Theme: Political Economy | Content Type: Blog

Sovereignty, Delusion, and the Economics of Brexit

Mona Ali


Robert Bye

| 11 mins read

Reclaiming national sovereignty has been a mantra of Brexiteers. Yet one of the many ironies of Brexit is that Britain actually enjoys a special status within the EU. In fact, the many exemptions and concessions secured by the UK – from constraints on sovereignty imposed by EU membership – brings to mind Carl Schmitt’s dictim: ‘sovereign is he who decides the exception’. 

Most Brexit calculations, which weigh the costs of exiting the EU against the benefits of EU membership in monetary terms, ignore these intangible and often immeasurable aspects of Britain’s geo-strategic power. 

On sovereignty and autonomy

On more than one occasion, Britain has embroiled the EU in drawn-out renegotiations of the very terms upon which it had agreed to join the supranational federation. In 2016, for instance, David Cameron signed Britain out of the first clause of the Treaty on European Union, where other member countries promise to strive towards a ‘ever closer union’. 

This was not a one-off instance. In 1975, just two years after its accession to the European Economic Community, the UK opted out of the European Monetary Union. Whilst benefiting from full access to the single market, as a non-euro member of the EU, the UK managed to maintain full monetary autonomy. This proved especially useful in the aftermath of the 2008 economic crisis when, attempting to restore macro-confidence, the Bank of England cut interest rates more quickly and aggressively compared to the European Central Bank. 

Having negotiated its way out of the fiscal constraints imposed by the Treaty of the European Union or ‘Maastricht treaty’ and the Fiscal compact (and earlier from sanctions for violating the Stability and Growth pact), the UK was also not bound to the rigid limits on budget deficits (six percent of GDP) and debt accumulation (60 per cent of GDP) imposed on member countries by the EU.  

Sovereign power not only entails autonomy, it also means having influence. In 1999, the largest proportion of highest-ranking EU positions by nationality were held by Britons. Following an era of German ascendancy, by 2015, the British occupied the second highest number of top Brussels jobs after Germans. And it is the City of London, not Paris nor Frankfurt, that is the EU’s capital in financial and related professional services. The largest clearing house in euro-derivatives isn’t based in the eurozone but in the City, majority-owned by the London Stock Exchange.   

The Transatlantic axis

One of the reasons stated by David Cameron for not signing the European Fiscal Compact of 2012 was that he wanted to protect American banks in London from EU financial regulation. Cameron’s position was rooted in a longstanding transatlantic alliance dating back to Bretton Woods. Postwar, the British and American financial establishment jointly carved out the City as an offshore financial center. Ironically, the Eurodollar markets located in London were an escape route for finance capital from the regulatory constraints of Bretton Woods.  

Today New York and London jointly constitute the twin apices of global finance. The City’s evolution from the European beach-head initially for American finance (looking to escape the ring-fences of New Deal banking regulation) was followed by Japanese, German, Middle Eastern, and Asian investment. At present, pivoting both east and west, the UK runs an equivalent bilateral surplus against both the EU and the US in financial services exports.  

London’s looser regulatory environment, which gave the City a competitive advantage, helped drive financial deregulation across the Atlantic. Deregulation coupled with innovation contributed to the exponential growth in high-risk investment banking involving complex financial reengineering of mortgage-backed securities. But these markets ultimately proved unprofitable and because of the intertwined chains of asset ownership and financing led to the global financial crisis of 2008. Originating in London and New York banks, the crisis soon morphed into Europe’s biggest financial debacle.  

The European banking crisis (misleadingly understood as a sovereign debt crisis) revealed the flawed logic of the fiscal and monetary unification of economies as disparate as Germany and Greece. Lacking both monetary and fiscal sovereignty, Greece capitulated to the austerity policies imposed on it by the European Central Bank in return for continued external financing and some sovereign debt restructuring.   

An incorrect response to a crisis

The modern response to a macroeconomic crisis, informed by Keynesian thinking, is for the government to increase spending to shore up the economy. Yet a few years into a weak recovery from the crisis, the Conservative government embarked on austerity. From 2009, the UK public sector deficit declined from 10.1 per cent of GDP to less than two per cent in 2017. (In comparison, over the same years, the US government deficit fell from 13.1 per cent to 4.1 per cent of GDP).  

