Wednesday, 18 January 2017

The case for hard Brexit

For all the talk of Brexit meaning Brexit what has become abundantly clear over the past few months is that most politicians and political commentators haven't got a clue what Brexit means or should mean, and nowhere is this confusion more apparent than in the Labour Party. At the heart of this confusion is the single market. Time and again we hear politicians from both the Leave and Remain camps declaring that while we might leave the EU, we will still need to be part of some aspects of the single market. On this they are all completely wrong to the point of delusion.

The problem is not that they want to cherry-pick which parts of the single market they want to keep, and thereby appear to trying to have their cake and eat it. The problem is that (a) they clearly do not fully understand what "access to the single market" (as they term it) means or entails, and (b) they have still failed to realise that all aspects of the single market, not just the freedom of movement of people, represent an existential threat to the very concepts of nationhood, sovereignty and democracy in the UK and in the rest of Europe. As a result it is not just small parts of the single market architecture that we need to reject, like the free movement of people, it is ALL of it.

Today Theresa May finally seemed to get some of this. Speaking from the same venue, Lancaster House,  where Margaret Thatcher once extolled the virtues of the single market, the current prime minister finally admitted that Brexit is incompatible with single market membership. Of course the big irony in this whole debate is that the single market in its current incarnation is primarily a child of unbridled Thatcherism. It is economic neo-liberalism in its purest form. In which case one would think that the Labour Party should be the party above all others that opposites it tooth and claw while the Tories should be the most vociferous advocates. It's a strange old world. No wonder the public are confused.

As we are forever being told, the single market is constructed around four fundamental freedoms: the freedom of movement of goods, the freedom of movement of labour, the freedom of movement of capital, and the freedom of movement of services. This is my reasoning on why we need to reject all four of them.

The freedom of movement of goods
On the face of it this is the one aspect that everyone agrees that we should keep. After all we are all in favour of free trade aren't we? Well yes, maybe, up to a point (although in a future post I may proffer a more contentious view). But we can protect most free trade using World Trade Organisation (WTO) agreements, and as most global tariff barriers now average less than 2%, any further reductions will have diminishingly small economic gains. Unfortunately this aspect of the single market goes much further than just free trade. It also seeks to create a "level playing field" within the EU by prohibiting any form of state aid and outlawing any government action or policy that could be construed as having distorted the market. Now while this may appeal to the neoliberal free marketeers, it should fill anyone with a social conscience with profound horror.

This freedom, in concert with EU competition law, effective curtails many socially progressive state interventions, ranging from taxation policy (such as minimum pricing of alcohol) to industrial strategy such as support for key industries like steel or nuclear power. If we accept the freedom of movement of goods, then we will be compelled to accept the rest of EU competition law and thereby be prevented from running our own economy in a way that allows us to protect it against external shocks and predatory pricing from outside the EU. If we can't set minimum prices for socially damaging substances like alcohol, then we can't set minimum prices for anything else such as labour. So you can kiss goodbye to the national minimum wage. If we can't support key industries in a recession then you can kiss goodbye to Keynesian economics. In short you can kiss goodbye to any form of economic choice at the ballot box. That is one reason why support for social democratic parties has fallen across Europe. It has fallen because those parties can no longer offer the policies that they once could. Instead they are forced to offer a sanitised version of centre-left neo-liberal economic orthodoxy and so democracy effectively dies.

The freedom of movement of labour
The negative effects of this part of the single market have become obvious. More than any other it has led to mass migration across the continent and widening inequality in all member states. The result has been catastrophic depopulation in the east and high structural unemployment in the west. Yet it didn't need to be this way.

Before most of the eastern former communist states joined the EU they were granted interim status where they were able to trade freely with the EU but had no freedom of movement of people, much as many Brexiteers want for the UK now. The result was that firms inside the EU, including a number of major German car manufacturers, moved some of their production out of the EU and into these states attracted by the lower wages and supply of labour. The jobs moved to where the labour was. Then, when these states gained full membership of the EU it all changed. The jobs stopped moving east and the people were forced to move west instead. Why? Because it was cheaper and more profitable for the corporate sector for people to move to where the jobs were rather than the opposite happening. The result has been one of the greatest economic migrations Europe has seen since the Irish potato famine of the 1840s, and both have been driven by the same laissez-faire liberal economic free-trade ideology.

This highlights one of the key objections to the freedom of movement of labour: it transfers the economic cost of matching jobs to people from the firm to the worker. In effect the costs are socialised and the gains are privatised. There is nothing remotely socially progressive about that. In fact it smacks of moral hazard as was illustrated in extremis by the financial sector pre and post 2007 where the benefits of an unequal system are privatised and the costs socialised. The result for member governments is also potentially calamitous. Their potential liabilities in terms of future welfare and education payments will become unlimited due to immigration while their income could become squeezed by tax avoidance from an increasingly mobile upper-middle class. The result would be either economic insolvency at a national level or a collapse in public services, and before either of these happens we would see a rise in income inequality and unemployment as migrant workers drive down wage rates ever further.

