.
In effect, what is happening at the government level is that they’re tinkering with all sorts of economic metrics, except the ones that would really have the desired effect of rebalancing the divide in society. This sends a message down from the top, stating that ‘it’s alright if you are one of those that have but for the rest of you, you must struggle.’ Though this may be the harsh reality of economic life in most countries, it strikes me that it’s been done in a way that most people cannot see the justification while they are exposed simultaneously to excessive wealth pushed continually in front of them via the Internet. This can only build significant levels of resentment, which continues to grow. In the past, it would have led to a revolution, maybe that’s still to come?
Against this backdrop, in some ways, it seems that Brexit is happenstance, because it was an opportunity for the people to voice their unhappiness in a way that historically wouldn’t have been available i.e. the referendum. The discontent was actually much greater than the issue of ‘Leave’ or ‘Remain’, but this was the only way that an anti-establishment vote could be registered; similar to Austria’s Hofer, France’s Le Pen and America’s Trump, Brazil’s Bolsonaro, Nigel Farage captured the momentum of the disenfranchised majority.
So why do all these high profile business leaders and prominent professionals support Remain?
Returning to the business leaders, bankers and lawyers; they all arrive at the same conclusion as the Liberal Remainers, but for an entirely different reason. I believe that theirs is one of self-interest, not social ideals. Successful business leaders are making a concerted effort to influence the politicians and wider community in order to help protect what they have. This is because change is bad for businesses that are succeeding in the current environment. After all, why would they want change? The present-day system is working for them and many are leaders on the world stage. To introduce anything that is uncertain or leads to variation or elements, over which they have no control, is a very undesirable proposition.
Stepping back, this logic also applies to any individuals who have established themselves in the top section of society or in the top section of the economic profiles; they all have a vested interest in keeping the status quo for the country as a means of keeping the status quo for themselves.
The real issue for these advocates is the unpredictability of what comes next; across all aspects of industry, the incumbent successful organisations aren’t looking at whether there is much to be gained, but exactly how much could be lost. Change means an awful lot of effort just to stay where they are, so is understandably undesirable to leaders in industry. However, if many of these leaders knew exactly what the position would be on March 30th, the attitudes might not be so anti-change as there would be specific knowledge on the pros and cons, coupled with time to prepare.
It’s no surprise that the average business leader, who’s endured this confusion since the referendum, now doubts the validity of any type of break; the fact is that they can’t trust anything they read or hear. The government has handled the negotiation abysmally and communication to the business community has been poor. Business people on the whole are pretty straightforward; give them the details of the challenge that will present itself on March 30th and they’ll create strategies to deal with it. Yet all they’ve been given are unknowns. As a result, investment has been put on hold and won’t be released until a level of certainty is established. Therefore, the pain we are feeling, while attributed to Brexit, could indeed largely be attributed to ineffective negotiations through Government ineptitude. This isn’t to say that many still don’t subscribe to ‘Remain’, but for the small business, the transition could have been so much less concerning if communication of some fundamental elements of the March 30th position could have been delivered beforehand.
What needs to happen next?
Change has to happen with the EU or else it will self-destruct. The weakness in everything is fundamentally the Euro but also the existence of traditional no go areas such as the common agricultural policy. It would have made sense if the EU had been just a North European club, because economically it made sense with participants having compatible economic models and structures. However, this economic model is stressed by introducing a generic currency; it imposes a requirement for the Northern European countries to support the Southern, which is not palatable to most Northern nations. When considering the problems currently experienced in Italy and Greece historically, the natural initiative to ease their problems would have been to de-value their currencies in order to strengthen their appeal for export, which obviously can’t be achieved in a shared currency situation.
While devaluation may not have been pleasant for the nation’s population, feeling the impact of escalating prices for imports, it was a non-obvious route to letting off steam and facilitating a road to recovery. However, with this option not available to them, the notion that edicts from the Government dictating that the Germans have imposed a 50% reduction in the value of everyone’s pensions are also grounds for rising levels of discontent and resentment on a national scale.
The only real solution to Greece was to write off the debt, and given that the vast majority is held by the banks from Germany and Italy, it is not an option.
A partial solution to the indigestible national debts of the smaller countries would be to engineer a decade of say, 8% inflation, which would have the effect of halving the problem. But, without this, debt-holding countries are still left with the fact that interest is outweighing inflation and the problem is just being ‘kicked down the road’. Increasingly, these countries are going to ignore the central legislation and apply their own beliefs with regard to wages and budget spend as has been seen in Italy recently, where the increased budget was favoured by the majority of Italians. On this occasion, negotiations ensured a compromise but the anti-EU sentiment remains very much the same and no doubt this is something that will rise increasingly as the weaker nations feel unable to take any measures that will get them out from under an inordinately high debt (whether justified or not), with no clear means of repaying it.
