The sideshow at the recent EU summit that decided on a new ‘fiscal compact’ to ‘fix’ the euro debt crisis and avoid a break-up of the Single Currency area was the refusal of the UK government to sign up to the deal (see my post, Euro calamity, 12 December 2011). The British leaders did not do this because they opposed more fiscal austerity or the lack of democracy in consulting the voters on whether they were in favour of more cuts in public services and higher taxes. No, the British leaders refused to sign because they were concerned that the European leaders would impose new taxes on the banking and financial sector of the City of London. They wanted to protect the investment banks based in London so that they did not flee to other areas like Switzerland or New York where a financial transactions tax would not be imposed.
Actually, such an EU tax cannot be imposed on Britain as it has a veto over such measures. But on many other EU decisions and policies, the European leaders have agreed to what is called a ‘qualified majority’ vote. This would mean that one country alone could not block a new measure. The Brits wanted to restore its veto powers and reverse the move towards qualified majority voting. That the EU leaders were not prepared to agree to and so Britain refused to sign up to the fiscal compact.
The British ruling groups have been split on whether it is good for British capitalism to be a member of the EU ever since the UK joined what was then called the European Economic Community back in 1973. The large corporations and big banks have generally been in favour of being in the EU, and even in joining the euro area when it looked like being a stronger currency than the UK’s pound. Small businesses have remained resolutely sceptical or antagonistic, as they gain little from exporting to Europe, relying mainly on domestic markets. Indeed, free trade with Europe threatened their markets at home.
Also, there is still a section of the British ruling class that hankers after its long-lost empire that British imperialism enjoyed during the 19th century. That finally disappeared after World War Two but many remain committed to the idea that British capitalism should look to its empire and is still a ‘world power’, if a junior partner to US imperialsm, in an Anglo-Saxon axis against European and Asian interests.
That old empire idea had little support in ruling circles after the 1950s and even following slavishly the policy of the Americans also lost favour in the decades of the 1970s onwards when Europe grew fast and the continent’s share of British trade rose to nearly 50%. However, once globalisation began in the mid-1900s onwards and China and then India came onto the world market stage, Europe’s dominance of British trade and investment began to decline. Europe was not the only focus for British capitalist interests any longer. Indeed, the European Union, with regulations and laws like a maximum 48-hour week (honoured only its failure to be applied) or a minimum weekly wage etc, began to be seen as a hindrance, increasing the price to a point that may not be worth paying for the benefits of free trade, movement of labour and capital on the Continent.
The euro crisis has brought this to a head. It now seems that the single currency area that the British decided not to join back in the 1990s is a failing project and likely to break up. Its value for British capitalism is beginning to look very tarnished. That’s why the mood among the ruling circles in Britain has altered. The supposed threat to the important financial sector in an increasingly ‘rentier’ economy (and by that we mean surplus-value garnered in the form of interest, dividends and rent) was the final trigger for this move away from Europe.
What would happen if the UK decides to leave the European Union? Would it benefit or suffer? For British capitalism, what have been the main benefits? Well, supposedly the EU-wide single market brings economies of scale in production, allows trade specialisation within a market and increases technological spillovers. That should raise productivity growth and eventually real incomes and GDP. Such is the mainstream economics argument for being in a ‘free trade’ area. The EU estimates, however, that this has helped boost UK economic growth by no more than 0.1-0.2% a year on average.
Supposedly being a member of the euro area itself should deliver even more gains from trade, as transaction costs of exchanging currencies are removed and interest rates fall to the lowest common denominator i.e. that of Germany (UK interest rates have usually averaged more than 3% pts above the Eurozone). However, the UK stayed outside the euro area, and when we look at growth in similar countries outside, like Norway or Switzerland, there would appear to be no particular advantage in being in the euro. Both those countries have high standards of living and have outpaced growth in many eurozone economies since 1999.
