Finance, Power & Brexit

Here is an interview I did recently with Esteban Mercatante for the Argentine-based Spanish language journal Ideas de Izquierda and which I believe will also be published in the near future at leftvoice.org. His questions centred on my book, The City. My answers give some background to the analysis and comments on recent developments, including Brexit.

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Q1       You show in your book that the City of London is the pre-eminent international financial centre for the world economy, despite the fact that the UK's own currency, sterling, is not so important on a global scale as it used to be before WWII. What are the main global transformations in the flows of capital that London could take advantage of to maintain its international status? And in what way has it been favored by geopolitical processes?

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A1       The financial business of the City of London was damaged by WWII and the disruption to international trading and investment in the immediate years afterwards, in addition to the weaker economic position of the UK. However, the City had many established international links, arguably more than New York, despite the very powerful position of the US in the world economy. These links evolved in the 1950s to use the US dollar rather than sterling as a financing mechanism, and this was helped by the restrictions the US government placed on the domestic US financial system at the time.

Big corporations demanded access to funds on a scale that was not easily available in the domestic banking markets, and by the end of the 1950s a ‘eurodollar’ market had evolved to supply this new form of credit. It was mainly located in London, but it could draw upon US dollar funds from around the world. A ‘eurobond’ market was also established in the early 1960s. Both types of euromarket grew very rapidly and the City of London benefited most from this. So the business of the City changed from the pre-war forms of dealing and it also became less directly dependent upon dealing with the British Empire/Commonwealth countries. Britain’s close political links with the US undoubtedly helped this process, limiting the risk that there would be any constraint on US companies and banks dealing in the London euromarkets.

By the early 1970s, the operation of global financial markets was in turmoil, as international imbalances and the changing positions of the major powers were no longer compatible with the previous Bretton Woods exchange rate system. The City of London’s position benefited further from these disruptions and from the later removal of nearly all restrictions on international financial dealing.

Q2       You have elaborated a power index that includes five measures to define the relative status of each country (GDP, FDI, Banks, FX, Military). As expected, US is at the top of the list, followed among others by Germany, China, and Japan. But it is surprising to see Great Britain in second place. To what extent does this index reflect the effective global power of the UK today?

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A2       My Index of Power is a summary measure that brings out significant features of the distribution of power in the world economy. It is a very simple tool based upon publicly available data. While it cannot capture everything, especially the relationships between countries, it throws an interesting light on where each country stands in the global system. I was also a little surprised to see that the UK ended up in second position, and you will have to take my word that the index was not planned to give this result! The UK’s position reflects the international investment, trade and finance components of the Index, but these are also very important in the world system. I think it is also an endorsement of the value of the Index that the highest ranking countries benefit from other aspects of international power that are not directly measured. For example, the UK is a key political partner of the US and is also a permanent member of the UN Security Council.

Relative positions in the Index of Power have changed over time and will change further, for example with the rise of China. The UK remains in a prominent position now, but its status will be damaged by Brexit. Brexit’s impact is likely show up in at least one of the Index components, that for the volume of international banking conducted from the UK base.

Q3       In your book you criticize the notion of ‘finance capital’ as developed by Hilferding because it misrepresents how the rule of capital is expressed. What are the risks you see in this notion that the banks are in control of the whole national capital as it was assumed in Finance Capital?

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A3       While Hilferding’s Finance Capital was an important work, ironically, it showed a poor understanding of the relationship of finance to the power of capital. It discussed new forms of finance in the capitalist economy, and was far ahead of other Marxist work in this respect. Yet when Hilferding examined aspects of the financial system, especially the role of banks in Germany, he drew the conclusion that these could be taken over – by a progressive government, of course – for the benefit of the mass of people. In this respect, Hilferding’s ideas continue to have resonance today, when we see some leftists call for banks to be nationalised, or for there to be a ‘radical’ national economic policy that would take more control of the credit system and investment.

