"Brexit": the real threat to globalization

Viewing the City of London's official 1:500th scale architectural model of central London at the City Centre gallery, May 2016. Dominic Lipinski / Press Association. All rights reserved. This article
tackles three issues: the impact of Brexit on Britain as a whole, both
politically and economically; the impact of Brexit on the European project; and
the impact of Brexit on British SMEs. This allows us to have a measured
approach to British voters opting to leave the single market on the 23 June
referendum. 

The impact of Brexit on Britain and
globalization: the role of the City of London

The
European Union accounts for almost half of Britain's exports and imports. This
corresponds to 15% of the country's GDP. EU membership is beneficial to the UK
economy, because the EU is a customs union and this lowers trade barriers. This
makes goods and services cheaper to British consumers.

The
downside of this is that Britain cannot negotiate, on its own, separate trade
agreements with non-EU members. Brexit would allow this to happen, because
Britain will recover full economic sovereignty. Brexit may also open the way
for protectionist, import-substitution policies and a re-launch of the welfare
state.

Britain, as
an EU member, receives the highest proportion of inward foreign direct
investment (FDI) and portfolio investment. Of all countries in the world only
the USA has a higher stock of FDI. This is mainly happening because of the
particular role of the City of London in the structure of the European and
global markets, namely the role of the City as a trading platform of financial
and global services: in particular, as the Financial
Times
have pointed out, the City has become the biggest centre for trading
the Euro. The City manages one trillion euros of assets in cross-border funds
and it dominates the global foreign exchange market, whose daily turnover is
about £4 trillion.

Foreign
investment banks, Over The Counter (OCT) operations, insurance, shadow banking
activity, lawyers, accountants serve the single European market. Some 38,000
people, which is 11% of the City's employees, come from Europe itself.

Overwhelmingly,
therefore, the City supports Britain's EU membership, except for a small tribe,
and to this belong some hedge funds and brokers whose market is global and who want
to break free of any type of EU regulation. This small tribe supports the Leave
campaign of UKIP and Boris Johnson. Overall, the City represents the most
crucial link in the global chain of financialisation and Britain has to remain
in the EU so that the link is not broken.

Brexit will
have one clear benefit. Leaving the EU would result in an immediate cost
saving, as the country would no longer contribute to the EU budget, and this is
some £13 billion a year. However, it also receives £4.5 billion worth of
spending and that is about 7% of what the Government spends on the NHS each
year.

There are
some political aspects too. Brexit would impact on the Scottish issue. And Brexit
may also upset Britain's relationship with the USA and, as a consequence,
disturb Britain's position within NATO. Moreover, a new transatlantic trade
agreement is in the making and Brexit would complicate matters, as Britain
would have to re-negotiate both with the EU and the USA, separate treaties.

The impact of Brexit on the European project

Many people
avoid talking about it. Many journalists and even academics are keen to say
that Brexit would impact negatively on the British economy, but they fail to
consider what is probably going to happen to the EU should Brexit occur. I
would argue that Brexit would be far more disastrous for the EU than Grexit for
the Euro-zone. And if Brexit is successful, then we should wave "good
bye" to the EU, along perhaps with the project of globalisation/ financialisation.

It is well known that Germany dominates both the EU
and the Euro-zone. It has the strongest economy and pursues an export-led
strategy based on a model of low wages and low inflation. This creates imbalances
and asymmetries within the Euro-zone dividing Europe into debtor and creditor
nations. In this respect, Germany keeps recycling its surpluses in the
Euro-zone, imposing regimes of extreme austerity on the periphery, such as
Portugal, Spain, Greece and even Italy (see chart). France has also problems
dealing with an over-competitive Germany.

But that's not good. Whoever says this is a great
picture, he or she does not understand economics. This is a picture that leads
to the disintegration rather than integration of the European project. It
pushes the nations of Europe into protectionism and a return to national
currencies. What is going to happen to the EU and its states if Britain leaves?

The countries with the highest exposure to British
capital will suffer most. These countries are the Netherlands, Belgium, Ireland,
Luxembourg, Cyprus, Portugal and Greece. France and Poland are also exposed to
Brexit in specific areas. Germany will suffer too. Poland, in particular, is
most exposed through migration and the EU budget.

Just to give some facts: Dutch firms have direct
investments worth £180 billion in the UK, earning over £9billion in 2013, which
is equivalent to 1.5% of Dutch GDP. Germany has a trade surplus with the UK of
over £28 billion. German manufacturers alone export £50 billion to the UK, or
2.4% of GDP. Just imagine what is going to happen to German industry if a new
Britain, outside the EU, pursues an import-substitution, protectionist policy.
This means that all Japanese and German producers will have to abandon their
British factories, with Britain re-building its own car industry and steadily
adopting a new industrial policy, moving away from
financialisation/globalisation.

A new industrial society will be created and
services will cease to be the backbone of the economy.  There are almost 750,000 Poles living in the
UK. This is the single biggest group of foreign nationals. Their remittances
sent back to Poland amount to over £1.1 billion each year. This is a
significant boost for the Polish economy.

Brexit and the British SMEs

SMEs
account for over 99% of British businesses and over 60% of all private sector
employment in the UK. The EU has a considerable remit over Employment Law.
European treaties grant the European Parliament and the Council of Ministers
the power to make social policy which supersedes national law. Excessive
regulation, health and safety requirements and various forms of taxation make
some SME leaders highly Eurosceptic. They want Britain to regain power over
trade deals, although some 83% of British SMEs do not export at all. Britain
has the largest portion of SMEs that export to the USA, some 43%, followed by
Italy at 33% and the Netherlands 31%. Some 1/5 of exports of British SMEs go to
China. Africa is not a significant destination (although this is not the case
with France and Belgium, for example). The EU absorbs the majority of exports
of those British SMEs that export. SMEs also benefit from some EU directives,
such as the "late payment directive".

The EU has
some special programmes for SME financing (e.g. COSME), which would no longer
be available if the UK leaves the EU. But the bulk of finance to SMEs is
provided by local retail banks, such as the British Business Bank, and leaving
the EU would not have a major impact on the availability of finance for SMEs.
Yet, leaving the EU may have a longer term impact given the current account
deficit of Britain, which is 5% of its GDP. That means that Britain depends on
foreign investors. And if Britain is outside the EU, foreign investors may ask
for a risk premium, which would be passed on as higher interest rates to SMEs.
However, this negative aspect could be avoided if a courageous policy of
import-substitution is adopted.  

Concluding remarks

The referendum of
June 23 is a political, not an economic issue. The Government has to reach out
to Labour Party voters in order to win. The Labour Party says it wants to
remain in the EU in order to influence and reform it in a progressive, social-democratic
direction. The Government says that it has already reformed the EU according to
Britain's national interest and the principles of a free market economy and
that's the reason why Britain should stay in.

The Leave campaign has two main components. The Right-wing, which is
dominated by the former mayor of London, Boris Johnson and the leader of the
UKIP, Nigel Farage. There is also a left-wing Leave campaign, "Lexit",
which is inspired by the legacy of Tony Benn.

In the referendum
of June 23 the British people will vote for what is best for them and the
country. Therefore, the result should be respected and followed through by all
political forces across the UK. The result should unite and not divide the
country. Yet, if Brexit occurs, this may well herald the beginning of the end
of globalisation/financialisation and the beginning of a new era in global
politics. 

This
was the Keynote speech at the Thames Gateway Business Awards 2016 Ceremony organised
by Archant.

 

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