One can always count on a Marxist not to lose his head. We have kept our articles concerning Brexit at a minimum to spare our readers the hysteria currently dominating British political discussion, much of it rather disappointing, even embarrassing, especially as much of the left has completely lost the political plot.
There are still thinkers like Michael Roberts who approach the topic with a cool head and analytically, allowing readers to reach their own informed opinion.
We are exceptionally thankful to Michael, who just two weeks ago gave us permission to cross-post his blog, which up to then had been relegated to our links.
Michael Roberts – Economist in the City of London and prolific blogger
Cross-posted from Michael Roberts Blog
It’s just 100 days to go before the UK officially leaves the European Union and the political shenanigans continue over whether UK Prime Minister Theresa May can get her proposed ‘transition deal’ with the European Union through parliament before 29 March 2019. The May deal is not acceptable to the bulk of her own Conservative party or any other party in parliament. May even struggled to survive an attempt to oust her as leader of the Conservative party, with the majority of her parliamentary members who were not on the government payroll voting her down. She only carried the day because she had the votes of government ministers and because she announced she would stand down as leader before the next election.
But uncertainty remains about whether a transition deal up to December 2020 (while the EU and Britain discuss a permanent trade arrangement) will be agreed or whether the UK will just leave in March without any deal, or whether parliament will call a second referendum to decide whether or not to leave after all.
Much ink and social media have been spilled on the politics of Brexit. For an excellent account of the options before the British people, see this by Laurie MacFarlane. But in this post I want to concentrate on the economic impact of Brexit – as Lenin said ‘’politics is a concentrated expression of economics”, or as former President Clinton put it: “it’s the economy, stupid!”
I have not posted on Brexit for over two years for two reasons. First, Brexit may be a big deal in the British media but it is no more than a side dish in the menu of the world economy and that is where this blog normally aims its focus. And second, I was waiting for some clarity on what deal had been reached with the EU over future relations. But such is the delay on the latter, I have decided I might as well review the economic outcomes now.
When we consider the impact of Brexit, it is clear that already it has had a detrimental effect on the UK capitalist economy. During the referendum campaign in 2016, the combined forces of the then Tory government of Cameron and Osborne, the Liberal Democrat junior coalition partners, the right-wing of the Labour party, the City of London and big business screamed that to ‘vote leave’ would lead to the collapse of the economy and a deep recession. This exaggeration, called Project Fear by the leavers, was only matched by the lies of the anti-immigrant UKIP party and the Tory right who claimed that leaving the EU would lead to extra money for the hard-pressed health service, trade would flourish and there would be prosperity all round.
Neither view was right. The UK economy did not go into a slump and there will be no extra money for the health service from Brexit; instead, the vote to leave in 2016 has been followed by a sharp fall in the much-needed immigration of health service and farm employees and a financial crisis in healthcare.
There may have been no economic recession but the ‘uncertainty’ of the last two years and interminable squabbling has been accompanied by a sharp slowdown in Britain’s economic expansion. I said at the time of the referendum vote that “in the short term, the uncertainty over the terms of any negotiations will mean a big reluctance of British capitalists to invest and for foreign investors to hold British financial assets. The pound sterling has already weakened and it would fall even more with a vote to leave.” So it has proved. Sterling’s value has dropped from $1.70 in 2014 to $1.25 now, more than 20%.
Britain’s trade deficit with the rest of the world has widened to around 6% of GDP; and real GDP growth has slid back from over 2% a year to below 1.5%, with industrial production crawling along at 1%. Whereas the UK economy was doing better than most other G7 top economies in 2015, it is now doing even worse than Italy, while inflation has picked up due to the devaluation of the currency – so much for the argument often presented by Keynesians that having the ability to control the national currency (unlike those in the Eurozone such as Greece) can help restore economic growth and avoid austerity. Depreciation of a currency is not enough or even beneficial.
Indeed, higher inflation and slower economic growth in the last two years have hit the average British household hard. Real wage growth disappeared and has only just returned at a feeble rate.
Above all, from the point of view of British capital, business investment stagnated as companies paused on any investment plans while waiting for clarity on the Brexit deal.
And now with the possibility still of no transition deal with the EU in March, Project Fear has returned. The Bank of England’s economists reckon that if there is a ‘no deal’ Brexit, then the UK economy could shrink 8% in 2019, while interest rates would rise to 5% to protect the pound and guard against rampant inflation, and home prices would fall by up to 30%. This would be a bigger decline that during the Great Recession of 2008-9.