There are several big problems with these views. First, they all operate in the framework of national capitalism and pay little attention to how the international system works. Second, they assume that controlling banks is the same as controlling finance, when actually the banks play only a limited role. Third, they ignore how the financial system necessarily pervades all capitalist market relationships. The financial system is not something external to ‘good’ capitalist production or a mechanism that could be managed by a progressive government to produce better economic results.

It is true that capitalist policy makes mistakes and there have been many stupidities. However, it is not the job of socialists to offer less stupid capitalist policies. Those who get into this game end up betraying the people they claim to represent and endorsing capitalist solutions.

Q4       You say that Marx’s analysis in Capital described interest-bearing capital as being parasitic, while other aspects related to the financial sector (like money-dealing) are not. However, your argument is that “All forms of financial operation can potentially assist in the transfer of surplus value from one country to another and so contribute to increasing the power of the dominant countries”, and are then a form of parasitism. Which are today the main mechanisms of this parasitism and how do they benefit London and other financial centers of the world?

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A4         My discussion of parasitism in The City showed the different ways in which this term was used by Marx and Lenin and related this to the forms of finance that we have today. I would not see ‘finance’ as being something narrowly defined and to include only banks or other financial institutions. I think that it is best to understand finance as an important aspect of what Marx called the ‘form of value’ and to analyse how it has evolved. To understand the forms of capitalism today, one has to go well beyond the notions of commodity production, buying and selling. For example, many large corporations use their equity as a means of payment when they take over other companies in a ‘share swap’. They do not necessarily use a bank loan or pay in cash, and they may not even use a financial institution to broker the deal.

If a country has an internationally important financial centre, then it can get revenues from dealing with capitalists from all over the world, not just in its national sphere. It can provide all capitalists with short-term or long-term funding, or with a market for their financial securities (bonds, equities). These may often look like specialist financial operations, but they are also closely tied in with the commercial and productive power of big companies, as reflected in trade relationships, investment deals, control of intellectual property and patents, and so forth. 

New York has the world’s biggest bond and equity market, but much of it is US-based. London has the world’s most internationally-linked financial centre. These and other centres generate big revenues for the country concerned – through dealing profits, high paying jobs, government tax revenues, etc. However, it is difficult to pin down where this money originally comes from! A French bank in London might gain commissions from dealing with a German company. But the German company’s transaction might be related to revenues from goods supplied by factories in Asia and sold in North America.

Q5       In March 2019 Brexit is supposed to conclude. But the negotiations with EU are at a deadpoint and May's government is in crisis. What perspective do you see for the process?

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A5        The Brexit process has been a complete mess, and I have been astonished at how stupid the British ruling class has been. It is amazing how the current political establishment does not seem to understand the EU political mechanisms, ones that British advisers had played such a big part in developing over the previous 45 years.

What makes this an unresolvable problem is also what makes it interesting politically, although it can be tedious to follow all the details. Brexit is clearly bad from the point of view of British business and it is also damaging for the UK’s political status. That should have made it avoidable, but the Conservative government made an unusual mistake and put a major decision of foreign policy up for a popular vote in the 2016 referendum. A narrow majority Leave vote resulted. This was made up of many working people who blamed the EU for their economic problems, especially those who were against the immigration of workers from other EU countries. Leave voters also included the more traditional anti-European British nationalists, and some misguided leftists who thought that reactionary popular sentiment could somehow be given a positive, anti-capitalist gloss.

Both major political parties in the UK, the Conservatives and Labour, probably have a majority of Members of Parliament who think Brexit is a mistake. But they cannot easily turn their back on the referendum result and snub the electorate without risking a big drop in support at the next election. It would even be difficult for them to try and organise another referendum to get the result overturned, by arguing that the circumstances have changed since 2016 and there is now a clearer idea of what Brexit will actually entail.

There is a different problem for big business. Despite growing signs of concern now that there will be trouble if the UK’s access to the EU single market is not maintained, companies had been reluctant to get involved in the political debate much earlier. They have now probably left it too late to have much influence. Previously, the British business elites were confident that their interests would be secured by the major parties, and they could keep aside from taking any public positions and just have a quiet word with the relevant minister. That view has now been shattered, but it is not clear what they can do about it.