The Maastricht treaty had helped enforce a neoliberal regime throughout the EU. Advocating reductions in government spending in the name of ‘inflation-targeting’ was neoliberalism’s fiscal disciplining of the state in reaction to the global economic crisis. But to embrace austerity in the aftermath of the 2008 crisis when the North Atlantic was facing a deflationary bias rather than inflation was unjustifiable even in theory.  

More than a decade of anti-government and anti-poor policies which include highly regressive tax reform (in the guise of ‘Compassionate’ Conservativism) have contributed to the mostly preventable tragedy in which a quarter of Britain’s population (almost one out of every two children) currently lives in poverty. Brexit’s negative impact on economic growth will only worsen this scenario. 

Austerity was unnecessary. Britain had already secured opt-outs from the rigid fiscal constraints of Maastricht. And the fact is we live in a deeply hierarchical global economy where sovereign nations wielding financial power have softer budget constraints. The UK clearly lacks the financing capacity of the US which issues the world’s most powerful currency. But because of the City’s centrality in global finance - which attracts foreign investment funds ashore (about six percent of GDP in 2016) –Britain’s government can afford to spend a good deal more than it currently does. The very low interest rates on treasury securities and gilts attest to the fiscal capacity of both countries.  

The ‘Global Britain’ delusion

For the governments of rich countries, sustainable deficit spending (‘deficits without tears’ to quote the 20th century French economist Jacques Rueff) is a mark of sovereign power and privilege. The point, of course, is to borrow for public investment in infrastructure and social spending which has a favorable impact on economic growth. By doing just the opposite from  2010 onwards, the Conservative government increased precarity, which advanced populism, a factor driving the Leave vote. 

Post-referendum, the farce continues in a desperate attempt by May to repivot Britain’s power politics away from Europe towards a ‘Global Britain’. According to a report of the Foreign Affairs Committee of the House of Commons, ‘Global Britain’ has been a defining purpose of the Foreign and Commonwealth Office since 2016. While nostalgia for the empire may hold affective power in certain quarters, it doesn’t automatically make for political and economic strategy. The same Foreign Affairs Committee report mentions “confusion over the meaning of Global Britain”and calls on May’s government to define the term, as well as the Global Britain Strategy, properly.   

Long-time proponents of ‘Global Britain’, the conservative transatlantic think-tanks such as the Institute for Economic Affairs or the Cato Institute, have argued for free trade agreements between the US and the UK based on their natural affinities and shared tradition of ‘rule of law’ and ‘free trade’. But the geographical proximity and lack of trade barriers between the UK and Europe have meant that the Britain’s trade with Europe is four times greater compared to its trade with the US.  

Of course, the term ‘free trade’ is misleading as free trade agreements actually involve lengthy negotiations to ease cross-border trade through legislation and regulatory harmonization. The EU (and hence the UK) has close to 80 free trade agreements with the rest of the world. Leaving the EU will mean that Britain will have to negotiate new free trade agreements without the weight of Europe behind it. 

How likely is that the UK’s newly opened Department of International Trade will be able to secure advantages in trade talks with the 200-strong marathon negotiators that make up the US Trade Representative (USTR)? For the US, trade with Britain minus Europe is a much less attractive proposition and the USTR is notorious for playing hardball. To think otherwise – as with Theresa May expecting the EU to be open to renegotiating Brexit at the eleventh hour – is the politics of the delusional.  

Resurgent nationalism has been a shared response to neoliberal globalization on both sides of the Atlantic. But protectionist policies (be they Trump’s ‘America First’ trade sanctions or Brexit) alone will not alleviate domestic precarity. Claims by Brexiteers that the benefits of the UK pursuing independent trade policy will compensate for the City’s loss of financial dominance within Europe will likely prove illusionary. The world economy and its governance is shaped by globalised networks of powerful corporations, states, and supranational agencies. Arguments that sovereign power is best advanced by states forging their independent economic and political futures based on self-interest alone is anachronistic if wishful thinking.

One of the contradictions of our contemporary interregnum is that while ‘the economy’ has been transformed from a nation-based nexus of government, firms, and markets to transnational economic and political networks, social provisioning is still relegated to the nation-state. Until this fundamental tension is resolved—and hopefully not in a dystopic fashion—the disorder will continue.

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    Mona Ali

    Mona Ali, an associate professor of economics at the State University of New York at New Paltz, is writing a book on Anglo-America and the International Economic Disorder.

    Articles by Mona Ali