Labour’s Titanic Brexit nightmare

Matt Bishop - Associate Fellow, SPERI & Senior Lecturer in International Politics, University of Sheffield

Rolling back neoliberalism

One of the most welcome developments in Labour’s current thinking is the idea that we need a serious, purposive industrial strategy to rebuild the post-crisis economy, along with far higher levels of state intervention to refocus what is, at present, a blatantly rigged system of often failed and certainly un-free markets which has undermined the productive bases of the economy, depressed growth, and visited great damage on the public realm. As Tony Payne has contended: Britain’s ‘development model’ is simply not working. This is – or should be – uncontroversial to anyone other than those still wedded to neoliberal orthodoxy. The left, and Labour in government, should always have been more sceptical of the claims of capitalists: not in a crude ‘anti-capitalist’ way, but in the enduring recognition that, for capitalism to work, it has to be continually saved from itself, not blindly worshipped.

As Dani Rodrik has suggested, the disfiguring distributional consequences of unfettered free trade and global market integration have always been well known, but in the UK were wilfully downplayed once Thatcherism came along and then transmuted into a Blairism that uncritically facilitated particularly rampant forms of globalisation. That so much ground has now been ceded to populists like Trump to crudely advocate economic policies that the left should have been intelligently advocating all along, such as placing certain limits on free trade and selectively protecting strategic national industries, is inexcusable. The lessons of history have always been clear: we need free markets, but they need to be carefully regulated, managed and even shaped, both nationally and globally, if they are to offer the most efficient social outcomes.

However, Labour now finds itself at a difficult pass, for in seeking to roll back neoliberal excess, it is in danger of throwing the ESM baby out with the Brexit bathwater, with potentially devastating consequences.

A problematic consensus

Both the Conservative and Labour leaderships have reached essentially the same position on the economics of Brexit, albeit via different routes. The former seem to think that removing the country from the most highly integrated free market ever envisioned – by Margaret Thatcher of all people – will actually be good for business and economic freedom, despite the fact that UK firms are almost united in their opposition to it. I find it astonishing that a Conservative government is taking such a cavalier attitude towards the opinions of business, and such enormous risks with the economy. The latter, by contrast, seem to think that exiting the ESM is a necessary precursor to building the kind of interventionist state that is desperately needed to retool the economy.

Both are dangerously misguided.

However, it is the Labour approach that worries me most and this forces me into the invidious position of, firstly, defending what is an undeniably neoliberal creation (that is, the ESM, if not necessarily the broader EU) whilst, secondly, suggesting that the kind of social democratic political economy that I wish to see a Corbyn-led Labour party implement can only be achieved by protecting Britain’s place within that neoliberal creation.

This is because we are hurtling towards an iceberg of Titanic proportions. Neither the Conservatives nor Labour really grasp what is at stake. This is despite Sir Keir Starmer’s clever but confusing positioning on the issue. There is no doubt that the Shadow Brexit Secretary has played an impossible hand brilliantly, particularly politically, and clearly has a far higher grasp of the technical detail than his counterparts on the opposite benches who are actually supposed to be doing the negotiating.

One welcome recent development is the prospect that transitional arrangements which delay a hard Brexit (i.e. leaving the ESM) might be possible. However, there is no expectation at present that this delay could turn into a decisive retreat. Starmer’s view still seems to be that ultimately leaving the ESM is necessary because Britain could not tolerate the lack of sovereignty implied by being party to essentially the same commitments as now, under European Court of Justice (ECJ) jurisdiction, but as a rule-taker with no say over how those rules are constructed. Plus, of course, there is the commitment to ending free movement – which is sadly always framed as being about stopping people migrating to the UK, rather than as extinguishing the amazing opportunity for Britons to live and work in 27 other countries – to which Labour seems unfortunately as wedded as the Tories.

Starmer is, of course, right that leaving the ESM – but trying to gain maximum access to it – is, in this narrow technical sense, the only conceivable way to attempt to reconcile these competing priorities. For now, the politics are in his favour too: there is still a large constituency for a substantial form of Brexit, and they will surely scream betrayal if this is not followed through.

Sovereignty or prosperity?

Yet in my opinion, too few are thinking about the economics of all of this, and they trump the politics many times over. Put simply: membership of the ESM is absolutely critical to our prosperity as a nation. What happens if we do indeed leave and it decimates the economy? Will Labour have made the right choice between an increasingly worthless sovereignty, on the one hand, and jobs and living standards on the other? The political mood, as Corbyn himself has shown, can change very rapidly indeed.

Part of the problem is that so few people – in an economically illiterate nation – seem to actually grasp the enormity of what is at stake, and therefore the possible (even likely) consequences of leaving the ESM. Few comprehend how weak our negotiating hand is and how limited our options actually are outside of the market. I have written previously (here and here) about how, particularly on the Conservative side, this myopia stems from a fundamental and wilful misunderstanding of contemporary trade politics, typified by an unreconstructed delusional imperial nostalgia.

But it is also reflected in Corbyn’s infuriating tendency to talk – in line with Starmer’s delicate balancing act – about ‘tariff-free access to’ (rather than ‘membership of’) the ESM. Tariffs certainly matter for the car industry, one of our few remaining major value-added goods export sectors, which is under serious threat anyway from the EU-Japan trade deal.

