Brexit chaos and Tory rifts as the City prepares

Philip Hammond accused of hindering Brexit

The Tory party is hopelessly divided. Prime Minister Theresa May is on the back foot, seriously at a disadvantage, often outmanoeuvred in her negotiations over Britain’s future relations with the European Union (EU). The meaning of Brexit is constantly in flux. The dominant sections of the ruling class, corporate business and the City of London, horrified at the damage an abrupt ‘cliff edge’ exit will do to the British economy, have started to up their game. A ‘no deal’ Brexit is no longer on the agenda. Brexit negotiations have, so far, seen Britain forced to give way on each meaningful, contested point. David Yaffe reports.

The exit agreement

The EU’s chief negotiator, Michel Barnier, had insisted that sufficient progress had to be made with the exit agreement – settling accounts, citizens’ rights, and the Irish border – before discussion on the future relationship between UK and the EU, particularly that on the terms of trade, could begin.1 At the end of November 2017, Britain submitted to the principal demand of the exit agreement, by stating that it would fully honour its financial commitments on leaving the EU. The net figure likely to be paid was thought to be in the region of between €40bn and €45bn.

The agreement on citizens’ rights protects existing EU residence rights and the social security rights of 3 million EU citizens in the UK, and about 1 million UK nationals living in the EU. Britain secured a concession during the talks in forcing the EU to drop its demand that the divorce settlement fall under the direct jurisdiction of the European Court of Justice (ECJ). But to the disquiet of some Brexiters, Britain did pledge indefinitely to pay ‘due regard’ to relevant European court rulings on citizens’ rights enshrined in the EU treaty. In addition, the ECJ will continue to have a role in overseeing EU citizens’ rights in the UK for eight years.

On 4 December 2017, May’s political weakness was dramatically revealed when the agreement between Britain and the EU on the Irish border2 and the move to the next phase of Brexit negotiations was scuppered by a last minute telephone call with Arlene Foster, leader of the pro-Brexit Democratic Unionist Party (DUP) in the north of Ireland, the party which provides the Tories with a working parliamentary majority in the House of Commons. Foster told May that she could not support the agreement to keep the north of Ireland aligned with EU laws, as it would prevent the north of Ireland from leaving the EU ‘on the same terms’ as the rest of the UK. May was forced to backpedal. The Irish Republic had demanded reassurances on how the UK would guarantee no ‘hard’ border if it left the EU without a deal. To allay that concern a final text said if no other solution were agreed, the north of Ireland would maintain full alignment with the EU single market and customs union rules that support north-south cooperation, the all-Ireland economy and the protection of the Good Friday Agreement. In addition, it said ‘no new regulatory barriers’ would be erected between the north of Ireland and the UK. This implies the possibility that the whole of the UK would be aligned with EU rules! On hearing the news Nicola Sturgeon, Scotland’s First Minister, suggested any promise for the north of Ireland could be replicated for Scotland. A similar suggestion was made for London by the London Mayor, Sadiq Khan (The Guardian 5 December 2017).

It was not until 7.20am on Friday 8 December that news emerged that a deal had been agreed. The build-up to this event epitomised the frequent farcical episodes accompanying Britain’s negotiating process. The day before, the DUP’s leader had kept the Prime Minister and her staff waiting for the go-ahead on the final text on the Irish border, bags packed, ready to fly to Brussels to meet the European Council President, Donald Tusk and close the deal. Around 6.30pm that day, an increasingly frustrated Tusk made it clear that he would hold a press conference on Friday at 7.50am on Brexit, with or without a deal. At 11pm, Foster was told by May she would sign the deal with Tusk, regardless of the DUP’s reservations, in order to ensure that the deal could be ratified at the following week’s European Council meeting. This was essential if the negotiations were to go on to the next stage early in 2018. At 3.30am on Friday, May and her entourage left Downing Street to fly to Brussels. The Brexit exit agreement, which had been under negotiation for nearly six months, was finally to be signed off (Information from Financial Times 9/10 December 2017). On 15 December at an EU Summit, the leaders of the 27 EU member states ratified the exit agreement and concluded that this resolved enough of the immediate issues raised by the separation to allow talks to begin on the future relationship.

These talks will be no easy ride, as Tusk bluntly pointed out on the morning after the exit agreement was signed off. He said that there was now, in practice, ‘less than a year’ to negotiate a transition period after Brexit of around two years, during which the UK will have to follow all EU rules and regulations, as well as the new UK-EU relationship. These discussions might not begin until February or March 2018, because Britain had yet to be ‘clear’ on its aims. With a hopelessly split Tory party and a divided ruling class, the absence of clarity and the unresolvable conflicts on the UK side suggest a chaotic reality will prevail.

