Isolating
London from the Rest of Europe is Dangerous
Updated: January
2012
Britain’s over-reliance on capricious banking and finance income and on depleting
crude oil reserves, coupled with nationalist Eurosceptics' relentless push to isolate
Britain from the rest of Europe is perilous to the country economically and damaging to
European and world peace.
Prime Minister
David Cameron exempted the UK during the EU summit on December 9, 2011 from a
new treaty after other EU leaders refused to grant the UK "safeguards" for its banking and financial services. Instead,
the 17-eurozone countries with other EU members except Britain will enter into
an intergovernmental agreement to coordinate fiscal policies.
In the European Parliament on December 13, 2011, European
Commission President Jose Manuel Barroso said that Britain's demand for special
treatment for financial services would harm the European Union’s single market.
Tight regulation and supervision of financial services is necessary
if societies’ saving is to be protected from being used for betting and gambling by dealing-room traders
and speculators.
How did betting
and gambling permeate what had been conservative cautious banking
culture? The answer may be found in the liberalization years of the Reagan and Thatcher
administrations of the 1980s. Free enterprise meant
de-regulation, a mentality that led in 1999 in the US to repeal the
Glass-Steagall Act of 1933 and in the UK to deregulate financial markets and opt for a
light-touch supervision of banks. As a result,
commercial banks were cobbled together with non-banks—investment, insurance,
and brokerage firms. Light touch regulations, lighter touch supervision, combined with obscenely huge bonuses and new access by traders and speculators to people’s deposits to bet
on stocks, currencies, interest rates, and derivatives created an atmosphere of
casino go-go banking, damaging respectable international banks
and contributing to the 2008 financial meltdown and recession.
That Britain's disagreement with the EU is driven by a lack of "safeguards" for British banking and finance is unconvincing. The Vickers Independent Commission
on Banking has already recommended and the government has accepted the
Commission’s major recommendation, that by 2019, banks’ retail business should be separate
from their casino business, though not a complete separation into two independent companies. It is hard to envision what serious
issues might lurk in the Eurozone reform proposals that the UK finds to be so objectionable as to justify isolating London from the rest of Europe, even if it were the Tobin tax on
financial transactions. "London banks stunned by Britain's EU veto" was Reuters' headline on December 12, 2011. "People working in London's financial industry denied Cameron's actions had been inspired by them and said they could ultimately damage the capital's position as a financial centre," Reuters continued.
So, if it was not the City bankers who led the latest attack on the Eurozone, who was it? The parliamentary
debate on October 24, 2011 points the finger at Britain's Eurosceptic nationalists. The debate was prompted by a petition signed by more than
100,000 people demanding a referendum on whether the UK
should stay in the EU, leave it or renegotiate its membership. 111 parliamentarians, 81 of
whom were from the Conservative Party voted in favor of the referendum.
Britain could use all the help it can get from its Eurozone neighbors, not only because more than one half of Britain's trade is with the EU and an estimated three million jobs depend on exports to the EU, but also because the Erozone enhances
European and world peace and would help the UK face the structural weaknesses in its GDP; namely, disproportionately
high contribution of banking and finance and the reliance on depleting North Sea oil reserves.
Enhancing European and world peace
The
Eurozone is more than an economic union. It is a brilliant political and
economic construction for European and world peace. The Eurozone is built on
the ruins of the first and the second world wars. World War I killed over 15
million people. World War II killed over 60 million people, the deadliest in
history. That Europe had 250 conflicts over the past one
thousand years, 150 of which were during the nineteenth the twentieth centuries
should be sobering. Might the defusing
on December 4, 2011 of a 2-ton unexploded World War II British bomb in Koblenz,
Germany remind the anti Eurozone camp of the terrifying alternative to
European unity, particularly with today’s infinitely more destructive
weapons. To fail to learn from such a history is to repeat it.
Parochial European rivalries for dominance in Europe threaten future
European and world peace. Eurosceptics' nationalism harks back to a past replete with discord, violence, and bloodshed. The
relentless assault on Eurozone countries by British Eurosceptics, in concert
with the chorus of credit rating agencies and some media barons is short-sighted and dangerous.
Washington's new military strategy, unveiled by President Obama on January 5, 2012, would shift America's military focus to the Asia-Pacific region. America's new strategic security architecture relies, at least in part, on the Eurozone's capabilities as a guarantor of peace among European states. Under the new architecture, Washington's best interest would be served by supporting a Eurozone healthy economically and unified politically. London cannot afford to be isolated.
