There is much talk amongst erstwhile Remainers that we must not anticipate, let alone advocate, an early British return to the European Union. Some, whose grasp of history is limp, even compare our situation to that of the Jacobites following the failure of the ’45. Many of us are certainly depressed. We are weighed down in particular by two considerations: the scale of the damage inflicted by Brexit that might be necessary to persuade the electorate to revisit the issue; and the scale of the change in the electorate’s understanding of the European project that would merit approval for such a return by the EU-27.
The business now being lost to the City of London, which seems certain to eventually destroy its status as the principal financial services centre in Europe, will be very difficult, if not impossible, to recover. Were Scotland to secure its independence, that too will be irreversible. And far too many even very committed and outspoken British pro-Europeans appear to expect that we could be re-admitted to the EU essentially on the same terms as we enjoyed prior to our voluntary departure: with opt-outs from monetary union and Schengen, and from the aspiration of “Ever Closer Union”. Such an expectation is utterly misplaced.
Brexit and the euro
All this is merely to state two sides of the same coin: economic difficulties sufficient for a Rejoin movement to succeed would almost certainly entail such damage to sterling as to make joining the euro acceptable. And clearly adopting the single currency would be the prerequisite of, and the precursor to, any recovery of London’s financial services status. But causation can also flow the other way: the Scottish electorate’s present preference for retaining sterling over joining the euro represents one of the principal barriers to Scottish independence.
The euro has in fact been the critical factor in determining Brexit, which was, as is now abundantly apparent, inevitable as long as we remained outside it. So, there is no exaggeration in the assertion, amid all the complexities of our future international strategic and trading relations, and internal political, economic, social and cultural cohesion, that there is a simple truth: the fate of Brexit rests upon the fate of sterling. Just as it was pre-eminently the constraints of the recurring crises of the currency which determined first Macmillan, then Wilson, and finally Heath, to seek to anchor the United Kingdom within the wider European economy in the first place.
The overall context then was the global monetary crisis caused by excessive American borrowing, which precipitated, amid a speculative rush for gold, the end of the Bretton Woods System and the advent of free-floating fiat currencies. The euro was conceived very much as a response to the resulting high levels of inflation in the 70’s and 80’s, with its emphasis on central bank independence, strict limits on fiscal excess and a rejection of devaluation as an acceptable source of economic stimulus. No sooner had it been established, however, than the powerful global deflationary forces unleashed by the collapse of Communism kicked in. Only the centrality of monetary union for the survival and intensification of the economic union of the European Single Market, with all which that entailed, allowed the eurozone to survive intact the cumulative pressures of the consequent comprehensive globalisation of finance and trade.
A new world financial order?
But now those deflationary forces are not just weakening, they are going sharply into reverse. Debt levels have never been higher, driven up by the costs of the pandemic and likely to be further increased by the challenges of climate change, not least a significant rise in inflation for many key products and processes. Moreover, the new green technological revolution that can combat global warming, unlike the last technological revolution of the internet, will be highly capital intensive. Competition for funds will force interest rates up, swamping any central banks’ striving to remain accommodative. The electronic tulips of crypto currencies are revealing the potential for a fresh global monetary crisis even more severe than that of the late 60’s and early 70’s.
We seem set to be entering a real-world experiment: the definitive test of whether, in terms of the capacity to borrow and secure investment, promote trade and employment, in short foster real and sustainable growth, it is better for a country like the UK to retain its own currency or, like France, be in the monetary union. It is a test I am very confident the euro will win, for once again its rigorous architecture will match the times, just as the rigorous architecture of the Deutschmark did, on a smaller scale, in the 70’s and 80’s. The consequences of sterling’s relative failure in such circumstances would almost certainly lead to its substitution by the euro, or de facto dollarization. How swiftly and severely such a test could come is obviously uncertain. But proof it could come sooner than very many now imagine is all around. France already borrows some 0.7% more cheaply than the UK. Britain’s services-dominated economy is structurally significantly more inflation-prone than any of its G7 peers.
The markets will decide
The big British political story of last week was the supposed victory of the Treasury over the Prime Minister in securing a tax rise of ca. £12 billion – a sum that would be entirely erased by additional debt service costs in the event of a 1% rise in sterling interest rates. There was much media comment over how this was an ideological demonstration by Mr Sunak of continuity Thatcherism as a corrective to the new “Red Wall” Conservatism of Mr Johnson. It was nothing of the sort. This government used the excuse of the pandemic to break a manifesto pledge not to raise taxes for one simple reason: they are afraid of the markets.
Brexit has ended the Golden Age of the City of London
Video with financial analyst Graham Bishop and Federal Trust Brendan Donnelly