Setbacks for the EU Withdrawal Bill3

On 13 December 2017 the government suffered a humiliating defeat on its Brexit legislation during the line-by-line scrutiny of the EU Withdrawal Bill in the House of Commons. The Bill is designed to transfer 44 years of EU legislation, incorporating it into UK law, whilst repatriating all executive and legislative powers from Brussels. MPs backed an amendment to the Bill, which limits the powers it will grant to government ministers. A month earlier the Prime Minister had promised Parliament a say over the final deal she agrees in Brussels, but as it stood it would be a ‘take it or leave it’ vote and ministers would retain powers to enact any deal without first gaining Parliament’s permission. The amendment means the terms of any Brexit deal must now first be approved with a full Act of Parliament – effectively allowing MPs to re-write parts of the deal before any of it is implemented by the government. The amendment was passed by 309 votes to 305, with 11 Tory MPs voting for and one abstaining, sufficient to overturn the government’s parliamentary majority.

A week later the government was forced to accept a compromise over its own amendment to put the Brexit date into law, demonstrating again the frailty of its parliamentary majority. The compromise would give MPs the power to push back the date if the leaders of the EU member states agree. With that, the EU Withdrawal Bill will next return to the House of Commons for its report stage before it eventually passes to the House of Lords. Meanwhile Michel Barnier has announced that the transition period will have to end by 31 December 2020, because it is the last day of the EU’s seven-year Budget. Much political turmoil can be expected in the interim.

The City of London and Brexit

The parasitic character of British capitalism, its dependence on the earnings from its vast overseas assets and particularly those of its parasitic banking sector to sustain the British economy, not only makes it vulnerable to any external financial or political shocks but has left it increasingly incapable of withstanding the economic and political challenge of US or European imperialism as an independent global imperialist power. Britain’s relationship with Europe and the impasse the British ruling class finds itself in over this question is having dramatic consequences for the rivalry between European and US imperialism and for the future role of the City of London.4 Brexit is creating serious obstacles to sustaining the City as the leading global financial centre.

London’s status as a financial market capital is built on ‘passporting rights’ that allow companies based in Britain to conduct business across the EU. That is why London has become the favoured headquarters of many US and international firms. Brexit threatens this development. Michel Barnier has recently said that it was unavoidable that British banks and financial companies would lose their ‘passports’ that allowed them to trade freely in the EU, as a result of any decision to leave the single market.

Last November David Davis, the Brexit Secretary, comically promised bankers and other professionals a special post-Brexit travel regime to move freely across Europe in order to reassure the City of London that its future is safe. More seriously, the Bank of England said in December that it would keep the UK’s financial system open to foreign institutions after Brexit. It would allow European-based investment banks that access the City through their branches under an ‘EU passport’ to apply for new regulatory licences like those used by US or Japanese rivals. The Financial Conduct Authority reinforced such assurances by announcing temporary waivers would be granted to more than 8,000 European institutions operating in Britain – banks, insurers, asset managers and payment firms – to allow them to continue as if the UK were still in the EU, if Brexit occurred without a bilateral agreement on financial services (Financial Times 21 December 2017).

Reality is, however, more forbidding. European banks have cut their exposure to Britain since the Brexit referendum, removing €350bn of UK-related assets from their balance sheets in 12 months. They are protecting themselves against a ‘no deal’ Brexit. The European Banking Authority (EBA), presently headquartered in London, will move to Paris post-Brexit.

The City is the global centre for clearing interest rate derivatives, a $482 trillion business. Last year it had cleared a notional €174 trillion of euro-denominated derivatives before the end of October that year, 75% of that market. Control of the global derivatives market will be up for grabs after Brexit. A ‘hard’ Brexit could see it fragment between London, New York and Europe (Financial Times 25 October 2017).

JP Morgan has started building a 22-storey tower on the banks of the Liffey (Dublin). Morgan Stanley is likely to shed jobs in London by expanding operations in Frankfurt; CityGroup, Standard Chartered and Nomura Holdings are reportedly opening new offices in the same city. RBS has its sights on Amsterdam. HSBC has set out plans to move around 1,000 jobs to Paris when the UK leaves the European Union. An LSE study reckons the potential loss of British business revenue to Europe is around 15%. One Brussels-based think-tank says the values of assets about to be transferred to mainland Europe may total €1.8 trillion, equivalent to 17% of UK banking assets (The Guardian 11 August 2017). The City of London has been put on notice by the EU’s top banking watchdog (EBA) that it cannot retain access to the single market after Brexit by using mere shell companies (Financial Times 13 October 2017).

