Thursday, 8 September 2016

Nonsense About Brexit

Over the last few weeks, since the referendum, I have heard a lot of nonsense about Brexit. The proponents of “Leave” have been quick to crow about the failure of the UK economy to collapse, for example.

But, that, of course, is an Aunt Sally. I certainly never believed that the UK economy would go into a serious decline simply as a result of a referendum vote. And, that is the point. So far, we have only had a referendum. All of the morons that have gone around physically and verbally abusing anyone who might in any way appear “foreign”, might be so ignorant as to believe that the consequence of that vote is that Britain is already out of the EU, but it isn't. Incidentally, the actions of those morons, is one of the immediate consequences of a Leave vote that I did expect. That is why the arguments of the Lexit camp were always themselves, at best, naïve.

The Tory government does not have a clue what Brexit actually means, which is why they are reduced to ridiculous and meaningless sound-bites, such as “Brexit means Brexit”. The proponents of Brexit, such as Gove, Johnson, Davis, and Fox clearly had no idea what Brexit meant either, and really never believed they could win, which is why they thought they could get away with their extravagant promises about £360 million a week for the NHS, and end to immigration and so on.

Now, May's government does not even propose activating Article 50 of the Lisbon Treaty for at least another six months. In this week's Commons statement by David Davis, the Minister for Department X, there was not one word of substance. Even for a Tory government with a six year record of vacuousness and evasion from the Despatch Box, his speech was marked by the amount of hot air.

Time and again, the government is asked what they want from the negotiations with the EU, but they are unable to answer, repeating only what they are against. If a trades union went into negotiations with an employer saying, “We are opposed to our current pay and conditions, and going out on strike, but we are not going to present you with a set of demands of what pay and conditions we do want,” they would be branded, quite rightly, as irresponsible and incompetent. Yet, that is exactly what the Tories are doing here.

At the moment, this is being interpreted by markets as an indication that Brexit is being postponed, perhaps indefinitely, and that is one reason financial markets recovered after their initial falls. But, the more this incompetence continues, the more uncertainty will rise, and the more that will lead mobile sections of capital to relocate into other EU states. Some of that is already being witnessed in relation to banks, and in the analysis of the Japanese government. But, those real economic consequences were always going to be ones that occurred over the next several years, and not the day after the referendum.

What was likely, immediately after the referendum, is what we have seen in the more ephemeral market reactions. In the expectation of a vote to Remain, the markets and the Pound rose sharply. On the actual result, the Pound dropped 20%, and markets sank. Its true that, in the last few weeks, the FTSE 100 has risen above its pre-referendum level, but the FTSE 250 has barely recovered that level. The reason is simple.

The FTSE 100 is dominated by large, international companies, particularly those involved in oil and mineral production. These companies have their operations overseas, and their products are priced in Dollars. Suppose you are an oil company, producing oil in Saudi Arabia. The price of oil is $50 per barrel, and you make $20 per barrel profit. With the Pound equal to $1.50, that means £13.33 profit per barrel. If the Pound drops to $1.25, however, the profit rises in £'s to £16 per barrel. As all these profits are repatriated, in Pounds, to the companies UK accounts, it represents a huge rise in their reported earnings, which is what caused their share prices to rise, and along with it the FTSE 100.

But, that is not the case with many of the FTSE 250 companies, let alone the millions of smaller British companies. Take a company based in Britain producing teapots. Its costs are sterling denominated. In a teapot, there may be £1 for materials, £0.20 for energy, £0.80 for wages, and £1 for profit. The teapot sells for £3. If it ships 1,000 teapots to the US they sell for £3,000, providing £1,000 of profit. At $1.50 = £1, that means $4,500 of revenue and $1,500 of profit. If the Pound falls to $1.25, however, the sterling revenue and profit remains unchanged. But, the Dollar price of a teapot falls from $4.50 to $3.75. That means these teapots become more competitive in the US market – or anywhere else where the sterling exchange rate has fallen.

Provided this translates into additional sales of teapots, the company will then see its revenue and profits rise. But, this is not the same as for the oil company that had its operations based overseas. Their profits rose, not as a result of selling more oil, but solely as a result of dollar denominated profits translating into higher sterling profits, as a result of the devaluation of the Pound. It did not have to sell more oil, or, therefore, expend additional capital, and so its rate of profit, rose. But, the teapot producer only makes a greater mass of profit if it sells more teapots, which means expending additional capital on materials, energy, and wages. Its rate of profit, thereby does not change, and it only increases its mass of profits, because it also expands its mass of capital advanced.

