Brexit Developments

Britain now has a tarnished reputation in the imperial family. It has long been the consigliere, advising on disputes and helping negotiate deals. While, of course, it often gets up to mischief for its own reasons, usually this is done in concert with one or more of the family – for example, it instigated the attack on Libya with France, drawing the US in too, and with the US it has promoted more liberal rules on financial dealing. But now the UK looks like a reckless troublemaker. Not only because the Brexit referendum led to shockwaves in world financial markets, but also because the aftermath of the vote further upsets an already crisis-ridden imperial landscape.

World leaders are bemused that the British government can have let things come to such a pass. For a major country to allow a pillar of foreign policy to be decided by the sentiment of a popular vote is just not done! Or, at least, never done unless the right outcome is assured. This outcome is unfavourable for the established powers, but that is no reason to look upon the result as progressive.

The Brits are in probably the biggest mess, not simply due to the drop in both sterling and the UK’s credit rating. It is also a question of status. They will look pretty stupid the next time they try to lecture other countries on the best way to run things. They will also be the wallflower next time they are in a party of ‘friends’, such as in NATO or the UN Security Council, aside from having fewer European-related parties to attend anyway. It is hard to see any way for the British state to restore the status quo ante. Even Britain’s new relationship with EU countries cannot be sorted out easily, quite apart from the main EU powers not wanting to make an exit seem like an easy option. The Brexit stance was based upon wanting (full) access to the single market, but rejecting the EU’s insistence on free movement of people within the single market, something that is anathema to the Leavers.

At the same time, the Conservative Party has to try to get a new leader, following Cameron’s resignation. It may only be then that the UK government will use the celebrated Article 50 of the Lisbon Treaty formally to tell the EU of the intention to exit, which will then initiate a period of up to two years of divorce proceedings. The schedule is uncertain, but the main EU powers have made clear both that they want things over relatively quickly and that there will be no real negotiations until the Article 50 exit period has begun.

Some writers have noted that the Brexit referendum is not binding on the UK government, and could be taken as ‘advice’ from an opinion poll. That is true constitutionally, but it looks politically impossible to reverse it, nevertheless. The point behind Cameron calling the referendum was to stem the populist anti-EU threat to the Conservatives’ base of support. Instead, it revealed how many voters thought they had gained little or nothing from established policies, and how far popular sentiment had congealed on anti-immigration policies for their solution. While the 52%-48% split in favour of Leave was close, there had been no guidance that only a 55% or 60% Leave decision, for example, would endorse a change to the status quo.

To ignore the referendum result would bring an electoral disaster for the Conservatives as much as it would for the Labour Party. The core Leave vote came from England, where the majority was 1.9 million in favour (15.2 versus 13.3 million votes), more than accounting for the overall UK majority vote of 1.3 million in favour of leaving the EU. This was despite a number of the bigger English cities – London, Liverpool, Manchester and Bristol – having large Remain majorities. According to the BBC, the Brexit vote was widespread, on top in 270 UK counting areas versus only 129 areas for Remain.

It will be interesting to see how much further the Labour Party adapts to anti-immigration sentiment, whether or not under the leadership of Jeremy Corbyn. Not under Corbyn is most likely, given the scale of opposition from Labour MPs to his continued leadership (172 against, 40 for). The Labour Party fears a near-term general election that they will lose, and there is evident panic and plotting in its establishment ranks.

Last September, Corbyn won the Labour leadership election by a landslide, driven especially by younger people who had recently signed up as Labour supporters to back a more radical set of policies. They will now find their hopes shattered. One can only hope that they will learn some lessons from their earlier foray into the Labour Party.

History shows that the Labour Party exists to divert popular demands for change into a dead end, and that its policies are always determined by what is viable for British capitalism. Adapting the catchphrase of an old Heineken lager advert, Labour can reach into the parts of the electorate other parties cannot reach, in order to sustain popular support for the system. Even Labour’s welfare spending proposals are made explicitly on the basis of what capitalism can afford. Still worse, Labour’s policies are unashamedly patriotic and support British imperialism’s ventures. In March 2003, for example, the vote on the Iraq war was 254 Labour MPs in favour and just 84 against. Hilary Benn’s more recent ‘bomb Syria’ speech in the House of Commons was not an anomaly. But a few differences with the party line, eg with Corbyn’s timeserving of 30-plus years as a Labour MP, help give a different impression to the gullible.

Scotland is in a separate quandary, having voted 62% in favour of Remain. The Scottish National Party is now trying to deal with the EU on behalf of Scotland’s relationship, but is being told very clearly that Scotland is not an independent political entity so there can be no negotiations. That would require independence from the UK, and that – via another Scottish referendum – is something the EU is not going to encourage, since they are already worried about the threat from other potential regional breakaways in Italy and Spain. In any case, were Scotland to gain independence from the UK and apply for EU membership, it would have to sort out the tricky problems of replacing UK subsidies, avoiding an obligation to join the euro and running a budget on the basis of $50 per barrel of oil.

Meanwhile, other moves are afoot outside the UK. For example, the French government has raised again the role of the City of London in euro financial trading. Back in 2011, the European Central Bank, with Trichet then its French president, put forward a regulation that would have led securities trading in euros to be ‘cleared’ in a euro zone country. The UK challenged that in the European Court of Justice. The legal and financial details are very technical, but the gist of the matter is as follows. Being annoyed at the City’s dominance of euro financial trading, there had been a number of attempts on the part of France to shift financial trading into the euro area, meaning Paris. The 2011 ECB regulation looked innocuous, but the Brits smelt a rat and challenged it in the European Court, since it would have disadvantaged euro-clearing in London. In 2012-13, France and Spain backed the ECB position in Court (Italy did too, in March 2013, but pulled out in November), while the UK was backed by Sweden, also a non-euro EU member.

The ECB argued that the UK did not have the ‘standing to bring an action against it, on the ground that it does not participate in certain aspects of economic and monetary union’. No status, hence not able to make a case at the European Court. However, the Court ruled in March 2015 that ‘as a Member State [of the EU], the United Kingdom has standing to bring proceedings against acts of the ECB’. Furthermore, the Court accepted that the ECB’s new regulation was against the principles of a level playing field between euro and non-euro members of the EU. The UK won the case, and also got the ECB to pay its legal costs. It is unlikely that the same judgement would happen again, since the UK is not (rather, will not be) an EU member any longer, but very likely that a similar ECB regulation will reappear.

Admittedly, this looks like just a small-scale example of an opportunistic use of status to press an advantage. But the bigger picture it shows is how the UK’s changed status in the EU is going to have unexpected effects elsewhere. The Brexit vote has sent tremors through the imperial system’s tectonic plates and a number of structures are shaking. The great pity is that this has occurred in the context of a reactionary debate on Britain’s status in the world and delusions about how the new found ‘freedom’ of the British state will benefit the mass of people, while adding fuel to the fire of growing nationalism in many European countries.

Tony Norfield, 29 June 2016

Political Fundamentals and the UK Brexit Referendum

What explains the desperation of British capitalism and Conservative Party in the lead up to the Brexit referendum on 23 June? Opinion polls have shifted in favour of a Leave vote and, while the accuracy of the polls is always in doubt, a shift towards Leave seems evident from widespread vox pop views in the media, in the panic of the Remain camp and in the financial market setbacks for sterling’s exchange rate. Equity markets have also been hit, and not just in the UK. As a sign of desperation, the Remain camp has even called upon the Labour Party’s lumbering has-been, Gordon Brown, to add his weight to what looks like a failing balance. Her Majesty has so far been allowed to stay above the dispute, just about. One can imagine that if the polls get any worse for Remain, then Downing Street could try to prompt a Royal appeal to her loyal subjects to do the right thing. Where has this revolt of popular sentiment come from?

My previous coverage of the Brexit referendum has focused on the situation facing the British ruling class in a world where its economic and political interests are clearly bound up with Europe, but where there has been a minority view that an alternative is possible ‘outside’, especially in a context of European economic crisis. But the significant support for Leave shows that this has underestimated a key point. What might otherwise be considered simply as popular disgruntlement with political elites – ‘vote Leave to teach them a lesson’ – is better explained as a widespread view that these elites have broken their pact with the people. The ‘Leave’ support, however disruptive it might be to existing power structures, is based on an appeal to the British state to restore the status quo ante. To understand this point, it needs to be put in context, one that will also confirm that this is not a debate in which one can take sides.