Have we been through pain like this before and come through it successfully?
The primary concern regarding a successful divorce is the scale of what is being attempted; never before have we had such vast economic models to meddle with. Today, we have a universal world economic unit that is completely and utterly different than anything that’s gone before. Given that the economic engine of the world is no longer in the USA or indeed even the West, the powerbase that’s growing in Asia adds a dimension that wouldn’t previously have existed. And even the Chinese market is struggling with the realities of its trade conflict with the US, despite the incredibly benevolent policies from the US, that enabled the Chinese structure to have been created in the first place, to the detriment of the US market.
This stance has sapped the American economic model and no one has really faced-up to the reality that the Chinese were remarkably adept at being able to justify their actions by holding vast quantities of American bonds to appear to be supporting the US markets. Yet the reality was that they were achieving 10% annual growth at the expense of the American economy, while appearing untouchable, because no one wanted to rock the boat regarding their position of apparent support.
Similarly, European manufacture has diminished within the same period, to the benefit of the Asian producers. Historically, getting the US or European economy right was largely a recipe for getting things right for the wider global market. This, however, is no longer the case given the shift in production power to the Asian territories. The potential for stresses are now much greater than they have ever been historically, which in my mind leads to an Emperor’s New Clothes scenario; so long as everybody trundles along in the belief that everything is ok, then it works, even if real economic value isn’t apparent. Property prices being one such example where the pricing of property is a product of belief, rather than intrinsic value. The whole business of increasing the amount of debt is propped up by the notion of increased notional value where it in fact may not even exist, should the climate change. For example, a commercial property in downtown Shanghai may be valued at $500M, which is soon decimated if there is a downturn in economy and therefore drastically reduced demand for office space, highlighting the notional value rather than its true economic value.
Forty years ago, we thought that billions were significant with regard to debt, now we talk in the trillions. The US debt ceiling for example was raised 90 times in the twentieth century. This has all come about through economic easing and creating money from nothing. All this has done has helped those that have, by supporting artificial values for certain economic items. The scale and complexity of this market and associated changes are therefore like nothing ever seen before.
The real issue is that the amount to which everyone is dependent on everybody else and none of it is stable, meaning the scale of the ‘emperor’s new clothes scenario’ is one that will cause a set of challenges that are not only significantly more complicated than ever seen before but also much less controllable. While one might use this argument as support for the ‘Remainers’, the blatant fact is that inside or out of the EU, this inability to control this complex, escalated world model is a real threat to all of us. The European Bank won’t have any real way of controlling these challenges if the underlying truth is that the EU model isn’t sustainable. The current situation has been propped up by the mass printing of money by the use of Quantitative easing, whereas normally this would have produced large scale inflation the size of the economic problem has meant that it has merely avoided recession but at the cost of severe economic disparities.
Two polarised schools of thought are that the EU is a terminally ill institution that is being held together for the benefit of a few. The alternative viewpoint is that the EU is a social ideal with integrated Europeans, all living and working to a common good, with the same basic tenets and values. I find the latter to be an implausible aspiration.
In my mind, the ‘ship’ is therefore sinking, and we need to jump, and swim twenty miles to the shore. It’s not going to be pleasant and for a vast number of businesses it will be both painful and scary, but nonetheless, the alternative is worse in the long run.
The stark reality is that there is no net financial benefit to us staying in the EU; obviously there will be winners and losers and we will be taught a lesson by those in central control whose ideals we are threatening. Juncker and Tusk have to punish the UK for threatening the system; it’s that simple. At the political level, a message needed to be sent to all other nations who might dare tread the path of the UK as Brexit could be the trigger to allow current European-wide discontent to not only have a voice but also a blueprint for exit.
Maybe we’ll have 2-3 years of punishment and discord. Will we die in the streets from this? Obviously not. Will it hurt? Yes it will but, bit-by-bit, we’ll dimension each of the challenges and solve them.
Cameron’s ineptitude allowed this discontent to be applied to a vote, May’s incompetence has made the public desire a dog’s dinner, Central European bureaucrats have agendas that are not in anyone’s economic best interests – it’s a story of political ineptitude and disconnection from the people they supposedly represent. Bad times are coming from this no doubt, but if we ‘lean in’ and solve the problems, we’ll watch the ship sink from our shore.
Others will follow, but not because we inspire them, because the pressure from within will become too great. The unworkable single currency, between such disparate economies, will force some to leave and take action.
Our nation is gripped with distraction and fear regarding what will be a small blip in the 21st century. Meanwhile, the real issue of a long term, unsupportable, ageing population is pushing us all into an economic abyss that will eventually make us wonder why we all spent so much time getting so worked up about a relatively minor event.
END