Britain’s political idiocy is shown by those pro-Brexit UK politicians who imagine a marvellous world outside the EU, one that will more than make up for the losses borne by having less access to the European market. Political leaders in Europe and elsewhere cannot believe they are witnessing this unprecedented act of self-harm from what had previously been considered as the most sophisticated ruling class in the world!

Q6       So far, has the Brexit vote had any impact on the business of the City of London?

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A6      There has been little impact on the City of London so far, but many banks and other financial institutions have made plans for relocating some of their business operations to elsewhere in the EU. I cover this question in the Afterword to the paperback edition of my book, The City. Apart from Brexit, the City’s business has in any case been impacted by a general downturn in European financial dealing over recent years, a result of the broader economic crisis. Brexit will make this worse, especially if British-based banks do not get a ‘passport’ to deal with other banks in the EU. However, the City of London has a range of skills that is not easy to replicate elsewhere, at least not for some years. There are also less visible items, such as the English commercial law that underpins many financial contracts, which make leaving the City of London more complicated than it might at first seem.

In the pre-Brexit years, London had rivals elsewhere in Europe, and some were bigger in certain areas of finance, such as Luxembourg in fund management. But London has been the biggest, or one of the biggest, in a very wide range of operations, from banking, to venture capital funds, to financial derivatives and foreign exchange dealing. If, post-Brexit, London’s position is greatly reduced, then no one centre elsewhere in Europe really stands out as a likely winner to take on London’s former role. Paris and Frankfurt each have some advantages, but so do Dublin and Amsterdam.

Q7       Besides Brexit, what are the most important challenges for the preeminent position of London and how is British imperialism responding to them? In your book you consider Islamic finance and China as the most important avenues of parasitism to pursue. Are there any others worth mentioning?

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A7       There has been little new of significance reported on the City and Islamic finance in the past year, but developments continue. In early September this year, there was an ‘Islamic Finance Week’ held in the City, while in late September the Lord Mayor of London visited Istanbul to boost Turkey’s business links with the City, in particular on Islamic finance. Regarding China, City foreign exchange dealing in the renminbi has grown by some 30% in the year to September and it remains the biggest hub outside Asia, while there are plans to develop links between the London Stock Exchange and Shanghai. I am not aware of anything important outside of these developments.

Q8       In your book you point out that the development of financial assets and derivatives is closely related to what happens in profitability. Ten years after Lehman's bankruptcy, we can observe that global debt is much higher than it was in 2008, and there are several stress factors (rising rates by Fed, the trade war instigated by Trump). What do you consider is the outlook for world economy? May we be heading another global slump?

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A8        Yes, debt levels are higher now than they were in 2008, not just in absolute terms but also as a share of GDP. This is the clearest sign of a continuing structural problem for the global economy that has not been overcome. Whereas 10 years ago the debt was very much concentrated in the major economies, now it is far more widespread, having risen sharply in ‘emerging’ economies too.

While this indicates a vulnerability of the world economy, for the major economies the outcome may be stagnation or slow growth rather than a dramatic slump. The banking system is less over-extended now and there is probably a smaller number of high-risk debtors, so that there is less chance of a wave of defaults causing a credit crunch. Debts in the major countries are more concentrated in the government sector, which means there is less risk of a series of defaults and the related panic, although this means there will be continued pressure to curb government spending.

For the emerging economies, there is far more risk of a serious economic setback, which is already occurring in several. The level of foreign currency-denominated debt can be a high proportion of GDP for some countries, notably Argentina, while the tightening of US monetary policy is both raising interest rate levels and boosting the value of the US dollar versus their domestic currencies. At the end of September, the US Federal Reserve raised the Fed funds rate to 2.00-2.25%, the first time it had been above US consumer price inflation for 10 years, and five-year US Treasury yields had also risen to just under 3% from less than 2% 18 months ago. These are low levels still, but they remain a big problem given the high level of debt.