The World System of Power

No country’s politics, still less its economics, can be understood outside its relationships with the rest of the world. Since at least the early 19th century, the world economy has increasingly shaped the position of all countries within it. The world system as we have known it in recent decades has been based upon three elements: American dominance and supervision of capitalism, the European Union project and the relationship between America and Britain. These elements may have come under some threat, for example with the growth of China and the crisis in Europe, but this pattern of world power remains intact.

The dominant European states wish that Britain would be more European, and that it would do more to curb the xenophobic, anti-European drift of British popular culture. But Britain’s relationship with the US is in their interests, because Britain’s mediating, intermediary role helps keeps the whole structure of Western dominance intact, with America at its apex and Europe benefiting from it. The Europeans are worried about an increasingly unstable world that sees the rise of China, a more assertive Russia, all sorts of threats around the Mediterranean and the Middle East, and in Africa. They are concerned that a Brexit vote would begin to unravel their security network, or at least begin to call into question who is allied with whom, and how committed they are to a joint project.

The dominant European imperialist states could easily accommodate Britain’s refusal to join the euro zone, a central plank of European policy. Britain’s role with respect to the European Union is not so much the product deeply ingrained cultural attitudes (although these do exist); it is more an expression of its important role within the pattern of power and the dynamics of its mediating role on the world stage. This role allows, and calls for, the British state to operate at the same time both outside and within the continental European political and economic set up. For example, the British-based financial system is a worldwide one, brokering the US dollar, and the political and economic interests of Britain do not support its membership of the euro zone. But the British state also needs to have a say in the development of European policy to sustain its position and the workings of the world financial system that it has helped to create and from which it benefits. The US also wants Britain in Europe because it is vital to US-European relationships. Every time Britain has shown itself truculent over European membership, and especially now, the US has reminded it, in a firm but friendly way, that it would prefer no change.

A new series of bilateral arrangements between Britain and other countries, as envisaged by the Brexit camp, cannot replace this system. The point is not only why on earth it would make sense for Britain, one of the major world powers, to tear up longstanding agreements that it has helped to produce and try to start again. It is also that a country stepping outside an established system of power would not have much leverage to devise another one. The pro-Brexit calculation can only convince those who ignore, or do not understand, the structure of Western dominance and Britain’s vital role within it. Britain’s business media has reminded the Leave advocates both that Britain alone is a small share of the EU market and that exiting the EU would put at risk all the other relationships that give British imperialism status in the world, from permanent membership of the UN Security Council downwards.

The Working Class Brexit Vote

Nevertheless, British opinion polls show that Brexit looms. A broad section of the population, especially the working class, is now liable to go against the establishment consensus and vote Leave as a way to complain, especially when it sees its troubles as resulting from global economic trends that the establishment has embraced. The focus of complaint is immigration. While the claimed economic benefits of the UK staying in the EU have been the main argument for ‘Remain’, this has been submerged by immigration as the dominant anti-EU point in the referendum debate. Many Brits, perhaps most, including those who themselves or whose families may have been relatively recent immigrants, support tighter immigration controls, as was already clear in the 2015 UK General Election.

Immigration plays such a role because it touches on a key point in British working class consciousness, one that reflects its material interests: a loyal commitment to the British state. This longstanding commitment has given the working class social protection as part of a deal not to cause too much trouble, a kind of ‘social contract’. Now, the immigration question helps to identify the national, British-based working class as the legitimate recipient of state assistance versus the immigrants (or even refugees) from other countries. In this pro-imperial outlook, the issue of inadequate housing, jobs and services delivered by capitalism becomes a moan about the supply of housing, jobs and services taken by migrants. In previous decades, the moan was about blacks and Asians; now it is more about white (East) Europeans.

This is not to say that such a view is held by all working class people, but the fact that it is so widely held should not really shock those who have read any history. For more than a century, despite occasional trade union militancy, the British working class has supported British imperialism and its war efforts. From the First World War, even earlier, the British state had made concessions to workers with welfare measures, ones that were developed further in the late 1930s and into the Second World War, when more ‘sacrifices for the nation’ had to be made. Introducing future plans for comprehensive welfare spending in March 1943, the arch-imperialist and violent opponent of the 1926 General Strike, Winston Churchill, declared himself in favour of ‘national compulsory insurance for all classes, for all purposes, from the cradle to the grave’ as part of his attempt to secure a solid national consensus of all classes.

It may surprise readers familiar with the story that the 1945 Labour Government invented the National Health Service, and broke the mould with state ownership of national assets, that Churchill also said in the same speech that ‘we must establish on broad and solid foundations a national health service’ and that there was ‘a broadening field for State ownership and enterprise, especially in relation to monopolies of all kind’. To underpin his endorsement of a national consensus, Churchill praised the Labour Party’s coalition government Minister for Labour and National Service, Ernest Bevin, for ‘the practical absence of strikes in this war compared to what happened in the last [ie in World War One]’. The rationale for Churchill’s support of welfare spending for the working class was that for Britain ‘to keep its high place in the leadership of the world and to survive as a great power that can hold its own against external pressure, our people must be encouraged by every means to have larger families’. Supporting more education spending, he added that the ‘future of the world is left to highly educated races who alone can handle the scientific apparatus necessary for pre-eminence in peace or survival in war’.[1]

Other articles on this blog have shown how, in the post-1945 period, Labour Governments continued in this pro-imperialist outlook, using exploitation of the colonies to help fund their national welfare spending to benefit the domestic working class.[2] But this perspective is not of only historical interest; in the same way that imperialism – a system of privilege and domination in the world economy – is not confined to the colonial period.

The Brexit debate shows that the British working class wants not so much a better deal within the existing system, but a return to the previous post-war consensus.[3] This perspective is not only far from being any challenge to capitalism; it supports Britain’s privileged position within the world system of power from which the working class had benefited. Brexit has risen in popularity because the domestic working class has faced the problem that British capitalists have benefited greatly from their increased links to the world economy, including an influx of cheap workers, less so from the more ‘home grown’ operations, so British workers have felt neglected. That is why Wetherspoons, a UK and Irish pub chain, very dependent upon local business links, is one of the few large UK companies to be pro-Brexit.

From the perspective of the British working class, the call for Brexit is a call upon the British state to keep to its previous compact with the workers for what can be presented as a fair, national deal. (Incidentally, the British left has the same approach to economic and political problems) Widespread complaints such as this may work to some extent, shifting the balance of the government’s policy tactics. For example, the collapse of Tata Steel Europe’s UK operations in the lead up to this troublesome EU referendum led to some government measures to delay the inevitable. However, the game is up. Whether Britain leaves the EU or not, capitalist companies will not turn their back on the world market and the relevant calculations. Neither will the UK government pretend in its policies that there is no capitalist crisis to deal with.

Above all, the British working class cannot explain to itself why the British ruling class has broken its previous agreement to deliver national welfare, and why it has turned its back on its natural supporters in favour of seeking better profits in international market dealings. That is why its anger is real and solid, although its political economy remains crap because it cannot understand why what used to work before does not work now. Simply belonging to a rich, imperialist country does not mean that you necessarily get a decent share of the rich pickings.

Awkward Moments for UK Policy

Now take a step back and ask yourself why the Conservative Party, the unabashed defender of big capital and the super-rich, has got itself into this mess, which now witnesses senior ministers attacking the Prime Minister’s stance for ‘Remain’. The simplistic view is that there were Conservative Party divisions that had to be resolved by Cameron calling a vote on EU membership, or that Conservative votes were being threatened by the rise of UKIP. But, while true, this story hides a more telling, political problem suggested by what has already been explained.

If a political party is openly ruthless in enforcing capitalist market discipline on everyone, unfortunately for the ruling class that is no way to win the necessary popular support to get elected. Instead, a broad base of loyalists has to be built, one of the annoying features of universal suffrage. The need to have a broad base of support is the reason we still find many ‘one nation’ Tories, why successive Conservative governments did not reverse the post-1945 welfare state reforms and why Prime Minister Cameron still claims to defend the National Health Service. But this creates political difficulties when popular opinion in the UK turns against what is evidently the best policy for British imperialism, ie staying in the EU.

US President Obama, a wide range of other US and European politicians, together with the IMF, OECD, etc, etc, have declared that they favour the status quo, as do the majority of British corporations and the leaderships of the main UK political parties. The logic here is that the existing pattern of world power relationships would be upset, unpredictably and possibly dangerously, if any major country tried to strike out on its own.

At risk is the EU itself, which could well see other countries heading for the exit, undermining an economic and political project that has been decades in the making. Neither is this a good environment for other agencies of imperial rule that have been in place since the late 1940s, the UN and NATO. These could be faced with new questions on who is a key member and why, or who has voting rights on the UN Security Council.