So leaving the EU wouldn’t appear to make much difference to British capitalism. But the key question is whether global free trade agreements like those made through the World Trade Organisation would be enough to ensure that British exports would not be damaged by losing membership of the EU free trade area. That depends on whether the UK can negotiate a free trade agreement in the European Economic Association as Switzerland and Norway have done. Switzerland enjoys all the free trade rights of an EU member and also the right of movement of capital and labour without the obligations of keeping to EU directives and regulations (although in practice it follows many of them closely). Can the UK negotiate similar favourable terms with France and Germany after snubbing them over the fiscal integration of Europe? – it’s a moot point.
As for fiscal costs, the UK contributes a net 0.5% of its GDP towards the EU budget, which is equivalent to about 1% of EU GDP. That’s about £7bn a year, after a special rebate that the UK negotiated back in the 1990s. It’s not a lot of money, but it still counts. The main spending component of the EU budget is the Common Agricultural Policy (CAP), which uses 40% of the EU budget to subsidise farmers in the EU who would not survive if they sold their produce at world market prices. The CAP is usually condemned in Britain as wasteful and profligate. No doubt it does benefit farmers in southern and core Europe more than others. But leaving the EU would mean the end of CAP support for British farmers as well. That would decimate what is left of the British farming industry. Food imports would become an even more dominant part of UK dependence on world trade.
But perhaps the most important issue for British capitalism is not trade within the EU. Trade with China, India and other ex-EU countries is now growing faster than trade to other EU countries, although the EU is still the biggest trade partner for the UK. The real problem is inward investment. The UK is a rentier economy, based on banking, commerce, professional and business services and real estate. Look at this measure of foreign assets and liabilities for different countries. The UK is the most dependent on foreign capital flows.
What industry remains depends on high levels of inward investment by US, European and Asian corporate looking for a base to export within the EU. If the UK were no longer seen as such a base, compared to say, France or Ireland, then it could lose a significant driver for profits and GDP growth. That is what worries the capitalist elite the most.
Financial services contribute about 10% of annual GDP and the City of London provides specialist services and a base for financial transactions second to none. This parasitic sector is a powerful lever within British capitalism as its manufacturing base has been allowed to die or be annexed by foreign investment. Along with creative services (advertising, film, graphics, media etc) and a few strategic industries (pharma, aerospace and armaments), the financial sector is now the biggest contributor to British capital – a real problem when global crises start in that sector!
The City of London is vehemently opposed to any financial tax and what they want is what the British politicians will back. Whereas up to now the City of London has been in favour of EU membership, and in some parts even euro membership, to increase the City’s role in Europe, the moves by the European leaders to tax the City just at a time when European capitalism seems to be heading into another economic slump have changed that opinion. The City would be prepared to see the UK leave the EU if that was necessary to protect the financial sector from reduced profitability.
That is where the capitalist class is at right now. But what would be best for we 99%? British public opinion is strongly against the euro and now probably in favour of leaving the EU. That’s partly because of a nationalist leftover in the minds of a proportion of people. But it’s also because the EU and the Eurozone are now seen as failing to deliver better standards of living. Indeed, it is the contrary, if you look Greece or Ireland. And yet, the idea that the UK, dependent as it is so much on finance rather than productive investment, is likely to deliver better standards of living for its people than Europe is an illusion
Also the electorate quite rightly see that democracy is badly missing in the European project. Decisions in the EU are taken by government ministers in long secret meetings or by unelected bureaucrats in Brussels. The EU parliament is a toothless assembly with no powers to sack EU commissioners or ministers. Elections to the EU parliament are poorly participated in. Of course, the idea of the right-wing nationalists that if all powers ‘were returned’ to the UK parliament, then all would be much better is also a jingoistic illusion. The current British parliament is imposing the toughest programme of fiscal austerity (excepting Greece) without a mandate from the people. In the last election, less than 25% of those eligible to vote supported the Conservative government’s fiscal plan.
What is needed is democratic control of the finance sector and the strategic industries, whether it is Europe-wide or in the UK. Leaving the EU and returning all ‘powers’ to the British capitalist elite will not improve much of anything for the average British household.