Tony Norfield, 8 October 2018

Lenin in London #2

I first wrote about Lenin’s stay in London in May. By chance, I have just come across a book published in 2000 that gives some interesting details of Lenin’s visits to London from 1902.[1] My previous article provided the solution to that author’s question about what happened to the bust of Lenin that was originally unveiled in 1942. Here I note some of the points she makes about Lenin’s visits. I am not usually one to dwell on such details, but it is a nice irony of history that the UK, a centre of anti-communism in the 20th century, and still today, was also a minor aid to the success of the Russian Revolution in 1917.

Lenin’s visits to London were more by necessity than choice, with political restrictions on operating in Russia under the Tsar or in some other, closer European countries, such as Germany and Belgium. London housed a number of radical Russian émigrés, but also a small group of UK radicals with a printing press. So Lenin wrote to Harry Quelch of the Social Democratic Federation, asking if he could print Iskra (The Spark, the revolutionary journal) from their offices in Clerkenwell.

In April 1902, Lenin moved to 30 Holford Square in Islington, renting two rooms with his wife Nadezhda Krupskaya. Pamela Shields notes that they breakfasted on bacon and eggs, washed down with beer because the poor water quality was a health risk. Lenin worked on Iskra in the Twentieth Century Press offices at 37a Clerkenwell Green, the building which is now the Marx Memorial Library, and which was not far to walk from Holford Square. He sat at a desk in a tiny office close to Harry Quelch, while Krupskaya was busy at Holford Square, deciphering cryptograms and sending coded messages to agents in Russia.

From April 1902 to May 1903, the Clerkenwell printers were responsible for Iskra numbers 22 to 38. During this period, a certain Lev Bronstein, later known as Leon Trotsky, arrived at Lenin’s home and told him that Iskra, for various reasons, was not getting through to Russia. The decision was taken to smuggle in the four-page Iskra into Russia on thin paper wrapped inside the knee-high boots of supporters!

In 1902-03, with his comrades, Lenin organised meetings of the Russian Social Democratic Labour Party (RSDLP), usually in pub rooms and with them pretending to be trade unionists. One room was also booked in the name of the ‘Foreign Barbers of London Association’, which was just as well since they were speaking Russian. On several occasions, the London Metropolitan Police attempted to eavesdrop or find out what was going on, but they had little luck, not least because their fluency in Russian left much to be desired. Lenin made further visits to London, including in 1907, and the last one, I believe, was in 1911.

The Old Red Lion pub in St John Street, London EC1, today: 

It is not known what Lenin liked to drink in the various London pubs he frequented, including the Crown and Woolpack, which closed some years ago, and the Old Red Lion, both in St John Street EC1. This was before his work on imperialism, so it is possible that he sampled India Pale Ale. However, one suspects that he would have rejected light and bitter as a typical Menshevik compromise.

Tony Norfield, 9 August 2017

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[1] Pamela Shields, Essential Islington, Sutton Publishing. It is not clear that there were as many as six separate visits to London as she claims. Her book is available on Amazon.

Brexit & the City of London

Brexit is a big economic and political mess for British imperialism. It also undermines some of the previous plans to boost the City of London’s operations, especially in deals with China. The City will not collapse. But it will lose business as other European Union countries are already aiming to divide up the soon to-be-deceased member’s estate while the body is still stumbling around.

A large proportion of City financial dealing is with the rest of Europe, although London has been pre-eminent because of its worldwide links – including with offshore financial centres, many of which sing God Save the Queen as their national anthem. These European ties formerly helped underpin the City’s growth, but have since been a factor in decline, even before the Brexit vote in June 2016. So problems for British-based finance due to Brexit now add to those resulting from a drop in European economic strength.

Shift in economic power from Europe to Asia

IMF data show that the European Union’s share of world GDP fell from 25 per cent to 22 per cent from 2011 to 2016, a sharp fall in just five years. This was offset by a higher share for the US, and especially so for China, based on their faster growth. Weak economies, massive debts and bad loans also undermined Europe’s banks and led to a cut in their dealing operations – most of which are in London.