A Referendum Dispute Between Loyalism and Imperialism

At first sight, a vote for Brexit might look to be the more progressive option, because it would help undermine the established structures of power in the world. Many UK voters disagree, noting that it would also give credence to a set of policies that would be driven by reactionary pundits and politicians. The problem with these views is that they do not understand how the debate is between a pro-imperialist populace and British imperialism. That is why the debate lacks any content and there are few substantial differences between the respective positions.

The ‘Leave’ side is not against developments in world capitalism. The bulk of its votes will come from a working class that has sided with imperialism and would like the British state to return the favour, backing up its privileges against others in the world economy, as in the good old days. The ‘Remain’ side too argues for no change to world capitalism, and will attract those who fear an upset to their current economic circumstances. The former expresses complaints against the status quo, wanting an exit in which they think changes could be implemented within the imperial system; the latter thinks the status quo is acceptable, although it might be amended somewhat within the imperial system.

How can complaints about capitalist market discipline be resolved in a crisis-ridden world economy, if the complainers want to keep the system that enforces that discipline, and especially the imperial privileges that accrue to one of the leading powers? If the complainers understood this problem, then progressive politics would be in with a chance. However, that is not the case in the UK, or in a number of other rich countries where the working class is loyal to its powerful state. Instead, the political logic is for pro-imperialist policies to win the day.

If you want to oppose the depredations of capitalism and imperialism, then please do so, but this is not what the Brexit debate is about. Above all, remember the classic revolutionary phrase: ‘the enemy is at home’.

Tony Norfield, 16 June 2016

---

[1] To emphasise this point, note that Sir William Beveridge, the main early planner of the UK welfare state – not the UK unions or the Labour Party, or pressure from them – was a collaborator of Churchill’s and supported by him, even though Churchill had doubts on committing to spending when it was not clear it could be afforded. The most that could be said for the 1945-51 Labour Government is that it implemented a more generous welfare system than had been envisaged by Beveridge, although that was paid for by loans from the US and by exploiting the colonies! A transcript of Churchill’s BBC broadcast in March 1943 is available at http://www.ibiblio.org/pha/policy/1943/1943-03-21a.html.

[2] For example this article.

[3] I will not cover this point further here, but for further information I recommend a book on the history of the Labour Party by Edmund Dell, A Strange, Eventful History: Democratic Socialism in Britain, HarperCollins, London: 2000. A Labour right-winger, Dell also spells out, in ways one rarely finds from the left, the consistently pro-imperialist and state-‘socialist’ nature of the British Labour Party, something that was consistent with the political outlook of their electoral constituency.

Cocytus Brexit

Apologies, this is very derivative. However, it highlights the moribund nature of UK politics.

A cartoon by Steve Bell in The Guardian makes an amusing point about the opposing sides in the UK Brexit debate. The cartoon, based on an image by Gustave Doré, depicts the ever more corpulent and bombastic Boris Johnson, ex-Mayor of London and now Conservative member of parliament for Uxbridge and South Ruislip on the 'Leave' side, together with David Cameron, UK prime Minister and leader of the Conservative party fronting the 'Stay' campaign. The principal claim to fame of the latter is that he can talk to the Queen in her own accent. Unless you are brought up correctly, you just carnt say 'house' proper, like.

Cocytus is the name of Doré's image, and Wikipedia notes that Cocytus, or Kokytos, means "the river of wailing" or "lamentation" in the underworld of Greek mythology. Cocytus flows into the river Acheron, across which is the mythological abode of the dead.

Many may nevertheless survive the Brexit debate and the UK vote on 23 June, rather than perish. The debate will open up a panoply of misconceptions that offers sustenance to purveyors of all kinds of degenerate imperial nonsense.

Tony Norfield, 18 May 2016

The Brexit Vote

The confusion of the left on the question of the European Union was shown by an event at my alma mater, the School of Oriental and African Studies, London University, on 16 February. It also revealed a more general absence of critical faculties among many of those who do not like the way the world works today. Tariq Ali was promoting his latest book, The Extreme centre: A Warning. He made the standard complaints about the lack of any political alternative to ‘neoliberal’ politics in most major countries, and he also tied this theme into the question of the vote on Britain’s membership of the EU (now set to be on 23 June 2016). I have not read his book, but based upon what he said in his presentation, I would make the following comments, ones that also set out how to understand the forthcoming UK vote on EU membership.

Firstly, as an old hand at these events, it was surprising that Tariq Ali did not reflect upon the lack of any widespread opposition to what he calls the ‘neoliberal extreme centre’. He did hope that the rise of Jeremy Corbyn to the lofty pinnacle of the British Labour Party leadership showed that the Labour Party was not actually dead, and he also cast a positive gloss on the popularity of the Scottish National Party as a sign of some popular opposition. My problem with this searching in the dustbin for a gem is that it does not understand that much UK public opinion is welfare-nationalist at best – ‘save our NHS’ – or that any materialist analysis would have to draw the conclusion that this opinion is because the mass of people see that this is where their immediate economic interests lie. A prime piece of evidence for my perspective is that half the British public voted for the Conservatives or UKIP in the 2015 general election, while the Labour Party had ‘controls on immigration’ as one of the policy demands carved into the infamous stone monolith of Ed Miliband, the former Labour leader. Instead, Tariq Ali gave credence to the implausible notion that the British media are responsible for right wing opinions.

Secondly, Tariq Ali made a telling point, almost as a confession. He had formerly been in favour of Britain’s membership of the EU, but now he had grave doubts. There seemed to be two connected reasons: what ‘EU policy’ had done to Greece, Spain and other countries was unacceptable, and the EU-driven policy was a machine for implementing the wider policies of financial capital, not those of the mass of people. Just consider what this position amounts to. It identifies a policy driven by the EU as the problem, not recognising that it results from capitalists in each country trying to restore their viability in the global market, still more that it is one that the richer countries are imposing on the poorer in order to get some of their money – bank loans, etc – back. So, it becomes a policy decision that progressive forces could change, not one that is inevitable unless the market logic of capitalism is overturned. It is not a question of ‘the EU’ demanding nasty policies; these are the consequence of the crisis that these economies face. The ECB, EU Commission, etc, are the messengers, and the message is that your economies are uncompetitive in the world market!

Thirdly, the political confusion of Tariq Ali, and many others, on the question of the EU is based on accepting the alternatives such a vote gives the electorate. There will be a ‘Yes’ or ‘No’ answer to leaving/staying in the European Union. But the terms of the debate are already set. Each side is based on what is best for Britain: whether to stay in a ‘reformed’ (on capitalist terms) EU, although the changes are minimal, and so keep the UK’s global bargaining power, or whether the UK should strike out on its own into what might be a more enticing, faster growing, wider world. The debate only reflects an anxiety of the British ruling class since at least 1945: what to do about a Europe in which the UK could only realistically play a manipulative, tactical role, when it is a minor country with much wider global interests. I have covered these issues previously on this blog (see, for example, here). There is no basis upon which the Stay or Leave vote could be construed as being in favour of something else, anti-capitalist, given the lack of any progressive alternative in the UK. For this reason, I will not be voting Yes/No on which is the best way to save British capitalism.[1]

Tariq Ali’s confusion also goes further. In the SOAS meeting he noted that there was a political problem of many of Europe’s right wing parties – for example, the Front National in France – being in favour of welfare spending. ‘And so are we!’ Well, the unacknowledged problem comes down to the fact that western welfare spending is based upon the privileges that rich countries have in the world, something that his kind of analysis is reluctant to recognise. The attack on welfare spending today results from the chronic stagnation of most economies, ones that are just about buoyed up by huge levels of debt, but which debt also calls time on the previous status quo. Rather than recognise this, Tariq Ali bemoaned the attacks on the welfare state and the ‘breach of the consensus’ that had previously been achieved. So much for the analysis of an anti-capitalist who sees unfavourable policies as a result of decisions that could be changed within capitalism. I heard nothing from him to suggest that what he called ‘neoliberal’ policies could not be changed by a more enlightened policy under capitalism.

The rich country welfare system represents part of a deal/consensus that is now being broken by many governments. Policies that are called ‘austerity’ have not been implemented much in the richer countries, though they will be in the next couple of years. However, the political reaction, especially in northern Europe, is often to bolster reactionary nationalists that want to restore the status quo ante against the ‘hordes’ of migrants and other unwelcome drains on the national wealth and welfare that rightfully ‘belongs’ to the ‘legitimate’ recipients. This is the basis of a reactionary trend in European politics today. While this is exacerbated by the flows of migrants into Europe from the destruction of the Middle East and North Africa, such events only harden the views of those in Europe (and the US) whose states have done so much to cause the damage. It is heartening to see the humanity of many people in Europe helping refugees, especially in Germany. But the problem remains that the overwhelming majority of the population in European countries takes a different view of the world and their economic interests in it.