But, even that may not be the case for the teapot manufacturer, or other UK based companies. For one thing, whether they are able to sell more teapots etc. depends also on what the demand for those teapots is in foreign markets. It also depends on the price elasticity of demand for those teapots. If the dollar price of teapots falls by 20%, but the rise in demand for those teapots, as a result, is only 10%, for example, the producer may sell this additional 10% of teapots, but each of them will sell for 20% less, so that their dollar revenues, even on this larger volume of sales will fall. For example, if they sold 1,000 teapots at $1, they obtained $1,000. If at $0.80 they sell 1,100 teapots they only obtain $880. 

Moreover, the other side of the devaluation is that the prices of all the imported commodities rise. That may not affect the teapot producer, in respect of their clay dug in North Staffordshire or Cornwall, but it will affect many other producers, who rely on imported materials. It will affect the teapot producer in respect of their energy costs, and transport costs, as the price of imported oil and gas, priced in Dollars, rises. And, where they are competing in global markets, and the increase in their profits derives from being able to sell more, they may not even be able to pass these increased costs of their constant capital on to the consumers of their products, because the higher price would cause them to lose demand. So, they would have to absorb these higher costs, resulting in a fall in their rate of profit, if not in their mass of profit.

Furthermore, the same rise in the prices of imported commodities will increase the cost of living for their workers. The rise in energy prices will mean that workers have to pay more to put petrol in their cars, to heat their homes and so on; the prices of their imported food, of clothes produced in Asia, of cars produced in Germany, white goods produced in Italy and so on, will all rise. The value of labour-power will rise, causing wages to rise, and thereby reducing the rate of surplus value, and rate of profit.

So, its easy to see why the immediate effect of a 20% sterling devaluation was to cause a rebound in the FTSE 100, and a smaller recovery in the FTSE 250, but the longer-term effect of that devaluation, and the further falls to come, are likely to be more negative. Another point here is that, as a lower Pound causes inflation to rise, the further consequence will be to cause bond prices to fall, and market interest rates to rise. There has already been a spike in Libor. These rises in market rates are ultimately unaffected by what the Bank of England does. Only where there is an actual credit crunch, a lack of liquidity, can the Bank of England effectively intervene to reduce those rates via the provision of liquidity.

But, a rising average rate of interest will cause bond, stock and property markets to fall. Any short-term rise in these markets, now, is likely to be reversed in coming months, and certainly were Brexit to actually happen.

However, that point alone explains why UK markets have recovered some of their initial losses. The fact that May has postponed triggering Article 50, until next year; the fact there are plenty of voices, even in and around the government, arguing for a second referendum, a partial withdrawal, and so on, has led many to believe that Brexit will never happen.

If the economy does slow down, and stock, bond and property prices enter a prolonged decline, then its easy to see how the conditions could be created to overturn the decision of the 2016 Referendum. But, the proponents of Brexit point to the current GDP growth, and the latest PMI and other survey data to suggest that will not happen.

However, some reasons for a short-term economic flurry were set out above. Just as some morons took the vote to mean they had a mandate to abuse foreigners, there are no doubt some Brexiters who swallowed the propaganda about a British economic miracle, who were led to go out and spend. Some would have been encouraged by the Bank of England, even though its cut of 0.25% points in official interest rates will have next to no impact on the majority of people's expenses.

If we take the Purchasing Manager's Index, it fell to 47 in July, and then rose to 52 in August. The July reading reflected the Leave vote, and the fact that, at that time, the country did not have a government. The August reading reflected the resolution of the latter, and the recognition that were Brexit to happen, it is at least two years away. If the two readings are aggregated, it gives an average of 49.5. Any reading below 50 suggests that the economy is slowing down.

Another effect of the falling Pound has been that UK assets have become cheaper for foreigners to buy. Its ironic that one of the reasons the advocates of Leave put forward is that of “sovereignty”, and yet the consequence of Brexit will be to reduce actual sovereignty, because much of the country's assets will be bought up by foreigners, including foreign states. China already owns 10% of North Sea oil production, the majority of Britain's water supply is owned by foreign water and utilities companies, the same for the supply of energy, transport and so on. Brexit facilitates that process of the transfer of assets into foreign ownership and control.