Then there is the effect on tax revenues. Those that support freedom of movement claim it benefits the UK economy, that it leads to increased taxes and that immigrants make fewer demands on public services than the average UK citizen. What they fail to note is that many migrants are temporary and so are exempt from UK tax, and those that stay often send money back to their country of origin. According to the World Bank (pdf) this could be over $11.5bn. This has the double whammy effect of both reducing jobs and GDP per capita in the UK and worsening our current account deficit.

So freedom of movement of labour represents a complete volte-face in terms of economic rationale. It treats workers as little more than a commodity that exists to serve the economic machine rather than treating the economy as a system designed to optimise the happiness of the individual. When coupled with other measures that effectively remove any form of democratic choice for the individual, then it really is the stuff of a some nightmare dystopian future that has so far only really existed in the pages of a few sci-fi novels.

Even more worryingly given that most in the Labour Party appear to support it, it is not even remotely socialist. For a start you cannot have full employment if you have open borders because the faster you create jobs the more migrants will flood in. It is like trying to bail out a rowing boat with a hole in the bottom. And if social democracy is about anything it is about aiming for full employment. On top of that freedom of movement of labour increases inequality. It allows rich countries to strip poor countries of their best talent to the disadvantage of the least well of in both countries. So much for international solidarity.

The freedom of movement of capital
The ability to move capital freely between member states may at first glance seem relatively harmless, but actually it has had a major detrimental impact on the ability of states to balance their budgets. The recent controversy over Apple's tax dealings with Ireland illustrate how multinationals can exploit the freedom of movement of capital to avoid tax. And it is not just Apple. Google's Dutch double-Irish sandwich tax avoidance scheme also plays heavily on this freedom, not to mention that of GSK and many others.

It is of course not just corporate tax avoidance that benefits from the freedom of movement of capital. Tax avoidance by individuals does as well. In my last post I argued for the taxation of UK ex-pats, partly as a way of tackling tax avoidance by the rich. Yet as long as we are in the EU, and more importantly, obliged to respect the freedom of movement of capital such measures will be impossible. In short freedom of movement of capital is at the heart of most tax avoidance, and so as long as we cling to it we will be unable to tackle the scourge of tax avoidance and governments will find it ever harder to raise the taxes they need to fund the services we all want.

And then there is the issue of financial speculation. For years there have been calls for something akin to a Tobin tax to be levied on financial transactions in order to suppress both the size and the volatility of the financial markets in order to improve market stability. Yet such a tax, particularly if imposed on currency trades, would again violate the principle of the freedom of movement of capital.

The freedom of movement of services
Of all the four freedoms this is perhaps the most rarely used, overvalued and misunderstood. The principal argument in favour of it is that because the UK has a large service sector that accounts for up to 80% of its economy, and also because a large part of that is the financial sector that accounts for a large part of our invisible exports, then we desperately need to retain access to the single market in order to protect jobs in London and to generate wealth and taxes. At the heart of this freedom is the concept of the financial passport. This allows any financial institution to operate in any other EU member state once it has been given regulatory approval in another EU state. The problem is that this just doesn't work.

This financial passporting is the system that allowed unregulated Icelandic and Irish banks (among others) to operate within the UK before 2007 and then collapse. It also allowed UK banks to import much of the financial crisis in 2007 from the US and the Eurozone. Do we really want a repeat of that?

The fact is the freedom of movement of financial services is a red herring. After 2007 the City was complaining about excessive future EU regulation. Now it says it needs to be part of the EU. These two positions are contradictory. The reality is it is easy for a UK financial company to open an office inside to EU for regulatory reasons and the cost is negligible. Moreover the financial benefits of exported financial services are puny. Financial services may account for about 13% of the economy, but exported financial services are a mere fraction of that. It really isn't worth the hassle.

What I have shown is that none of the four freedoms of the single market brings any real benefit. The freedom of movement of services exposes our economy to high risk lending and other dubious financial practices. The freedom of movement of capital prevents governments taxing the rich and large corporations, and will ultimately lead to a collapse in national tax receipts. The freedom of movement of people leads to social disintegration and alienation, inequality and unemployment, and will ultimately lead to a collapse of national finances. The freedom of movement of goods leads to a loss of democratic choice and sovereignty.

What I think all this illustrates is how the EU has lost its direction and its soul. The EU could have been a force for social good. It could have protected workers rights while promoting equality across the continent through the redistribution of income and resources such as through a common industrial policy. Instead of exporting jobs to China and importing labour from Poland we should have been exporting jobs to Eastern Europe thereby re-industrialising the continent and not de-industrialising it.  The result would have been an EU that was richer and more equal. Instead it has become consumed by a neoliberal monster that ultimately has had the opposite effect. That monster is the single market.

The EU, and particularly the single market, has become little more than a protection racket. As we are now seeing as we try to leave, the EU not only bullies those countries that have chosen to join, like Greece, it also bullies those outside. The message it is sending out, even to non-members, is play by our rules or we will trash your economy. This is another reason why it must be stopped.