Tony Norfield, 20 February 2016

---

[1] For the record, I will probably turn up and scribble something on the ballot paper. Pointless, but amusing for me, at least.

The Dogs of War: Syria and the Middle East

International crises can have the effect of making clearer what is going on in the world. At least, that is a potential benefit, although it is one not likely to be used by those who would prefer not to see. Today, the UK political position has become clear with a large majority of 397 versus 223 members of the British Parliament being in favour of bombing Syria. This article looks at the background to why the British government is aiming to get more involved.

The most important reason behind UK Prime Minister David Cameron’s campaign to bomb Syria is that he does not want the UK to be left out of the running when a new carve up of the region occurs. That means bombs, and bombs mean prizes![1] Cameron’s rationale is that this is an attack on IS/ISIS/ISIL/Daesh to ‘protect the UK’, because the UK cannot allow its ‘defence’ to be left up to ‘other countries’. Further, Cameron raises the rhetorical question of what will the UK’s other allies think of the UK if it cannot come to the aid of its ally, France, when France has asked for assistance. For example, what about Britain’s allies in the Gulf, including Saudi Arabia, on which many commercial and financial deals depend? The key issue for the British state is that game changing political moves in the Middle East involving Syria and Iraq should not take place without Britain properly being in the game. All those networking opportunities and deals that could be done – but only if you are recognised as a player.

This underlying rationale is cloaked in implausible arguments about defending national security against IS, ignoring, as usual, that the UK has on innumerable occasions trampled on the security of others around the world. Just to mention the Middle East, how about recalling when the Royal Air Force bombed Iraqis in the early 1920s, both to repress revolts and to encourage them to pay their taxes, let alone the bombing of Iraq and Libya in more recent years?

A big problem for all the major powers is that the ‘country’ boundaries that they had drawn, especially in the Middle East, but also in Africa and elsewhere, have no legitimacy. All countries or nations are political inventions that depend for their stability on some form of political agreement, or acquiescence, among the population that exists within its boundaries. This ‘national’ set up can be quite fragile, even in what might look like established states, such as Belgium, Spain and Italy. Most strikingly, even the three-century old political deal between England and Scotland was questioned by Scotland’s independence referendum. How much more fragile are the lines in the sand drawn by external powers in the oppressed countries of the Middle East less than a century ago. Even more damaging was the way in which colonial powers often established reactionary regimes that had little popular support and depended upon the colonist’s military force – a specialisation of the Brits. This often underpinned a repressive society, one that was both defended by the ‘democratic’ imperialist powers and one that liberal critics from these powers would criticise as being backward and reactionary, while ignoring their own country’s role in the proceedings. All this prevented a legitimate political power developing within the ‘national’ borders.

The focus of most attention in the news media these days is on IS. Something this group of brutal, militant jihadis would not want to recognise is that western powers have given backing to Sunni-based regimes in a number of countries, particularly those in which much of the population is not Sunni. Neither would it want to recognise that the key opposition to western rule in these countries has been from secular nationalists – ones whom they have often opposed on religious grounds, while being in the pay of the major powers! However, the main problem IS causes for the major powers today is that it does not accept the national barrier between Syria and Iraq. Some historical examples show that they have a point. The existing national lines are not, as one might say, ‘God given’.

Before 1918, much of what we now call the Middle East was part of the Ottoman Empire, run by Turkey. It was mainly organised on a regional level, with the main objective being to have a local administration that would pay duties and taxes into the centre, Istanbul. These regions were often multi-ethnic and multi-religious. The largely Sunni Moslem ruling centre had no significant prejudice or discrimination against Christians, Jews or other versions of Islam, as long as they paid their taxes and did not cause trouble for the Empire.

After the First World War in 1918, and even before it ended, the UK and France planned to carve up between themselves Turkey’s colonies in the Middle East. A key deal between the two countries, subsequently modified in favour of the British, was the infamous Sykes-Picot Agreement in 1916. This was the deal over which Lawrence ‘of Arabia’, the British intelligence officer fighting with the Arabs against the Turks, had his pangs of conscience about betraying Arab nationalists. Not worrying too much about this problem, however, was the British Prime Minister of the time, the Liberal Herbert Asquith. He said ‘if … we were to leave the other nations to scramble for Turkey [ie its wider empire] without taking anything for ourselves, we should not be doing our duty’.[2]

In this context, the UK took over and invented the modern boundaries of Iraq in the early 1920s, out of an area that, more or less, had been called Mesopotamia by classical scholars. By 1926, Britain had edged out France and added the Mosul region (now called the Nineveh Province) to the new Iraq, which was under its domination, after large potential oil resources were discovered there. Britain had far less interest in Syria. It had already manoeuvred to get the Palestine Mandate from the League of Nations, so having access to Eastern Mediterranean coastal ports and a means to protect the hinterland to the Suez Canal. Basically, the British left the Syrian region to French imperialism, which also allowed France’s division of Syrian and Lebanese territory. Arab nationalism’s plans post-1918 for a ‘Greater Syria’, incorporating most of the previous areas, were then stymied. As part of the new arrangements, in 1921 Britain made Faisal, a capable but trusted collaborator, the King of Iraq, as long as he dropped his previous claims to rule Syria. Britain had a dominant role in Iraq for decades afterwards.

The UK also invented the country now called Jordan in the early 1920s. Initially called ‘Transjordania’, it was made up from part of the area awarded to the British with the League of Nations’ Palestine Mandate. This area was a place in which they could place their Hashemite stooge, Abdullah, the incompetent older brother of Faisal, and keep him out of trouble (especially trouble with Saudi Arabia). Their rationale was mainly to have a military base in a strategic area and with a compliant country ruler, although that meant subsidising him more than they had bargained for.

As is often forgotten these days, there had been several attempts to construct Arab unity in the Middle East region, even after the challenges to the Ottoman Empire during and immediately after World War One. These were often undermined by internal rivalries between different governments, the most recent being the United Arab Republic of Egypt and Syria, in 1958-61.

A big problem in all this also comes for Israel, the least legitimate state of all in the region, one that is based not on imperial line drawing after 1918, but in 1948, and also upon the theft of land beyond these artificial borders. Of course, Zionists like to claim that Palestine is theirs, ‘a land with no people, for a people with no land’. But while Palestine was not previously a ‘nation’, being part of the Ottoman Empire, the racist, absurdly ethnic definition of being a Jew common to the Zionist outlook, something that dates from 19th century European racism, can still less invent its own ‘nation’ in this area, one that its aggression extends to ever wider borders. When boundary lines are being redrawn by IS, or being pushed back by the major powers, can the undisturbed extension (even ‘internally’) of Israel’s borders continue? No wonder the voluble Israeli government has kept relatively quiet on this issue!

The US role in the Middle East is paramount, but clearly not in anything that can be considered to be ‘control’. Russia has been a relatively new element, also militarily involved, with its aim being to support Syria, where it maintains a seaport, and also to prevent itself from being enclosed by the ever-expanding NATO forces surrounding its borders. Problematic for the US, this has undermined the influence of the supposedly overwhelming power of the US military, although the US will attempt to push Russia to agree to its aim of regime change in Syria. France, like Russia, having been attacked by IS, but having lost much influence in Syria, wants to re-establish an interest there, and determinedly bombs Syria to exact revenge. Its efforts nevertheless kill many civilians and Hollande’s firepower only highlights how fragile is his own domestic political support.

As for the UK, the government pretends that there is a pliable 70,000 group of rebels to oust Syria’s Assad. It may even give them almost ‘democratic’ credentials, but the main thing is that they will bend, at least a bit, to British interests. After all, showing British flexibility, British official flags were set at half-mast for the death of that other great leader, Saudi King Abdullah in January 2015, as a sign of the lucrative defence, commercial and financial deals with the right kind of regime.

Jeremy Corbyn, leader of the Labour Party, is in a more tricky position. He has had a consistent view that he is against the UK military bombing of Syria, although he also thinks that it would be OK if the United Nations legitimised such an imperial policy. He considered that the decision to go to war was a ‘most serious, solemn decision’, but then refused to exert any leadership discipline over his MPs’ votes, with no threat of sanction if they disagreed with him. I cannot say I was surprised, since he has found it possible to belong to the pro-imperialist Labour Party for more than three decades. The farce here is that a Labour MP voting for the Conservatives’ austerity measures would have faced party sanctions, whereas, if an MP votes to bomb Syria, that is a matter of conscience.