A good example of the impact is seen from the global foreign exchange market, which reflects the cross-border deals in the currencies used for investment in bonds, equities and real estate, and the buying and selling of goods and services. From 2013 to 2016, the size of the foreign exchange market had declined for the first time in more than a decade, based on low world growth and problems in banks. The UK’s share of the foreign exchange market fell from 41 per cent in 2013 to 37 per cent in 2016. Although the City still remained by far the world’s biggest FX dealing centre, and the US in second place had a much lower 19 per cent, the US share rose a bit, helped by the better position of its banks.

By contrast, Asian financial trading centres were the clear winners. Singapore’s share of trading rose from 5.7 per cent to 7.9 per cent from 2013 to 2016. Taken together, China’s and Hong Kong’s rose from 4.8 per cent to 7.8 per cent. Though still a small share, this is an astonishing result for China, one backed by the near-doubling in the use of the renminbi in global FX dealing to 4 per cent. This made the renminbi the eighth largest trading currency in 2016, just behind the far more established Canadian dollar and the Swiss franc. Meanwhile, the euro, now the currency of nineteen countries, saw its share slip to the lowest since its inception.

UK politicians: dumber than you might think

The City had a falling share of a falling market even before Brexit,[1] but now faces the prospect of Brexit. A key problem it faces is how far will UK-based financial companies be able to conduct business with the European Union once the UK leaves. Implausible as it may seem, despite UK governments having promoted the financial sector for more than three decades, there is no sign that the current UK government has given this much attention.

Under the Labour governments from 1997-2010, there was also a clear pro-finance policy. This was seen as one of the few competitive UK ‘industries’, one that also provided lots of tax revenues to fund public spending, from income taxes on the high paying jobs and the various duties imposed. Finance supported millions of jobs related to trading in foreign exchange and all kinds of financial securities and insurance services. It also provided international revenues that covered nearly half of the UK’s record-breaking trade deficit in goods that in 2016 amounted to 7% of GDP. Even non-financial UK business services, from accountancy to information technology, are very closely tied into the financial sector, and offset another chunk of the trade deficit. Basically, without the City’s financial business, UK living standards would be lower.

In more recent years, the UK political class has had trouble maintaining support from a disgruntled electorate. Voters worried about pressure on living standards focused on immigration from the EU, so this has led the two main parties, Conservative and Labour, to accept the referendum vote and reject EU membership. They obviously want free access for all UK business to the EU market, but this is not possible under EU treaties for a non-member, unless, at a minimum, that country also accepts the free movement of labour, ie no restrictions on migration from the EU. UK politicians can grandstand as much as they like, declaring what they want from a deal, but the end result will come from a negotiation

With the UK a member of the EU, City-based financial firms can freely do business across the rest of the EU single market, due to so-called ‘passporting’. This means that banks or other financial institutions in the UK can sell their services in all other EU countries, as these are considered part of the same market. Without the ‘passport’, or something very similar when the UK leaves the EU, that ability will either cease or become much more restricted.

More than 5,000 UK-based firms rely on these passport agreements, and some 8,000 European companies also need them to offer services in the UK. So there may be some compromise. But it is in the interests of the remaining EU-27 countries not to make this a favourable one for the UK, or else the longstanding European Union project would risk being unravelled as others considered the exit too.

How to get a piece of the financial action?

Whatever the wider economic and political issues for the UK and the rest of Europe, the UK’s financial business is an area coveted by some of the major EU players. Already, many UK and international banks and other financial institutions have said that they plan to relocate some business into the EU-27. So far it is only on a small scale, and as a precaution so as not to be left high and dry if there are barriers to their UK-based operations doing business in the EU. If it becomes clear that full access to EU financial markets will be difficult, more will follow.

The likely outcome is a piecemeal lopping off of some parts of City business into several other EU locations rather than into one new rival centre. Frankfurt, home of the European Central Bank, is one of the favoured alternatives, but there is also Dublin, Paris, Amsterdam, Luxembourg and others, depending upon where a financial company might already have some existing business.

Ironically, Frankfurt, the main financial centre for Europe’s largest economy, Germany, is a rather provincial town, not particularly attractive to financiers, and is based in country whose politicians have shown little orientation to finance. They have instead been able to benefit from the prowess of German engineering business and have had other ways of promoting German capitalists on their minds.