Dealing with Britain's disproportionately high banking and finance
contribution to GDP
The growth of
banking and finance’s contribution to GDP in the UK over the past four decades
at the expense of manufacturing threatens Britain's national security.
The following chart shows proportions of
national output in the UK as appeared in a BBC article by Hugh Pym and Andrew
Evans on July 12, 2010 entitled “what might the UK economy be like in the
future”. It demonstrates the decline in manufacturing as a share of GDP from 1970 to 2000 using official data and then
forecasts from 2009 to 2020.
The chart shows that while finance and
business services grew as a percentage to GDP from 16% in 1970 to 33% in 2009
with further growth forecast to 38% by 2020, manufacturing shrank from 32% in
1970 to 12% in 2009, with further declines projected by 2020.
A similar pattern for employment from 1980 to
2009 may be discerned. While jobs in finance and business services as a
percentage to total employment grew from 11% in 1980 to 21% in 2009,
manufacturing jobs shrank from 25% of total employment in 1980 to less than 10%
in 2009.
Trading the industrial might of the country that led the world into the industrial revolution for financial intermediation and casino banking is a poor exchange.
Already, the 2008 banking meltdown caused the severest of recessions in
generations, costing British taxpayers tens of billion of pounds. Such losses could very well dwarf all the profits from banking and financial
services that had allegedly accrued to the British economy from the City, which turned out to be phantom profits, except for the real monies bank executives took in bonuses and profit sharing.
In terms of quality, income from banking and finance is risky and
unpredictable compared to income from manufacturing. In addition to losses from
careless lending, rogue traders in dealing-rooms often cause gigantic and unexpected
losses. Although, bank scandals are generally kept under wraps,
enormous losses in recent years could not be kept secret; such as the £1.3
billion in
September 2011 at the London branch of Union Bank of
Switzerland, the £3.5 billion in October 2010 at the French bank Societe Generale, and the £820
million in 1995at the Singapore branch of the 233-year-old Barings Bank, which led to its sale to ING Bank for £1.
No one can predict when or which bank
might be the next victim. Serious
banking reforms are the answer to an improvement the quality of bank earnings.
The head of
the British armed forces emphasized the importance of economic strength to
national security. General Sir David Richards stated in a lecture to the Royal United
Services Institute in London on December 14, 2011 that
the biggest strategic risk facing the UK is economic not military."No
country can defend itself if bankrupt", he concluded.
Within the context of economic security, it might be added here that
the decline in UK manufacturing has serious national security consequences. No country may secure itself effectively against external
military threats if it does not possess the necessary human and industrial
infrastructure to manufacture and maintain its own machinery and armaments.
Manufacturing in the UK should be re-emphasized at the expense, this
time, of banking and financial services. Importing fewer manufactured goods,
exporting more manufactured goods, and engaging in less bank gambling and
betting, will generate a higher quality GDP and a healthier work force.
Talented men and women should be employed in solid professions in engineering
and science, not lost to the corrosive culture of greed, gambling, and
betting.
Reliance on depleting
North Sea oil reserves
The eventual depletion of North Sea crude oil reserves will deny the UK
economy a huge prize. In 1976, before North Sea oil became a factor, Britain
faced a financial crisis serious enough to force the Labor government at that
time to apply to the International Monetary Fund (IMF) for a loan of nearly $4
billion.
However, British fortunes suddenly
improved dramatically as North Sea oil started to flow in the late 1970s, a
feat described by
former Labour Prime Minister Jim Callaghan as “God’s gift to the British
economy”.
The significance of the oil sector was captured by Edmund
Conway in an article in the Telegraph Newspaper on November 5, 2009: “In
1979, when Margaret Thatcher came to power, the amount Britain owed, as a
nation, was £88.6 billion. In the subsequent six years, taxes from the North
Sea (which had been pretty much non-existent previously) generated an
incredible £52.4 billion… The benefits went far beyond the public finances.
Were it not for the cushion provided by oil exports, the deficit in Britain's
current account…would have been one of the worst in the Western world.
Moreover, much of the massive rise in business investment in the years before
the financial collapse was due entirely to spending in the North Sea. In short,
without oil, recent history would have been vastly different. Growth would have
been weaker, consumer spending less and the public finances decidedly more
perilous.”
Too bad that God’s oil is a depleting asset. Accurate projections of
oil reserves volume are difficult to make. What is known, however, is that
Britain’s oil reserves will run out at some point in the coming few decades. Whenever that happens, the
UK economy will suffer a serious contraction, unless new sources of income are
developed.
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