Tony Norfield, 2 December 2015

(note: some later rephrasing of  text, 6 Jan 2016)

---

[1] I am too polite to mention that Dave’s first foray into military matters, teaming up with French President Sarkozy to encourage US and ‘allied’ intervention in Libya, has not turned out that well.

[2] This and some other details are taken from an informative and well-written work by John Keay, Sowing the Wind: The Seeds of Conflict in the Middle East, John Murray: London, 2003.

Pfizer's Bid for AstraZeneca

A huge US pharmaceuticals company, Pfizer, wants to buy a huge UK pharmaceuticals company, AstraZeneca, for £63bn, possibly more. Is there a side to take in the battle? Or is it more revealing to consider what each company represents?

Consider these points:

- Both companies operate in markets heavily protected by patents that keep the prices of proprietary drugs high.

- Both companies have lucrative deals with public sector purchasers of their drugs, financed by taxation.

- Both market many branded drugs whose effect is little different from generic and much cheaper products (eg Pfizer's Anadin is basically a combination of aspirin and caffeine, but at a price that roughly equals a regular aspirin plus a cup of coffee at Starbucks).

- Both operate in a sector that is infamous for producing research on the efficacy of medicines that is biased by deliberately distorted evidence (see the valuable work by Dr Ben Goldacre, in Bad Pharma and elsewhere).

In the UK, opponents of the Pfizer takeover argue that it buys up other companies rather than investing in new pharmaceuticals research itself, and that it cuts back research operations. In Sweden, home of the Astra part of AstraZeneca, there are opponents of the Pfizer bid too. But they need to take account of AstraZeneca's actions before they press their case.

Zeneca is an offshoot of the former British monopolist, Imperial Chemical Industries, and its takeover of Astra in 1999 also led to a shift of corporate power and decision making to the UK from Sweden. Like Pfizer, AstraZeneca has also been involved in many takeovers of other companies to boost its ownership of pharmaceutical products. It has not been immune from the high cost of research, which, for example, led it to close research facilities, most recently in Loughborough in December 2011 with the loss of 1,200 jobs.

For every jobs-related worry on the European side about the deal, there is an equal concern in the US. However, while understandable, to get a more grounded view as to what is happening one needs to see the bigger picture of the economics of imperialism today.

Take tax. Pfizer admits that a key factor in its bid for AstraZeneca is the tax regime in the UK that it can use to boost its corporate profitability. On the bid being accepted, the formal corporate location will probably be changed to the UK, something that has led British Prime Minster Cameron to be favourable, despite other UK opposition. It is probably only this tax deal that stops Pfizer, like many other corporations, from otherwise using the alternative infamous 'Double Irish' or 'Dutch sandwich' tax tricks to achieve the same result by locating elsewhere.

Corporations, and their owners, always want to avoid tax. But the more significant point is that scientific ingenuity is used under capitalism as a means for private appropriation not social gain, something exacerbated by the power of monopolistic corporations. This would be true even if the corporate executives were not, on the whole, a bunch of useless bastards.

Tony Norfield, 10 May 2014

Cameron's Sharia Bond and British Parasitism

To be the political leader of an imperialist power that has attacked a number of Muslim countries in the past decade, it takes a certain, how can one put it, chutzpah, to say:

"I don't just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world."

Yet that was British Prime Minister Cameron, talking to the World Islamic Economic Forum in London on Tuesday. Part of the plan is for the UK Treasury to launch an 'Islamic bond' worth £200m next year, presented as the first Islamic bond issued outside the Muslim world.

One UK financial lobby group report suggests that 'global Islamic finance assets' - namely those which are 'Sharia compliant' - already amount to some $1.5 trillion and are growing fast. Hence the UK wants some of the action. There are 22 Islamic banks in the UK, more than in all other western countries combined. The UK government has even established an Islamic Finance Task Force, but this one is not weaponised.

The contradiction between Britain's foreign policy and its financial policy is only apparent. Despite the invasions of Afghanistan and Iraq, and the bombing of Libya, not to mention other covert interventions, Britain is not anti-Islam or anti-Muslim. It just wants to see its interests protected. It has no problem backing jihadist rebels if they will serve that policy, as in Syria, just as it supported the Moslem Brotherhood against the nationalist threat from Nasser in Egypt from the late 1950s. Today British imperialism steadfastly supports Sunni elites throughout the Middle East, and most of the families were put in place by British policy. Further afield, in Brunei, 1000 British army Gurkhas are also paid for by the Sultan to back his 'security' - and the interests of Royal Dutch Shell plc. Brunei is not a big place, so if you had some doubts about the wisdom of the autocracy you would think twice about expressing it with these guys coming at you.

However, to return to the financial issues. Cameron's Sharia bond is planned as a sign that the City is 'open for business', to use Bank of England governor Carney's phrase (see below). The size of the planned bond issue is minuscule in terms of state finance, but it will show that the City is willing to do whatever is necessary to attract business from this previously untapped area. It will encourage other financial activity and it will give enterprising specialists in Islam a profitable role as arbiters of what is Sharia-compliant. From the City's perspective, dealing spreads can be important, not just interest rate returns. In any case, it will not be difficult to transform interest remuneration into something that does not look like interest and so be Sharia-compliant. Best of all, Britain's lack of capital controls will make it easy for rich foreign investors to put money in, and take it out, while there will be little fear of political moves against them. Well, perhaps less confidence these days, since Assad's wife no longer shops at Harrods and the Gaddafi family no longer have a residence in Hampstead.

Details of Cameron's bond are to be finalised, but early reports suggest that coupon payments will be based on rentals from government property. Will the rentals come from chemical weapons plants, MoD buildings, GCHQ, MI5/6, US bases in Britain or the leased bases around the world? That can be sorted out later, and the result will no doubt be deemed 'ethical' and compliant.

Two other issues are worthy of note related to imperial finance, but not to Islamic finance. The connection is that these two and the previous discussion all relate to a desperate attempt by the British state to boost the scale of financial dealing, with all the opportunities this offers for skimming off more surplus value from the rest of the world. My previous note (see this blog, 22 October 2013), showed that the balance of payments flows are worsening for the UK so, as one might expect, the focus of British policy now is on how to leverage what the Brits are best at in order to get more revenues in the future. No, not by marketing self-deprecating humour in BBC video exports, but by increasing financial deals to make money from other people's money.

The first is Britain's attempt to build on its already prominent role in the offshore trading of China's currency, the renminbi. It took a while before the People's Bank of China gave the Bank of England the currency swap line it wanted. It was delayed until June this year and was CNY 200bn, embarrassingly less than the CNY 350bn agreed with the European Central Bank in October. This may have been aimed to cast a deliberate shadow over the status of the City of London, although the swap is for sterling versus CNY not for the much larger euro currency. As if to ward off any further problems, the UK Treasury went out of its way to make it easier for Chinese banks to set up in London in October, lifting regulatory hurdles and risking annoyance from the Americans, together with embracing a pan-European visa deal - for Chinese tourists only.

Outside China and Hong Kong, the City already manages some 60% of offshore trading in China's currency, with the US at just 15% and France at 10%. In October, the UK Treasury announced the opening up of direct trading of China's currency with sterling and that it had gained a (small) quota for accessing Chinese equities and bonds. These factors will increase the potential for City dealing, at least until China changes its mind.

The second is the latest policy change from the new Bank of England governor, Mark Carney. The theme of a keynote speech to a Financial Times anniversary event last Friday was that London was 'open for business'. So he introduced policies to boost the volume of financial dealing. He envisaged bank assets in the UK growing from some 4 times GDP at present to more like 9 (!) times by 2050. Then, in a squaring of the circle that was a wonder to behold, he argued this could be done with lower costs for private banks getting central bank aid while at the same time making the overall system more secure.

I am not one to make ad hominem comments, for example noting that he, like Mario Draghi of the European Central Bank, is an alumnus of Goldman Sachs. This is because, despite him being Canadian, and despite him being in the job only since July, last week he showed that he had the best interests of British imperialism at heart. This, together with the Sharia bond and China policies already discussed, is the clearest sign that the British ruling class knows how to adopt and to bring on board whomever and whatever policies look like having some upside in these difficult times.

Tony Norfield, 30 October 2013

Running Out of Rope

It is easy to dismiss the downgrading of the UK’s credit rating by Moody’s as yet another example of an agency stating the blindingly obvious. Indeed, so belated are such judgements that a Bloomberg report notes that bond markets ignore more than half of the agencies’ decisions on sovereign ratings.[1] Moody’s decision is an embarrassment for the UK Chancellor, oleaginous Osborne, as he promised to retain the coveted AAA status. It could also be a soundbite benefit for the opposition, but for the fact that their spokesmen cannot even pronounce the words ‘credit rating’ correctly. However, the significance of the decision is that it shows how the UK is running out of options to manage the crisis and that a more aggressive policy is likely.

