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.

Summary

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.

The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.