The Bear’s Lair: BREXIT: The real danger is staying in

It looks increasingly likely that David Cameron will produce a modest list of “reforms” at the next EU meeting in February, after which some time next summer the British people will be asked to express their view on whether to leave the European Union. The possibility of “Brexit” appears full of risk, a fact that will doubtless be used incessantly by the Establishment campaign to keep Britain within the EU. However, when the activities and aspirations of the EU bureaucracy are examined in detail, it becomes clear that the real danger for Britons will lie in voting to stay in.

Economically, membership of the EU never made much sense for Britain. The EU countries represented less than 15% of British exports in 1960, with North America being more important and the rest of the world being four times as important. That was a result of simple Ricardian comparative advantage considerations; the EU had the same strengths and weaknesses as the UK, being strong in manufacturing and lacking natural resources.

Enthusiasts for EU membership would expound excitedly on how it made little sense to export British automobiles 15,000 miles across the globe, when a huge market existed for them only a few hundred miles away. However in reality when British trade was re-oriented to the EU, from the 1960s onwards, the British automobile industry collapsed. It became a byword for poor quality, management incompetence, union bloody-mindedness and huge losses which eventually fell on taxpayers.

In 1946, William Morris, Lord Nuffield (1877-1963) was planning a massive export drive to take over the U.S. market for compact and sub-compact automobiles. As a result of Maynard Keynes’s ignorance of industry and inept negotiating as chief British delegate at the 1944 Bretton Woods conference, resulting in a severe overvaluation of the sterling/dollar exchange rate, and of a grossly bloated public sector and of an excessive focus on the chimerical markets of Europe, UK automobile penetration of the U.S. market never exceeded 1-2% and Nuffield’s dream was stillborn.

Even as late as 1960, Paul Ferris’s book on the City took as an outstanding example of merchant banking enterprise Hambro Automotive, the U.S. sales operation set up by Hambros for what was by then British Motor Corporation, the successor to Morris Motors. Needless to say, by 1963, Hambro Automotive had been sold to BMC amid mounting losses, only to collapse into a morass of lawsuits by 1970. Being a former employee of one of Hambros’ competitors, Ferris’s account gave me a few good belly laughs, but for the British automobile industry the saga was no laughing matter.

Don’t blame Nuffield; he was one of the finest entrepreneurs of his generation in any country, but the combination of Keynesian ignorance and appalling official policy was too much for him. Britain’s prosperity in the 1930s had been re-established by the system of Imperial Preference, a set of modest tariffs (normally 10%) around Empire and Commonwealth markets instituted by Neville Chamberlain in 1932, that should have been brought in a decade if not a century earlier.

Keynes hated Imperial Preference, partly for “not invented here” reasons (he had been firmly cut out of Treasury influence, and its useful insider trading opportunities, during Chamberlain’s tenure of office.) Consequently at Bretton Woods he agreed to the Roosevelt Administration’s disgraceful demand that Britain abandon it, cutting Britain off from her main international markets, and condemning the country to gradual relative impoverishment through the 1970s.

Entry to the EU appeared to Harold Macmillan (whose 1938 “The Middle Way” advocated massive nationalization and abolishing the Stock Exchange – as his nanny said, “Mr. Harold is a dangerous pink”) a solution to Britain’s problems. In reality it threw away Britain’s traditional advantages of access to raw materials and cheap manufacturing labor, getting very little in return.

Today, that’s all history. Outside the EU, Britain will have to make its way in a cold world, with traditional friendships and alliances only a moderate help to survival. Yet many other nations manage to do this, and with the remnants of its global trading links and service capabilities, Britain is as well placed as most to survive independently.

Inside an EU in which Britain would have been trapped for at least a further decade by a favorable referendum vote, the dangers would be much greater. With the threat of Brexit removed the EU bureaucracy would have no inhibitions about imposing its maximum wish-list on the British people – and that wish-list is likely to be very damaging indeed to their livelihoods.

To see where the EU bureaucracy would like to go, you only have to look at its treatment of Hungary and Poland, two East European fledgling democracies that have dared to elect (and in Hungary’s case, re-elect) governments whose policies are not to the taste of EU bureaucrats. The Hungarian public sector deficit is policed much more severely than that of other states. The EU Commission has launched repeated legal actions against Hungary’s government. It has even threatened to remove Hungary’s EU voting rights because Hungary disagrees with its open-borders policy on refugees. Similarly, as soon as the new Polish government took office in November, the EU began a series of harassments, including now a full audit of Poland’s financial relationships with the EU.