Capital Economics researchers are less pessimistic but still estimate that a ‘disruptive no-deal Brexit’, where the UK and the EU do not co-operate, could knock 3% off Britain’s likely national income by 2020 and possibly “an outright recession”. However, a “managed” no-deal scenario — where the two sides seek to minimise disruption in key areas, for example by agreeing arrangements to enable flights between the UK and mainland Europe — would only involve a pause in economic growth next year and a 1% hit to gross domestic product by 2020. Oxford Economics estimates that in this ‘managed scenario’ the economy would still “flirt with recession” in 2019 and GDP would be 2% lower than its current baseline forecast by 2020.
And even if there is a ‘transition deal’, the next two years are likely to be fraught with ‘uncertainty’ for British capital, while some sort of trade deal with the EU is cobbled together. Indeed, so difficult might that be (even excluding the thorny problem of the so-called backstop for Ireland), that the transition period might have to be extended into 2022!
But let us look further ahead. Assuming the UK leaves the EU in March with a transition deal in place and eventually some long-term trade arrangement is reached with the EU, what are the prospects for 1) British capital and 2) British labour? Well, there have been a host of reports recently that try to measure the impact on the economy. For British industry and service sectors, Europe is the main trading partner. About 57% of UK goods trade is with EU; and 40% of services trade.
Most long-term forecasts by mainstream economic institutes, including the Bank of England and the UK government, reckon that there would be an accumulated loss in real GDP from potential for the UK over the next ten to 15 years of between 4-10% of GDP from leaving the EU. That’s a 3% of GDP loss per person, equivalent to about £1000 per person per year. It all depends on whether any deal keeps the UK in a customs union (with similar tariffs and border regulations) with the EU and what parts of the existing Single Market (freedom of movement of labour and capital and citizens’ rights) are preserved.
But whatever the final deal (or no deal), it does not mean an actual fall in UK GDP over the next ten to 15 years. This cannot be emphasised enough. The UK economy will not be smaller in ten years if it leaves the EU, it will just grow slower than it otherwise would have. The current average growth rate for the UK has been about 2% a year since 2010, which is down from an average 2.6% a year before the Great Recession in 2008. Most mainstream forecasts are predicting a slowing of the growth rate to between 1.3-1.6% a year depending on the nature of the final deal with the EU. Below I show in a graph how that looks relatively. This is hardly a disaster, if still a significant loss.
The problem with the mainstream forecasts is that they ignore the elephant in the room for the UK economy – another global slump or recession. The forecasts are based on ceteris paribus (other things being equal). But they won’t be. Can it be realistic to assume that there will be no major slump in the major capitalist economies over the next ten to 15 years?
A slump as the UK economy experienced in 2008-9 would deliver much more long-lasting damage to national income than even a ‘bad Brexit’ deal. I calculate that the UK economy, like all the other major economies in the Long Depression that has taken place in the last ten years, has experienced a permanent relative loss in GDP – in the UK’s case of over 25%. In other words, the UK economy has had average growth some one-quarter slower since 2008 than it did before. Even if it continued to grow at around 2% over the next ten years with no impact from Brexit, that relative loss from the Great Recession would reach 40% by 2030. That would be four times as much as the worst outcome from Brexit.
An economic slump and the Long Depression are way more damaging to the UK economy than Brexit. Brexit will just be an extra burden for British capital to face. The UK economy already has weak investment and productivity growth compared with the 1990s and with other OECD countries. It is a ‘rentier’ economy that depends too heavily on its financial and business services sector. And services sector trade with the EU is likely to fall 50-65% after Brexit.
Many banks, insurers and asset managers who want to retain access to customers in the EU after 29 March have already redirected hundreds of millions of pounds of investment towards new or expanded hubs in the bloc. Nearly 40 banks from London have applied to the European Central Bank for licences. According to Frankfurt Main Finance, which promotes German ﬁnancial capital, these are set to transfer 750-800 billion euros in assets early in 2019. This is still a trickle, but it could turn into a flood.
From the point of view of labour (‘the many not the few’), the failure of British capitalism and the prospect of yet another slump in the next few years is much more of concern than Brexit as such. Indeed, the EU as a trading destination for UK exports is in relative decline – as it is for other EU economies. The fastest-growing areas for trade are outside the EU, in particular, Asia.