I do not think that the Brexit effect by itself is likely to add up to a dramatic reduction in the City’s operations. London has built up a series of reinforcing advantages that are difficult to replicate elsewhere, as shown by the several directions in which alternatives are sought. For now, at least, London has very many more international connections than rival financial centres, plus a broad range of financial services and personnel skills that other centres lack. English is the main business language and English commercial law is the foundation for many financial contracts, for example interest rate swaps, the largest traded financial derivatives contract.

The commercial law issue is more important than one might think. Lawyers based in other countries, or sent from the UK, might be trained in the relevant aspects of English commercial law, but legal judgements are based on court decisions. Being part of the relevant legal network is important. It would also take a long time before contracts are changed into another legal system, and that system may not have the specific aspects necessary that have been developed over decades within the UK legal set up.

Furthermore, most other possible centres have also had governments that have been advocates of a financial transactions tax. This will not help them make a convincing case for expanding their role as a financial business centre. Nevertheless, the incompetence of the present British government could make them question favouring London.

What next for the City?

Despite the impact of Brexit and the recent decline in the growth of financial dealing, it will not be easy to dislodge the City of London from its pre-eminent position. London will almost certainly lose business to other financial centres, but it is costly for banks to move even some operations from London to the rest of Europe, estimated at anything from $30-$50bn.[2]

As these decisions play themselves out, British financial elites are planning to secure for the London Stock Exchange the flotation of Saudi Aramco’s shares. This state-owned Saudi Arabian oil company is the world’s largest and the deal would produce big revenues for the exchange and banks handling it. Around five percent of the company might be on sale, but even this is expected to raise some $100bn.

Only a major stock exchange could handle such a large deal. But although New York is the biggest, and Trump’s pro-Saudi politics are supportive, US financial regulations could be a barrier since the Saudis do not like giving much information. London is more lax on that score and has also changed its rules to help its bid for the deal. Furthermore, there could be US legal claims against the Saudis regarding the 9/11 attacks that would impact Saudi Aramco, and this kind of trouble looks more likely to occur in a US court than any such thing in British courts.

One deal, no matter how big, would not point to sunlit uplands ahead for British finance. But the outcome for Saudi Aramco’s deal will be an interesting signal of how far a Brexit-hobbled City can have a future outside the European club. It would also indicate how far Britain’s status as a key player in world politics has been damaged, since the Saudi decision will certainly have that in mind.

Tony Norfield, 1 August 2017

Notes:

A fuller discussion of City finances in relation to British imperialism, plus Brexit and Trump is available in the paperback edition of my book, The City, available from these sources.

For a brief article on this blog covering the background to the City’s business relating to British imperialism, see here.

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[1] The Bank for International Settlements surveys from which this information is taken are conducted in April of the relevant years, so in 2016 it was before the June Brexit vote. Similarly, the UK’s share of the trade in financial derivatives fell back between 2013 and 2016, based largely upon a drop in the volume of dealing in euros.

[2] See this Bloomberg story: https://www.bloomberg.com/news/articles/2017-07-31/banks-may-be-hit-with-50-billion-capital-needs-after-brexit

Lenin in London

Lenin stayed in London during 1902-03, using the time to write for and edit Iskra, while also studying in the British Museum library, riding around on buses, learning English and trying to avoid proletarian food. An address he stayed at was 30 Holford Square, WC1, in Islington, while he also worked in the office of a socialist publisher in Clerkenwell that is now the Marx Memorial Library at 37a Clerkenwell Green, EC1.*

Holford Square was bombed during the Second World War, and the building in which Lenin once lived no longer survives. What does survive, however, is a commemorative bust of Lenin that in 1942 the Soviet Ambassador to the UK, Ivan Maisky, unveiled in the square, facing number 30. This was a time when Britain’s relations with the Soviet Union had thawed, following Germany’s breaking of the German-Soviet Non-Aggression Pact with Operation Barbarossa in mid-1941. With Russia now an ally in the war, it was time for Britain to be friendly. Nevertheless, the memorial to Lenin was repeatedly vandalised and it had to be moved.