On the other side, the leftist Syriza government in Greece has been allowed to get away repeatedly with flouting all attempts to get its finances in order, while actions that the bureaucracy agrees with, such as Angela Merkel’s monstrous invitation to unlimited numbers of refugees to swamp Europe’s institutions, meet only with encouragement, even though the interests of Germany’s 27 EU partners are drastically damaged by it.

The EU bureaucracy is entirely unelected, and has strong left-globalist “politically correct” anti-free-market views of its own, which are made to dominate EU policy in all areas. Elected governments such as those of Hungary and Poland that wish to pursue a more independent, populist approach to their development are quashed with every weapon in the bureaucracy’s power. Once Britain has thrown away the option of leaving the Union, we can be sure that the bureaucracy’s unpleasant anti-democratic views will be given full rein against Britain. The EU bureaucracy no doubt already has a list of actions it proposes to take against British freedoms and taxpayers as soon as it feels itself free to do so.

For example, it will almost certainly seek to rein in the City of London. Paris and Frankfurt have ground their teeth for 30 years about the ability of the City to keep its business in the face of such “obviously superior” alternatives. Whether or not Britain votes to leave the EU, the EU bureaucracy will assist them in their attempts to cause the business to migrate. This will take different forms depending on whether Britain leaves the EU or stays in.

If Britain leaves, the EU will no longer be able to regulate the City of London (Hallelujah!) This is a very good argument for not trying to arrange a half-way house arrangement like Norway or Switzerland. Norwegians and Swiss have to accept the vast majority of EU regulations, without having any say on them. Thus a Britain that had left the EU to such a half-way arrangement would find itself subject to all kinds of “revenge” restrictions on the City’s activities. Much better to leave the EU altogether, in which case the EU could not dictate how the City did business, but only how it did business with European companies and institutions – and in the latter case, the more extreme forms of protectionism would be prohibited by various international treaties.

One regulation that could disappear if Britain left the EU would be the new EU restrictions on banker pay, limiting bonuses to twice salary. These regulations, the implementation of which has been postponed to 2017, look like being highly restrictive and damaging for smaller trading-oriented houses (they will add fixed costs in a highly cyclical business, causing unnecessary bankruptcies.)

If Britain stayed in the EU on the other hand, the bureaucracy would finally be able to achieve its dream of regulating the City of London and driving as much as possible of its business to Paris and Frankfurt. The banker pay restrictions alone may achieve a lot of this single-handedly; the simple business will migrate to the Continent while the more interesting trading activity will go offshore altogether, to Asia or (if we get a Republican administration) Wall Street.

For non-bankers, an even more dangerous result of being locked into the EU will be the bureaucracy’s ability to achieve its dream of “ever closer union” allowing all power to drain away from national governments and become concentrated in itself. That would make it almost impossible for Britain to leave the EU at a future date without causing the kind of destruction that South Carolina brought on itself in 1861 by firing on Fort Sumter. There is no question that South Carolina could have left the new United States peacefully if it had wished to in 1800; by 1860, less than a century after the first stirrings of U.S. independence, it had become impossible. The same danger applies to Britain. Needless to say, rule by the Brussels bureaucracy will be nothing like as light and even-handed as was rule by the antebellum Washington DC; as a top Bulgarian central banker said to me in 1992, the Brussels bureaucracy has the same aims and methods as the Comintern, without the Comintern’s sensitivity to local needs.

One particularly irritating feature of Britain to the dozier socialist EU partners such as France has been its relatively moderate approach to personal taxation, which has attracted skilled people from all over Europe to London, in spite of its ludicrous real estate prices and appalling climate and traffic. This will change. Taxes will be “harmonized” upwards, with much more of the total proceeds heading to Brussels and staying there. Since Britain is more diligent than most European countries in enforcing its regulations, this will mean that British taxes will become effectively the highest in Europe.

Europeans are our friends, by and large. But when entering the voting booth next summer (if the referendum is held then) you should remember: EU bureaucrats are not the friends either of Britain or of freedom as a whole. Brexit, with all its dangers, remains the least perilous option.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)