British labour is already taking a pounding. Research by the British Trades Union Congress (TUC) found that the average worker has lost £11,800 in real earnings since 2008. The UK has suﬀered the worst real wage slump among leading economies. Stephen Clarke, senior economic analyst at the Resolution Foundation think tank, put it: “While wages are currently growing at their fastest rate in a decade and employment is at a record high, the sobering big picture is that inﬂation-adjusted pay is still almost £5,000 a year lower than when Lehman Brothers was still around.”
On leaving the EU, what little British labour has gained from EU regulations will be in jeopardy within a country which is already the most deregulated in the OECD. The EU rules include a 48 hour week maximum (which is riddled with exemptions); health and safety regulations; regional and social subsidies; science funding; environmental checks; and of course, above all, free movement of labour. The latter means immigration into the UK from EU countries which has been significant; but it also works the other way; with many Brits working and living in continental Europe.
The number of EU citizens living in member states other than their own has risen from 4.6 million in 1995 to 16 million in 2015. And 22 of the 28 EU Member States participate in the Schengen Agreement, which allows passport-free travel for over 400 million citizens, who make over 4 million trips as tourists in another member state every year. With the UK out of the EU, British travellers will be subject to travel visas and other costs that will be greater than the total money per person saved from contributions to the EU.
Around 3.7% of the total EU workforce – 3 million people – now work in a member state other than their own. The number of students studying in another EU state other than their own has increased from 3,000 in 1988 to 272,000 in 2014. Since 1987, over 3.3 million students and 470,000 teaching staﬀ have taken part in the EU’s Erasmus programme. There are 1.5 million Brits living in other EU countries and two-thirds of the long-term residents (800,000) are working (not retired) – although the UK has the lowest proportion of citizens living in the rest of the EU.
On balance, EU immigrants (indeed all immigrants) have contributed more to the UK economy in taxes (income and VAT), in filling low-paid jobs (hospitals, hotels, restaurants, farming, transport) than they have taken up (in extra cost of schools, public services etc). That’s because most are young (often single) and help pay pension contributions for those Brits who are retired. The Brexit referendum has already brought about a sharp drop in net immigration into the UK from the EU, down 50-100,000 and still falling. That can only add to the loss of national income and tax revenues down the road.
It is an irony that the Brexit referendum was called by the Tories to head off votes going to the anti-immigrant UKIP and so to hold onto power. Because just this week, the Tory government has dropped its election commitment to reduce net immigration to 100,000 a year, as that cannot be achieved, if only because non-EU net immigration will stay much higher, even if all EU immigration were stopped.
The pressure on public services and social resources is not the result of ‘too much immigration’ – on the contrary. It is a result of huge cuts in public spending by the Conservative government and the overall slowdown in economic growth. The answer is to stop cutting taxes for the rich and instead boost public spending, in welfare and investment. The answer to British citizens being undercut for jobs from EU immigrants is to raise wages for all. For example, agricultural workers used to have a Wage Board to ensure minimum wages in rural work. This was abolished by the Conservative government. State pension levels in the UK, relative to average wages, are the lowest in the OECD. This has nothing to do with immigration, but only to do with the weak state of British capital and government policies against labour.
On balance, leaving the EU is a negative for British capital but it is also not good news for British labour, even if the hit is relatively small compared to the hit that working-class households suffer from regular and recurring slumps in capitalist production, especially when followed by a depressionary stagnation, as in the last ten years.
The EU is a ‘capitalist club’ in that it was set up to improve trade and integrate small nations within Europe so that Franco-German capital could lead a new force to compete with the US and Japan (later China). But then the UK is a capitalist state and its policies will still be decided by market forces and big business, in or out of the EU. So whether the UK remains or leaves the EU is not pivotal for working people.
What is pivotal is whether there is a complete change in the control of investment, employment and production. There has been some discussion about whether a left government staying in the EU would be blocked or not by EU rules on state aid in implementing a programme of public ownership and state investment. It is another irony that it was successive UK governments that inspired the EU’s current state aid rules. If such a left programme were blocked, and it’s not clear that it would, that would be a much better reason for leaving the EU to put to the British people than ‘too much immigration’ or ‘EU regulations’, as the Brexiters have presented it. Anyway, a left government that aims to make such pivotal change will be faced with vehement opposition by the forces of capital, whether the UK is in or out of the EU.
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