Russian émigré architect, Berthold Lubetkin, was commissioned to build a block of flats on the bomb-damaged site for working class accommodation. It was an ambitious and effective design, although its scope was later limited by lack of sufficient funding. The name for the block was going to be the Lenin Court, but the Cold War had made this impossible by the time it was opened in 1954. Instead it was named to commemorate the pugnacious, pro-imperialist, anti-communist Labour statesman, Ernest Bevin, who had died in 1951.

Here is a link to a Pathe News report on the 1942 Lenin commemoration at Holford Square, with a hilarious upbeat, upper class commentary.

This is the Lenin bust, now held in the Islington Museum, St John Street, EC1:

This is Bevin Court today:

 

Note added 14 January 2021 *: Lenin seems to have stayed in London on five occasions. A good review can be found here.

 

Tony Norfield, 14 May 2017

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

The Scotland Debate

The irony of the British establishment's attempt to keep Scotland within the UK from an economic perspective is that it is also an argument why the 'rest of the UK' should get rid of Scotland as an economic burden on the rest of the UK! Whether they note how population trends in Scotland make pensions less affordable, or the risk of North Sea oil revenues running low, or being volatile, or the fact that public spending per head is 10% higher in Scotland than in the rest of the UK. This might backfire, except that the rest of the UK does not have a vote on getting rid of Scotland.

My guess is that Scotland will vote for keeping the union with the UK they have benefited from. This is not such a brave gambit, given that polls in Scotland still suggest a majority in favour of maintaining the status quo, although there are plenty of 'undecideds'. The brief period when the British establishment went for intimidation and threats to the Scottish nationalists is over. Instead there are promises of more goodies to win over those who are recalcitrant. They will benefit more from extra policy autonomy from the London-based regime and do not have to answer for the local, professional prejudice against outsiders if they stay inside the club. A wild card is the vote of those aged 16-18, whose opinions appear to be less carefully tracked by the regular pollsters, and who may know what they don't like (London rule), but are unsure what might happen at the start of their real lives under a fishy Salmond regime.

When all is said and done, for 'auld lang syne', it comes down to the status of the UK as a world power. Losing 8% of the UK population in Scotland might be a misfortune, as Oscar Wilde might have said, but losing part of an internal market, territory that includes mineral rights, a nuclear base and a ready supply of aggressives for external combat (the internal requirement having long been redundant) will look like carelessness in the eyes of other major powers. This is the basis of the countervailing offer by London.

A Scottish 'Yes' vote (in favour of separation from the UK) can hardly be characterised as a vote against British imperialism, even if it would cause the British ruling class some problems of management. The Scots are part of the privileged imperialist elite, and the demand for 'independence' is essentially a demand for privileges to be improved, not really independence. That is why the 'Yes' campaign wants to keep the Queen, the pound sterling, etc, etc. The 'Better Together' campaign argues that the structure of privileges will be more secure with a 'No' (continued union) vote, because they are backed up by a united, British power. That is the referendum debate, and it is a mistake to try and give the 'Yes' side a progressive veneer, as do some misguided radicals, both in Scotland and without.

Tony Norfield, 16 August 2014

(resubmitted after some amendments)

Fixing LIBOR

Last week Barclays Bank was fined close to $450m (£290m) by three government agencies for manipulating the benchmark level of market interest rates. This is a record fine for such a misdemeanour, although still very small in relation to the bank’s financial resources.[1] The affair has caused a furore in British media politics, adding to the populist anti-bank sentiment that ignores what is really going on. By manipulating the interest rates, Barclays was not ripping off consumers, it was questioning the ‘integrity’ of British-based international financial markets. That is a mortal sin, and that is why Prime Minister David Cameron and Bank of England governor Mervyn King are concerned.