A first indication of that was seen in the purchase of ARM by the Japanese company Softbank. In the modern world, what is important is often intellectual property rights. The majority of value of an Apple iPhone resides in the labour used for its design and development, by US workers, not the labour of Chinese workers, who actually assemble it. Look on a piece of pottery and you will often see that it is labelled as designed in North Staffordshire and produced in China. What a depreciated Pound makes possible is for foreign companies to buy up British companies, on the cheap, and, in so doing, to obtain cheaply all of those valuable intellectual property rights. All of that high value production, design and development can then be undertaken by workers in Japan or wherever the acquiring company is based.

Meanwhile, the acquiring company can then locate all of the low value assembly work wherever they choose. Where they want that production to have immediate access to the EU's single market they are likely to locate that production now in Ireland, Spain, or Portugal and not in Britain that will be outside that single market. Thatcher's Tory government, during the 1980's, oversaw the de-industrialisation of Britain's manufacturing based economy; today, May's Tory government looks set to oversee the de-industrialisation of what exists of its technology and intellectually based economy.

For that very reason, there will undoubtedly be many fragments of capital, in the EU, that would welcome Brexit. There will also not be a few EU politicians and bureaucrats for whom British exceptionalism has been nothing but an expensive and time consuming pain in the arse, and who would, also, not be sorry to see Britain go.

But, an actual Brexit still poses threats for capital globally, and in the EU particularly. An actual Brexit, as opposed to simply a vote to leave, would cause financial and economic dislocation. Britain is a small and declining economy compared to the EU, US, China or Japan, but it is still significant, and its global financial assets are still extensive and considerable. We do not know whether a Grexit would have caused another Lehman moment, but Brexit probably would. A failure of Britain to actually leave, however, would put all of those nationalist and separatist movements, across Europe, back in their box.

The objections being raised both by Leavers and Remainers is that the vote to leave must be respected. That is nonsense. If a similar referendum were held on restoring the death penalty, it would likely succeed. Should we then also acquiesce in such reaction, and demand that legislators uphold that will of the people?

In the referendum, it is quite clear that the large majority of those who supported Leave did so as a proxy for opposing immigration. Other surveys have shown a huge overlap of that support with other reactionary views on feminism, homosexuality, the environment and so on. So, where would this acquiescence to reactionary views, in the name of a mindless bourgeois democracy end – a repeal of all equality laws, making homosexuality illegal once more, banning all immigration, repatriation of immigrants?

We do not say that, just because a vote has been held, we have to abandon our own views and convictions! If that were the case, there would only ever be one set of elections. But, the moment an election has taken place, the reality is that the losing parties begin their campaign to reverse that decision, and to bring about a new election at the earliest opportunity, which they hope to win. Councils hold elections every year, and if the Chartists had been successful, we would also have annual parliamentary elections.

The proponents of Brexit themselves assumed they would lose, and had already initiated a petition for a second referendum. No one believes UKIP or the Tory Right would have gone away had they lost, any more than has the SNP after losing the Scottish Referendum. So there is no reason why opponents of Brexit have to accept the referendum result, why they should not step up the campaign to overturn it, and to frustrate it by whatever means possible.

Moreover, the democratic basis for that is clear. The majority for Brexit was small at 52:48. It was not even a majority of the population, only a majority of those who voted. There was a high preponderance of Leave voters amongst the elderly and a high preponderance of Remain voters amongst the youth. It was estimated that had 16-18 year olds been allowed to vote, as they were in the Scottish Referendum, Remain would have won.

But, just in the time since the vote, thousands of the elderly Leave voters have died. Similarly, thousands of people have had their 18th birthday and are now entitled to vote. The two things together, plus the number of those Leave voters suffering buyers remorse, means that there is now probably a majority for Remain. What kind of democracy is it that seeks to blindly impose a decision on the population that the majority of the population no longer supports? That is like those 172 members of the PLP demanding the right to continue to rule, even though they now no longer reflect the majority of party members.

Labour should make itself the champion of remaining in the EU, irrespective of the referendum. It should do so, because we are international socialists who see our future as inseparable from that of workers across Europe, and that principal cannot be changed by any referendum. Labour should redouble its efforts around the need to build a different kind of Europe, a social Europe, based upon working-class unity and solidarity across the EU. We should be bringing the leaders of Podemos, Syriza, the Left Bloc and others together to forge such a movement; we should organise mass demonstrations in London, Paris, Madrid, Rome, Athens, Lisbon, Berlin and every other European capital with the European trades unions and workers parties organising contingents from every country to support them, demanding an end to austerity and for a Workers Europe.

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