Moody’s cited two related problems that result in a third: weak economic growth and high debt levels mean that the UK government is in a much worse position to manage further ‘shocks’.[2] Hence the downgrade. Moody’s assessment is that stagnant growth will hinder the reduction of the UK government debt, which it now expects will reach a level of 96% of GDP in 2016. This figure is high, but it would have been higher still had it not included the Treasury allocating to itself a surplus of some £35bn from the Bank of England’s emergency operations, and if it did not exclude the liabilities from the so-called ‘temporary’ financial interventions after 2007!

These latter items are extraordinary. The £35bn is the accumulated net interest from buying gilts that the Bank of England has gained from the Quantitative Easing programme. It has purchased a huge amount of government debt (£375bn) with monetary financing, got paid interest on the debt by the Treasury and then gave the interest back to the Treasury. This is a form of debt monetisation, one that is moderated only by the Bank of England buying debt in the secondary market and under a specific programme, rather than being open-ended, direct government financing by the central bank. As for the financial interventions to save the banking system, the ultimate scale of the liabilities is unclear, but, taking the cases of Lloyds and RBS, the UK government spent £66bn on their shares in a quasi-takeover. On the latest count it remains under water to the tune of £14bn just on the RBS holdings.

Moody’s analysis focuses on government debt because it is rating the UK government’s credit. However, it is well aware of the extreme levels of debt in the whole UK economy, levels that have also alarmed the Bank of England and underpin the widespread forecasts of stagnation. Some 280 people are declared bankrupt or insolvent every day in the UK, according to Credit Action data, while outstanding personal debt is close to the value of GDP and average debt per UK adult is £29,000, or 117% of average earnings.

The explosion of debt is a function both of the 2007-08 financial sector slump, and of the longer-term dependence of growth on credit expansion. Now the limits have been hit, more or less. This is the most important implication of the credit downgrade decision. Far from Moody’s assessment being an attack on government austerity policy, or endorsing more government spending to rescue the economy, as Labour party commentators like to imply, the agency makes very clear that a further credit downgrade would be in prospect if

“government policies were unable to stabilise and begin to ease the UK's debt burden during the multi-year fiscal consolidation programme. Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation.”

The ratings change will likely have little effect on UK bond yields, at least in the immediate period. It is only a one-notch downgrade from the top rating by one agency, and similar downgrades of the US in 2011 and France in 2012 had no measurable impact – one that would indeed be difficult to measure, given the extraordinary crisis policies followed by all central banks. Furthermore, Moody’s points out that the UK is in a robust position in its debt financing, given its freedom in monetary policy and the relatively long maturity of its outstanding debt. So, the end is not nigh yet.

Neither is any abrupt UK policy change likely to follow from Moody’s downgrade. Instead, the background default policy remains as before: a remorseless squeeze on living standards. In the five years to early 2013, average weekly earnings rose by 9%, but retail prices (RPI measure) rose by 17.2%, resulting in a fall of 7% in real earnings. More of the same is in prospect, with a variety of price hikes in the pipeline and little effective resistance from workers.[3]

However, this squeeze is showing no sign of recreating conditions for renewed economic growth. This is not because austerity curbs demand, as Keynesians like to argue, but because conditions for profitable accumulation remain stubbornly absent. Boosting ‘demand’ through more government spending would only make the debt dynamics worse, yet limits on spending have obviously done little to encourage investment. By the third quarter of 2012, the volume of business investment had recovered somewhat from the trough of 2009, but it remained 8% lower than at the beginning of 2008. At the end of 2012, the GDP measure of output was still more than 3% below its level four years earlier. Official interest rates are the lowest on record, both in the UK and elsewhere, but the rates at which companies can borrow do not make investment attractive. Stagnation persists.

A striking fact is that while there have been many reports of cuts in government spending, and plans for more cuts in future years, the latest data to January 2013 show no reduction in central government spending on social benefits or other expenditure (outside debt interest). Nominal spending has risen roughly in line with inflation.[4] This suggests that the complaints over ‘cuts’ are more about the cuts that are in prospect, while the real austerity is yet to come.

With a desperate economic situation at home, it was no wonder that Prime Minister Cameron recently took the largest ever delegation of companies, more than 100, to India to tout for business. The main items up for sale were British military hardware, and Cameron extolled the virtues of the Eurofighter jet, partly built in Britain, over the decision India looks already to have made, to buy 126 French-made Rafale fighters in a multi-billion dollar deal. Aside from exports, Cameron also represented the interests of British companies that wanted to invest directly in the Indian domestic market, one that looks more promising than Europe in coming years.

Another policy that is ripe for conflict with other struggling powers concerns the exchange rate of sterling. Over recent months the Bank of England has continued to endorse a fall in the value of sterling on the foreign exchanges to ‘rebalance’ the economy. Since mid-December, sterling’s value has slumped by close to 7% versus both the euro and the US dollar. That will do little to boost exports in a world economy where output growth remains weak and where many other countries also toy with devaluation policies. However it is another point of tension, to complement the debates over Europe’s proposed financial transactions tax and other populist initiatives.

Tony Norfield, 23 February 2013

---

[1] Fergal O’Brien, ‘UK Loses Top Aaa Rating From Moody’s as Growth Weakens’, Bloomberg News 22 February 2013.

[2] “Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.” The UK report is on their website: www.moodys.com

[3] Note that the Bank of England’s monetary policy committee is not bothered about ‘above target’ inflation when real earnings are falling and the rate of inflation has not (yet) become too embarrassing. This is especially when they are in no position to raise interest rates to curb inflation, as the old policy stance would have it, because of the still disastrous levels of debt.

[4] Total current central government expenditure rose by 6.3% year-on-year in January 2013, and for the period from April to January, the rise was 3.6%. ONS, Public Sector Finances, January 2013, Table PSF3A.

Cameron, Merkozy & Europe

The latest European summit to ‘save the euro’ did little to achieve that end. Instead it revealed the growing political divisions between the UK and the main driving forces of the European Union, Germany and France. We are witnessing another stage in the rebalancing of relationships between the major powers. This article examines what is happening, drawing on the historical background to give insights into current developments. One insight is that the capitalist crisis is far more likely to bring further political deals than to see the collapse of the euro.

The latest news is a big setback for British policy, since the UK can no longer play the role of an important party with a key vote in European negotiations. The foundations of the British position were already crumbling before this week, since the 17 euro member countries within the 27 strong European Union already have a wide range of institutions making policy in areas over which they have exclusive control.[1] Being outside the euro, but a key member of the remaining 10 countries, Britain hoped to maintain a significant voice in policy decisions affecting all EU members. That prospect is now over. As a columnist on the Financial Times put it, the decision by the euro countries to go outside the legal framework of the EU and to set up the core of a fiscal union in a multilateral treaty will eventually produce a break up of the European Union itself.[2] 

This may not immediately be obvious. After all, the 10 non-euro countries are still clearly outside the euro group. Why should they follow policies designed to save the euro group? The reason is that all, except the UK and Denmark, are obliged to join the euro system when they meet the membership criteria.[3] If they wanted to join in the foreseeable future, they would have to meet the new criteria; even if they did not, they would all feel under pressure to agree to any new policies that would appear to stabilise the euro system, not least because their economies are very closely tied to that system. By Friday 9 December, they all did agree in principle - with the exception of the UK. 

Prime Minister Cameron was opposed to a political deal among the 27 European Union members to change European Treaties unless there was an exception made for the UK on any future rules that might impinge on the British financial sector. One report claimed that Cameron went too far in the way he proposed this demand. He wanted the EU to pass “a protocol imposing decision-making by unanimity on a number of areas of regulation currently decided by majority voting”.[4] This was seen as a bad precedent for future decision-making, and France and Germany refused to allow it: “Our British friends made unacceptable demands,” said President Nicolas Sarkozy. They claimed that their proposals would improve policies on managing government deficits, and found the UK opt-out unacceptable. It is a sign of how important the UK financial sector is to British imperialism that Cameron was prepared to take this stance.[5] 

My understanding is that the suggested (although not yet even proposed) EU-wide Financial Transactions Tax would require unanimous EU voting approval. In this case, Cameron’s position was a diplomatic blunder. He should also have realised that the last thing that France and Germany would have allowed is to exempt financial markets from further policy measures when they are blaming financial markets for all their problems! Raising the issue in this way was an especially stupid move by Cameron at a time when the EU is trying desperately to save the euro. Nevertheless, economics rules politics, and Cameron’s policy stance was inevitable, given British imperialism’s core interests. Even if there were no plans to impose a transactions tax, or he could stop the tax in the UK, he would still fear other measures that might damage the City of London's potential for parasitism.