The interest rates at issue were the London interbank offered rate (LIBOR) and the euro interbank offered rate (EURIBOR). The former is far more important, since it covers not only US dollars but also a range of other important international currencies, from UK sterling to the Japanese yen to Swiss francs, and also the euro. LIBOR measures the prevailing level of interest rates to borrow funds of different maturities from banks operating in London; EURIBOR is a comparable rate for euros only, and is set by banks operating throughout the euro area. While this may seem a technicality, it reflects the fact that the London international money market is the biggest in the world, and the location for the largest concentration of international banks. As noted before on this blog, this provides many important advantages for British imperialism, from the provision of cheap funds to a variety of revenues derived from surplus value produced in the global economy.[2]

For the British government, it is bad enough having to fight off the latest euro area plans for Europe-wide banking supervision and regulation, plans which threaten to cramp Britain’s room for manoeuvre and which could even raise barriers to London’s ability to penetrate European financial markets. Having the British-based financial system undermined internally is even worse. ‘Light regulation’ makes London attractive for global finance, but if it looks like the market is dishonest that undermines its status. In this game, the big players can, and do, act like monopolists, using their power to influence market prices. That is part of the game of being in imperialist finance. But they are not allowed to lie about the market prices that have been determined.

Barclays’ crime was therefore against principle. In terms of quantitative impact, the crime was nevertheless trivial. The FSA's report documents what happened, complete with hilarious citations from emails and internal communications that only serve to confirm that most traders are greedy, arrogant, irresponsible juveniles, rather than ‘masters of the universe’. However, it also makes clear that Barclays’ actions of pitching its rate above or below the market could have shifted interest rate settings by, at most, only one or two basis points (one basis point is one-hundredth of a percentage point). This is because the LIBOR setting was made from input from a panel of 16 banks. The official rate setting agency discarded the top four and bottom four rates received by banks, and then averaged the remaining eight.[3]

A couple of basis points higher or lower for the interest rate makes a measurable difference to the absolute level of interest payments on debt securities, on interest rate swaps, or to the net gain/loss on a futures or options position, when the value of these payments is already huge. Even then, for an interest rate level of, say, 5%, two basis points up or down will only change the annual interest paid by 0.4%. It is not a matter of concern for normal human beings, certainly not when compared to other issues in the economy. It is an issue for wholesale financial markets, where data for the first half of 2011 show that the notional amount outstanding of OTC interest rate derivatives contracts was $554 trillion, and that the total value of short term interest rate contracts traded on LIFFE in London in 2011 was 477 trillion euros, including over 241 trillion related to the three month EURIBOR futures contract. But even then, a higher or lower interest rate represents a gain for one party at the expense of another. Not everyone is a loser. In the case of Barclays, the evidence suggests that they were more often in the business of understating interest rate levels, both to benefit their own trading book and to give the impression that they were not finding it as difficult to secure funds as in reality they were. Hence, it is absurd to use this case as an example of banks exploiting mortgage holders. That is innumerate populism, not real analysis.

This case highlights an interesting feature of British critiques of the banking system. UK politicians, banking officials, journalists and media pundits can attack the greed of banks and the damage caused to the economy (usually meaning the national economy) by their actions. Some even think that the financial sector is, perhaps, a little too large, given that UK bank assets are five times UK GDP! But nobody wants to question the role of Britain’s own giant vampire squid in the global economy. People who get worked up about the Barclays interest rate scam are usually those who want imperialism’s financial system to work ‘properly’.

Tony Norfield, 2 July 2012

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[1] The UK Financial Services Authority (FSA) levied the lowest fine of £59.5m, a trivial amount for Barclays. The US regulator, the Commodity Futures Trading Commission (CFTC), levied a fine of $200m, the biggest it has ever issued and the fraud department of the US Justice Department's Criminal Division fined the bank $160m.

[2] See ‘The Economics of British Imperialism’, 22 May 2012. The latest data show the City gained net foreign revenues on financial services of £35bn in 2011.

[3] Even if Barclays’ low (high) quotations were discarded, this would still tend to have the effect of biasing the average for the remainder of the sample down (up). If a number of other banks also gave low (high) rate inputs, then there would be a bigger effect, but overall the banks would usually have offsetting positions and would not all be quoting with the same bias.