Still, as I argued in those previous articles, tariffs remain a relative sideshow, and ‘access’ is broadly meaningless when the value of the single market derives specifically from comprehensively regulating cross-EU production and trade by allowing firms to operate – i.e. perform myriad different functions other than simply sending goods across borders – in that single regulatory space. For the UK this is all magnified many times over given our outsize dependence on services, for which tariffs barely matter at all, and regulatory equivalence – which can only be ensured by being inside the ESM – is both absolutely critical and unremittingly arduous to re-negotiate once it has been lost. The EU has been clear all along about this: the ‘four freedoms’ of the ESM are completely ‘indivisible’. If they were not – and states could enjoy differing degrees of membership for either their sole benefit or for anything other than a temporary period – the market, by definition, would cease to be ‘single’.

This is why Labour’s objective of achieving the ‘exact same benefits’ of ESM membership after leaving is also delusional: those benefits are, and can only be, available to members!

Clouds on the horizon

If we do actually leave the ESM, particularly in a disorderly fashion – which is surely the only imaginable way once panic starts to set in – our firms will be immediately unable to operate in the value chains in which they are presently deeply enmeshed, and no amount of ‘tariff-free access’ for their tradable products will alter or cushion that. There is only one logic here: they will have to move all or part of their operations – and do so well in advance of the turmoil unleashed by our exit – and the economic impact will not simply be a minor shock and some lost GDP.

Rather, I have increasingly come to the view that we may be potentially facing a correction on a larger scale than anything we have witnessed in modern British history: Black Wednesday ‘on steroids’, if you will. The clouds are already amassing on the horizon and ‘storms are brewing’.

If both the Conservatives and Labour are genuinely serious about extricating the UK economy from the ESM it is fairly clear that swathes of activity that is presently integrated in EU-wide value chains will have to shift to the continent. This is why even just the suggestion that this might happen has seen many firms implement an investment strike and start activating contingency plans to offshore (or is it onshore?) investment to the European mainland. The trickle could soon become a flood. It takes no great leap of imagination to conceive of a situation – in a country that is highly open, massively over-leveraged in terms of public and private debt, and hugely dependent on foreign capital – where firms begin to announce substantial disinvestment, money starts to be removed from the London housing market, prices start to tank – putting untold pressure on Sterling – and a negative death spiral ensues.

Most worryingly, this could begin very suddenly and unfold very rapidly, and, given the embarrassingly abject, irresponsible, slapdash government approach to Brexit, this traumatic reckoning could come sooner than we might expect. If neither clarity about the future, nor a guarantee that we will remain in the ESM are forthcoming, I fear that the markets will eventually demonstrate, as they did in September 1992, just how much ‘control’ the government actually enjoys. Such a catastrophic loss of confidence in the economy would be, for a country that already cuts a diminished figure globally, a ‘national humiliation’ of the highest order.

Labour’s avoidable iceberg

It is unlikely, moreover, that Corbyn’s Labour – fully implicated as it will be in the disaster – will victoriously emerge to pick up the pieces, and woe betide the politicians (all 500+ of them) tarnished with enabling a discredited form of Brexit when the front pages are filled with litanies of economic calamity. The narrative will no longer be: ‘we want our sovereignty back’. It will rather be: ‘why on earth didn’t Corbyn and his party stand up in the national interest and stop this nightmare from happening?’ His project would be dead on arrival. The idea that Labour can simply wait for the Tories to implode over Brexit while harbouring basically the same policy towards the ESM is reckless and foolish – not ‘savvy and astute’ as it was recently described – particularly if the kind of economic cataclysm I have described here comes to pass before they actually do so.

Labour’s strategy has to be considerably more cognisant of the scale of economic danger. The broad goal, in a world where neoliberalism is collapsing under the weight of its own contradictions, is not to forego globalisation altogether and risk such short-term economic ruin that it kills a sensible long-term left-of-centre alternative. Put differently: socialism in one country does not work.

So, the twin objectives, surely, of any social democratic party are to simultaneously maintain and reconcile an outward-oriented, internationalist, liberal (but not neoliberal) orientation, whilst rebuilding the public realm and advancing a meaningful industrial strategy. These two things are not mutually exclusive. The latter is not truly precluded by membership of the ESM, as the Labour leadership seems to believe, and leaving it will, paradoxically, make it even more difficult to realise given the staggering economic crisis it could provoke. It would also represent a profound and unnecessary betrayal of the promise of Corbynism, not least since we may well have centre-left leaders in power in both Paris and Berlin by the autumn, and therefore the very real prospect of meaningful reform to the ESM and other EU institutions, which could plausibly see them recalibrated in a less market fundamentalist direction.

The irony, then, is that to have any chance of transcending neoliberalism in the long term, Labour needs to maintain the UK at the centre of a whole set of neoliberal arrangements for now. The EU and the ESM are not static. They can evolve with the right leadership amidst the auspicious circumstances which may well be arriving at last. This is why ‘Lexit’ remains a chimera: its purported objectives would be better served by staying in, and reforming from within, rather than the left being complicit in hitting an avoidable iceberg that will eviscerate it too.

The neoliberals know all too well how to exploit disaster capitalism to reproduce, extend and defend their project. Corbyn should avoid giving them that opportunity if his is to ever have even the prospect of fulfilling the potential that made so many people vote for it in the first place.