France and Germany will probably not plan in future for EU Treaty changes to implement policies because these require unanimous agreement among the 27 EU members. But they are beginning a process to make inter-governmental policy decisions within the EU and without the UK. So Britain is not only outside the euro currency group of 17 countries, it also faces diplomatic isolation. The Telegraph notes a wide range of comments to this effect from major news media in Germany and France, together with reports that the two countries will set up a new ‘Euro-Plus’ group of countries. The immediate policy objectives of the new group would include the “need to foster growth through greater competitiveness as well as greater convergence of economic policies … To these aims, a new common legal framework should be established to allowing for faster progress in specific areas such as financial regulation, labour markets, convergence and harmonisation of corporate tax base and creation of a financial transaction tax." [6] Depending on the manner in which any new policies are proposed, it might also turn out that a majority vote would suffice to make it law within the whole of the EU. 

Why the new euro policy, and will it work? 

While these developments break new ground for European politics, the new Franco-German policies will do very little to shore up the euro, which was the whole point of the summit. The proposed fiscal deal does nothing at all to resolve the current euro debt crisis. It could be asked why new fiscal borrowing rules even had to be raised at this point within the whole EU and not just within the euro member group. The reason is partly as suggested above: the fact that eight of the 10 non-EU members are presumed to be willing to join EMU at some stage, so they would need to be willing to get their fiscal policies in order ahead of this. There is also the factor that a Treaty change was necessary to force the new fiscal rules into national law, not just as an informal agreement between members. 

These fiscal rules will not now be implemented via a Treaty change, and it will take a long time for them to be accepted by different countries. Some may even decide that the German proposal for an externally imposed cut off point for fiscal deficits does not make any sense (it doesn’t). However, the proposal does provide a policy fig leaf for the European Central Bank to begin to intervene more aggressively in debt markets to buy – or to encourage euro banks to buy - the bonds of countries hit by the crisis.[7] Reuters has even quoted Sarkozy saying that private banks could borrow from the ECB at 1% and then lend on to their governments! It is unclear how far the ECB would allow this, but if it did then Italian banks would be able to lend to the Italian government at rates much lower than the current market rate (6-7% in Italy’s case). This kind of fix, which would have been seen as outrageous only a few years ago, is now par for the course. Apart from that, Chancellor Merkel probably hopes that the new fiscal plans it will play a role in persuading the Bundestag to agree new euro rescue spending. Here the argument will be that the new strict budget rules will prevent unending bail-outs.

All this might buy time, a currency the ECB cannot print, before yet more plans are laid to try and secure the euro monetary system. Nevertheless, there will still be demands for austerity in most countries. While austerity will undoubtedly make the crisis worse, there is no real scope for further economic stimulus. It is not only that debt levels are already very high; in recent years there has been a steadily diminishing effect on the economy from the accumulation of debt.[8] Now the debt itself has become a key problem, threatening financial collapse. This has nothing to do with the euro; it is a feature of all major capitalist economies, certainly including Britain. Within the euro system, however, Bloomberg reports that governments have to repay (and so get a refinancing of) more than €1.1 trillion of long- and short-term debt in 2012, with about €519 billion of Italian, French and German debt maturing in the first half of the 2012 alone.[9] That sum is more than huge, and is a reason why regaining ‘market confidence’ is a prime policy objective for all euro countries. A dive in the euro’s value on foreign exchanges and a several percent drop in stockmarkets on Monday suggest that ‘confidence’ has not been restored. 

The euro: history of the present 

The institutional design of the euro system is a mess, one that was recognised by many writers before EMU began in 1999. A single currency across such a wide range of countries is bound to need a mechanism for fiscal transfers from a central fund towards which everyone contributes. An effective fiscal transfer mechanism also implies a political union, or some kind of agreement between member countries that will maintain the integrity of the system. In the case of the euro, the creditor northern European countries - especially, but not only, Germany - wanted to avoid this fiscal union, fearing that they would end up paying all the bills. Instead, they set out various rules of good behaviour, trying to limit government deficits and debt for prospective members. This was the origin of the Maastricht criteria, part of the Treaty setting out the terms of monetary union, signed in 1992. Monetary union is clearly a political deal between member countries that agree to a common set of rules and regulations, but the richer countries wanted the potentially big economic benefits without bearing the possible economic cost of a political responsibility to keep the system working. That view may now be changing, though in a far from clear-headed fashion.

It is worth reviewing some key points in the history of developments towards European monetary union to see how important this project is for the major European powers. This will also show why they are not likely to let it fail, despite the heavy costs that the world crisis has now brought them. 

Economic cooperation in Western Europe began with Germany, France, Italy and the Benelux countries attempting to rationalise their coal and steel industries just after the Second World War. Later, their efforts covered broader areas of the economy, including atomic energy, in the 1957 Treaties of Rome that established the European Economic Community. This economic cooperation was always in the context of rivalry between the six countries, but they had enough shared interests to do important and mutually productive deals. A common objective has been in place since the 1960s: to develop an economic bloc that is a counter-weight to the overwhelming power of the US. EEC membership expanded in the 1970s beyond the core six, to include Britain and others, as the first major crises of the post-war period, with the ensuing economic and financial turmoil, encouraged more countries in Europe to join the trading bloc.

In the 1970s, managing the currencies of member countries moved to the top of the European agenda. For most of the post-war period, global currency rates had been fixed against the dollar under the Bretton Woods system, with only isolated cases of a national currency’s dollar value being revised down (UK, France, Spain) or up (Germany, Japan). After 1971, however, strains on the dollar-based system resulting from relative US economic weakness led it to break down completely. As a result, the European trading bloc tried to develop its own system to limit the damage from currency volatility and the Exchange Rate Mechanism was established in 1979. There were many currency crises over the next two decades, not least sterling collapsing out of the system in 1992 after just two years. But every crisis propelled the core European powers further towards the goal of a single currency, a development that was made clear by the Delors report of 1989. Britain did not join in this process, for reasons covered in the next section.

By the start of monetary union in 1999, 11 countries had joined the single euro currency project. This was well beyond the original concept of perhaps only five members (excluding Italy), or six (all the EEC founders), who could meet strict economic criteria. But the promise of a stable and large economic area had become more attractive. This was especially so after the 1997-98 Asian crisis and the Russian debt default had caused more panic in global trade and financial markets. Both the weaker European countries and the stronger ones wanted economic security. Being part of a group of countries trading together with a common currency looked a lot more appealing than being battered every few years by sharp moves in currencies, interest rates and flows of capital.

Germany, given its economic strength, had always found itself favoured in financial crises. This was as much a curse as a blessing, because strong inflows of financial capital pushed up its exchange rate. A too-strong Deutsche mark threatened the exports of German industry, and trouble elsewhere undermined the weaker countries that were Germany’s external markets. These countries, even those in as favourable a position as France, found themselves on the rack when the DM rose in value, having to raise their interest rates and to impose deflationary policies, or else to devalue and suffer financial penalties. So the single currency system of the euro was seen as good for everybody. By 1999 it also seemed that the broader the euro area, the better to maximise the benefits of cross-border trade and investment.

This was the background to the more relaxed German view of wider EMU membership, a membership that expanded further after 1999. While economic differences between richer and poorer members might be large, all member countries were expected to gain from the single currency and the growing economic relationships. Germany was nevertheless concerned that weaker countries might take advantage of the new euro system, leaving it to pick up most of the bill for any sorting problems out. So strict membership criteria were imposed. Countries could only join the euro if their finances met certain criteria on government debt and deficits, and if their economies looked fit enough to survive in a regime where no devaluations were possible to restore lost competitiveness. 

Of course, in practice the rules were bent. In the lead up to the start of EMU in 1999, public sector debt at 60% of GDP was the rate that European economic policy wonks considered to be the maximum compatible with long-term economic stability. But both Belgium and Italy had debt ratios between 110-120% of GDP – somewhat more than a few decimal points adrift. German politicians and central bankers had always expressed doubts about Italy’s financial integrity. Nevertheless, it was an important trading partner. Belgium’s debt level was even more problematic, however it was so closely integrated with the German economy that a top Bundesbanker once quipped to another European official that their EMU membership was guaranteed – Germany would ‘buy’ Belgium if necessary. As long as these countries promised to sort out the government debt issue over time, that was OK. Belgium and Italy could also claim that they were making good progress, and had cut government spending to meet another rule that the annual deficit was below a maximum 3% of GDP.

