Britain’s ‘Brexit’ referendum, with
its daily bombardment of misinformation and blatant lies, is causing confusion
and uncertainty amongst the electorate, along with strange alliances
and rifts amongst political enemies and friends. It also adds to the
many reasons why things are going to get worse.
Of all the economic problems we are faced with today, the only one that might be helped by Britain leaving Europe is the excessive cost of housing in the wealthier regions of England, which, oddly enough, our chancellor, George Osborne, is using as a reason for staying in the EU.
The government seems to think that high house prices are a good thing, even though they make most younger people, who are already struggling to find good jobs, much poorer. As the following chart shows, UK house prices have recently hit new peaks, while the median wage has been falling in real terms.
The chancellor’s desire for high property prices shows a common misunderstanding of the nature of wealth, believing that market valuations and numbers in bank accounts constitute wealth, when in fact the real wealth is in the solid structure of the house, which doesn’t change just because the market price rises or falls.
But as far as the Brexit argument goes, that is a minor issue compared with the likely loss of trade and jobs if Britain leaves the EU. Lower housing costs would be a good thing, but the economic costs of leaving Europe are likely to be high.
Although he’s right about staying in Europe, our chancellor doesn’t seem to understand the real problems affecting our economy. Why are official growth forecasts forever being revised downwards? Because there is less real wealth creation going on than governments and other policy-makers like to believe.
One of the many misconceptions about Europe is that the problems it faces are caused by attempts at closer integration, especially the concept of the single currency. While it is undoubtedly true that the euro project cannot work properly without greater political unity amongst members, especially regarding fiscal policy, this is not the real reason for the eurozone’s economic problems.
The real problem is the futile attempt by most governments, Greece being only the most obvious example, to create wealth out of nothing. Throughout most of the developed world – and in Britain more than just about anywhere else – there has been a mistaken belief that the boom times that began in the 1950s and continued for several decades (the ‘golden era’, or Les Trente Glorieuses) would somehow continue indefinitely, if only we kept borrowing and spending, even though the industrial base that powered the golden era had long since been dismantled and moved to China.
The days when coal-mining, steel production and other related heavy industries provided millions of well-paid jobs are long gone from Britain, and from much of the rest of Europe too, and weakening the EU will only make matters worse, as current battles over cut-price Chinese steel illustrate.
Britain in particular is a post-industrial society, almost totally reliant on services, especially the financial sector.
Yet banking doesn’t create any wealth, it merely shifts wealth around, mostly from the middle classes to the rich: over 80% of finance these days is non-productive, so it isn’t even contributing to real wealth creation the way it used to when banks invested in real industry.
All the banks are doing these days is lending to consumers whose future income is unlikely to meet expectations, as earnings are held down by the combined forces of automation and globalization. The price of borrowing is likely to stay low, but so is the price of labour: there is a glut of money in the hands of investors, and there is a glut of workers looking for decent jobs, as machines and software take over. The multinational corporations that dominate global trade will continue to seek ‘efficiencies’, buying up smaller businesses and shedding workers. Few of these dominant corporations are British.
None of these trends will favour smaller nations that try to ‘go it alone’, unless they happen to be rich in natural resources. But Britain’s resources are dwindling: if we leave the EU, our voice will barely be heard in the hustle of the global marketplace.
Inequality will keep getting worse
The single biggest cause of the worsening inequality that is currently wrecking the British economy, along with most of the developed world, is the decline in real industrial employment and the continuing financialization of business and society, a process that raises debt levels while at the same time directing an increasing proportion of wealth into the hands of the owners of capital (ie, the 1%, or more accurately the the 0.1%).
This process is particularly advanced in Britain, which relies more than any other large economy on financial trade. Thanks to its historical role as the centre of a great empire and its subsequent position as a global financial hub, Britain is particularly good at importing wealth from other nations, especially the oil producers of the Middle East and Russia, and more recently the wealthy industrialists of the Far East.
This role as global banker will diminish if Britain leaves the EU, as London will cease to be the preferred gateway into Europe for wealthy businesses and individuals. And although it would be good to reduce this reliance on other people’s wealth, reducing the banking sector without increasing real industry is not a great improvement, even if it does lead to lower property prices.
For those who need to earn a living, Britain’s continuing industrial decline means fewer good jobs: real wages will keep falling and the majority will keep getting poorer.
These problems will be made worse if Britain leaves the European Union, because whatever else might happen, trade with Europe, our biggest market, is almost certain to decline.
The Brexit crowd might have a point when they denounce Americans for interfering in British politics, but it doesn’t alter the fact that what Obama said is true: some US business will be lost if Britain leaves the EU, and there is no reason to think it will be replaced by greater trade from elsewhere. Why would it? Do we not already trade with as many nations as we can?
The two charts below, which I’ve compiled using data from the World Trade Organization, show how global trade has been rising in recent years, and how dependent Britain is on trade. The second chart shows how much of that trade goes through Europe, which is still the most important market in the world. Why would we choose to disassociate ourselves from that market?
Yes, there is much wrong with the EU: it is far too bureaucratic, wasteful, cumbersome, undemocratic, slow to adapt, intrusive, etc, etc. But all these failings can be fixed if there is enough will to fix them, and in the end the benefits far outweigh the costs. Even the immigration crisis is not a fault of the EU: the problems lie in the regions from which the migrants are coming, and such problems are better fixed when nations work together. What price do we put on international peace and cooperation? And why would we choose to weaken the only real counterbalance to the power of the US and the rise of China?
Those Brits who see a great future for our small nation going it alone are living in the past. We are no longer a great industrial power. We are a trading nation, dependent on imported goods, including 40% of our food, as well as imported wealth. It makes sense for a nation dependent on trade to be part of a large trading bloc, and only Europe can fulfill this need because trading blocs work best when they are also geographically close.
If Britain wants to retain at least some influence in this world, we need to stay in the EU.