These exceptions to the rules made it clear that EMU was as much a game of political decision making as a purely economic project. Expanding the scope of the membership group and increasing the euro’s economic weight also looked like a good idea, even if some of the new prospects were on less stable ground. These potential members had far smaller economies than the two large players, Germany and France, who accounted for half of euro area GDP. If things did not go well, no great trouble was expected. Famous last words, of course, but there were rules to monitor, though not to control, or put sanctions on, the economic performance of member states. Even if there were trouble, the Maastricht Treaty establishing the system said that no member state was liable for the debts of any other member state. It did not turn out that way, as the recent history of Ireland, Greece, Portugal, Spain and Italy shows, but it looked like a good idea at the time.

The euro single currency project was thus born out of a coincidence of interests between the major European countries. Starting from a series of economic policy arrangements, it developed into monetary union, spurred on by the financial crises that are endemic to capitalism. However, the economic currency deal at the core of the euro system did its best to avoid even addressing the political question of what should be done if things go wrong. There was an illusion that economic rules would enable the members to avoid explicit political decisions about who was in charge. This led the US once to complain that they didn’t know whom to call when they wanted to contact ‘Europe’, but the development of the crisis has now put a Berlin telephone number at the top of the list. 

Britain and Europe 

The UK has been happy to be a member of the 27-nation European Union, but it has always dealt with the EU principally as an economic grouping centred around the single market. British politicians have never signed up for the more overtly political dimension of the EU that, especially since the 1989 Delors report, had the objective of drawing all members into a monetary union and, by implication, eventually also into a political union.

Britain’s separation from the European project has rested on its own interests as an imperial power. While Europe is clearly a major trading partner and the location of much British overseas investment, Britain also has a wide range of non-European interests. The strong British political link with the US, the so-called ‘special relationship’, is one means of protecting these. Britain has also depended on the US connection for its military policy, and used it to develop and promote its financial sector, one of the key mechanisms Britain has for deriving profits from the global economy.[10] 

These factors have meant that a succession of British governments did not see a strategic advantage in joining the European project beyond getting involved in the more narrow, single market economic dimensions. For Britain, the real decision on EMU membership was whether there would be an advantage in being part of a single currency system dominated by the decisions of other countries, given that it would also lose control of its currency and monetary policy. Consistently, the British judgement has been no.

In 1991, John Major’s government gained an ‘opt out’ from the Maastricht Treaty – an opt out that not only meant that Britain was not obliged to join EMU at some point, but also that it did not have to sign up to the social and employment chapters of Europe-wide legislation, thus giving British capital a freer hand to downgrade employment conditions. The counterpart to this deal was that Major gave Germany’s Chancellor Kohl clearance to recognise Croatia, a German area of interest in the former Yugoslavia. This was one of the factors helping provoke the savage conflict between Serbs and Croats in Yugoslavia as that country broke up. Croatia is now a candidate member of the EU.

Britain’s longstanding strategy for Europe has been to encourage a wider membership of the EU as a means, it hoped, of delaying or preventing the emergence of a more overtly political union over which it would have less influence. But it is not simply ‘perfidious Albion’ that looks after its own interests, as a report of a meeting on 20 January 1990 between UK Prime Minister Thatcher and French President Mitterand shows. The report is from the UK Cabinet Office and it describes the concerns each leader had with an emergent Germany, one on the verge of re-unification in 1990: 

“President Mitterrand said that he shared the Prime Minister’s concerns about the Germans’ so-called mission in central Europe. The Germans seemed determined to use their influence to dominate Czechoslovakia, Poland and Hungary. That left only Rumania and Bulgaria for the rest of us.” 

Where is our share of the loot? It is in such confidential meetings that imperial plans are more openly admitted. At this time it was not colonisation, but a plan to open up a wider range of countries to exploitation within the orbit of the major powers of the EU. 

Britain’s diplomatic isolation from the other EU countries now puts it in less of a position to do deals with and have leverage over other European countries. It was reported today that the US was not happy with Britain’s new position that makes it a less useful ally, and a far less useful European port-of-call than it was before last week. The conclusion one would have to draw is that British politicians’ self-congratulation about not being part of the euro project is going to be replaced with soul searching on the best route out of this crisis. The Brits can no longer depend on much help from other powers if their own financial system hits the rocks again. Prospects on this score do not look too good. Apart from the huge levels of UK debt that are on the UK government’s books, and on the balance sheets of companies and individuals, there are some other items, such as the loss of £26 billion that it has now incurred from its purchase of shares in Royal Bank of Scotland! 

Conclusion: European power plays

So, we have an interesting situation when it comes to sizing up the positions of the major European powers and what they might do next. Germany’s relative economic strength has come through, but it does not have endless amounts of cash, also being threatened with a credit rating downgrade. Neither does it have the experience of France and the UK in political strategy. The latter have bigger mouths, but smaller wallets, so they have limited room for manoeuvre in a crisis. While the UK is diplomatically isolated, at least until the next bout of turmoil, France is in a not much better position. Sarkozy has rejoiced in the term ‘Merkozy’, at least giving him the position of the back half of the pantomime horse. However, one commentator has suggested that even the term ‘Merkely’ might be overstating his real influence. 

France, nevertheless, does appear to have won a key point in the bilateral deal with Germany that is now put forward as EU-26 policy: private bondholders will not be forced to take any losses in future bond rescue plans. This does a great service to French banks that are much more exposed than their German rivals to potentially defaulting countries. The quid pro quo appears to be that France must sign up to the German-inspired fiscal plans, but that is a pain to be borne on another day. 

Alliances between euro members have traditionally been built on either side of the Franco-German pivot. The balance normally falls in favour of Germany, which has the biggest economy and pays the biggest share of the bills. Germany can count on the Netherlands to be onside, the country that has been within its economic and financial sphere for decades. The first president of the European Central Bank, Wim Duisenberg, was formerly in charge of the Nederlandsche bank, and basically took the position because he was close enough to Germany without being German. Austria, Finland, Belgium and Luxembourg – each a creditor nation - make up the other usual supporters of German policy. France, by comparison, has fewer natural allies among the financially stronger euro members, and its previous overtures to the weaker southern members, Italy and Spain, may not offer much bargaining power in a crisis that affects them most. This explains Sarkozy’s more recent close alliance with Merkel. 

The diplomatic dance is far from over yet, but for now the balance of forces looks to be against British imperialism - at least until the next euro crisis. Cameron must be feeling miffed that the alliance with Sarkozy has broken up so soon after the cooperation in attacking Libya. He must also be feeling sidelined by Merkel who declared that “I don't believe David Cameron was ever with us at the table.” [11] While Merkel and Sarkozy have a marriage of convenience, their union looks to be somewhat longer lasting, resting as it does on the joint need to keep the euro show on the road.


Tony Norfield, 12 December 2011

---

[1] These include the European Central Bank, the European Financial Stability Facility, the euro group of finance ministers, etc. However, in the past, decisions that might affect the outer group of 10 countries were normally negotiated at the EU level among the 27 members.

[2] Wolfgang Münchau, ‘The only way to save the eurozone is to destroy the EU’, Financial Times, 9 December 2011.

[3] Sweden has a de facto opt out, not the legal one given to the UK and Denmark. Sweden did not join the exchange rate mechanism, a pre-condition for joining the euro at a later stage. It also voted against introducing the euro in 2003.

[4] See ‘The moment, behind closed doors, that David Cameron lost his EU argument last night, The Economist, 9 December 2011.

[5] The ‘financial transactions tax’, or the so-called Tobin tax, will never be agreed by the UK, nor by the US, given the importance of the financial sector for these powers in particular among the major imperialists. See for background, ‘The Economics of British Imperialism’ on this blog, 22 May 2011.

[6] See ‘EU treaty: Britain now faces a Europe that is becoming hostile’, The Telegraph, 10 December 2011.

[7] So far the ECB has bought a little over €200bn of government bonds in the secondary market, of which around €50bn are Greek bonds.

[8] See ‘Capitalist crisis, Keynesian delusions’, 5 September 2011 on this blog.

[9] See ‘Euro Leaders Agree Budget Rigor, Leave Next Step to ECB’, Bloomberg 9 December 2011.

[10] Britain’s US connections were also a key reason for France, under De Gaulle, to veto Britain’s EEC membership applications in both 1963 and 1967. The UK eventually joined in 1973.

[11] The Guardian, 9 December 2011.