On 18 January 2018, during a joint press conference with Theresa May, French President, Emmanuel Macron, rejected any proposal of a bespoke Brexit deal for the City of London. He insisted that Britain will not be allowed full access to EU markets, including financial services, unless it pays into the EU budget and accepts all it rules, as is the case for Norway. France wants to take an increased share of the EU market for financial services after Brexit. Macron calls for ‘a more integrated Europe’ as a path to ‘real sovereignty’. Despite reticence in Berlin, he will propose a separate budget, a finance ministry and a European monetary fund for the eurozone. Germany’s election result has weakened Chancellor Angela Merkel’s room for manoeuvre, but a proposed coalition government with the Social Democrats can only strengthen Macron’s hand in his efforts to consolidate a European imperialist bloc with or without Britain’s membership. Macron said that the leaders have to be ‘bold’ against the threat of populism. He proposed the creation of a ‘military intervention force’. He also spoke of a ‘sovereign’ powerhouse able to compete with the US and China (Speech at Sorbonne in Paris, Financial Times 27 October 2017).

Brexit and immigration

Net immigration fell by a quarter in the year to March 2017, driven by a 59% rise in emigration of people from eight east European countries living in Britain. Bank of England Governor, Mark Carney, called Brexit a unique example of de-globalisation, which will hurt the British economy as trade ties are weakened, workers emigrate and investment is lost. Productivity will take a significant hit.

British business has reacted with fury to a leaked Home Office plan to restrict the immigration of lower skilled EU workers after Brexit. The proposals were described as potentially ‘catastrophic’ by the British Hospitality Association, while the National Farmers Union claimed it would cause ‘massive disruption to the entire food chain’. The Agricultural and Horticultural Development Board says that farming incomes could more than halve after Brexit unless the UK strikes a free trade deal with the EU. UK farmers are dependent on €3.1bn annual payouts from the EU’s Common Agricultural Policy, mostly through farm income support.

An analysis by the Resolution Foundation found EU nationals account for 31% of workers in food manufacturing, 21% of those in hotels and other accommodation and 16% of those in agriculture. There are about 2.3 million EU citizens working in the UK, accounting for about 7% of the workforce. They span both ends of the labour market, with 23% of EU migrants in ‘elementary occupations’ and 17% in ‘professional occupations’ (Financial Times 7 September 2017)

According to a GMB union study, using Office for National Statistics data, EU workers account for more than 20% of the labour force in at least 18 specialist sectors. Some 75% of waiters and 25% of chefs working in the UK come from other EU nations.

Only 1,107 EU nationals joined the nursing profession in the 12 months to September 2017, according to the Nursing and Midwifery Council, an 89% drop from the preceding 12 months. Over the same period the number of EU nationals who left nursing jobs rose 69%. This is having a dramatic impact on the NHS that is already struggling to recruit let alone retain staff.

Tory splits threaten May’s government

It takes very little to get the different factions of the Tory party on Brexit to be at each others’ throats. There is little honour between thieves. It was not long ago that the arch-eurosceptic MP John Redwood wrote a financial advice column in which he told investors to ‘look further afield’ and avoid the UK because of the state of the UK economy. Apparently he earns £180,000 a year in this second job as a chief global strategist for Charles Stanley. Yet as a supporter of a ‘hard’ Brexit he is aware that it will seriously damage the British economy (The Guardian 14 November 2017).

At the Davos World Economic Forum on 25 January 2018 the Chancellor, Philip Hammond, called for a ‘soft’ Brexit seeking only ‘modest’ changes in the UK’s relationship with the EU. Immediately the arch-eurosceptic MP Jacob Rees Mogg, who chairs the European Research Group of around 60 pro-Brexit Tory MPs, accused Hammond of flouting the Prime Minister’s flagship Brexit speech at Lancaster House last year, as well as the Tory election manifesto. A former Minister, Andrew Percy, said Hammond should ‘put a sock in it’ and stop ‘mocking other cabinet ministers by writing his own Brexit policy’. The Prime Minister, who only remains in position because any other cabinet minister given the job would force an immediate split in the Tory Party, put out a statement disowning Hammond’s contribution saying: ‘The government’s policy is that we are leaving the single market and the customs union. Whilst we want a deep and special economic partnership with the EU after we leave, these could not be described as very modest changes’. No one can have any real idea what this means and the EU is still waiting to know what Britain wants from a future trade relationship with the EU.

Rees Mogg is threatening to use his group of Tory MPs to vote as a bloc against the government should it try to remain in the customs union with the EU. Meanwhile a group of pro-EU Tory MPs were alarmed by May’s willingness to cave into the Brexiteers. One said: ‘[May] should be supporting her Chancellor, not giving in to an unrepresentative, ideologically driven minority.’ It has become clear that May has lost control of the Brexit process. It has been reported that a growing number of Tory MPs have written to Graham Brady, chairman of the 1922 committee of backbenchers, demanding a vote of no confidence in Prime Minister. If that number reaches 48, 15% of the parliamentary Conservative Party, May’s chances of staying in office are in jeopardy and with it the future of the Tory party.

1 See David Yaffe ‘Brexit, imperialist rivalry and the split in the working class’ FRFI 260 October/November 2017 at https://tinyurl.com/ yckzdp9m for a discussion of these developments.

2 No ‘hard’ border – ‘physical infrastructure at the border’ between the north of Ireland and the Irish Republic.

3 See ‘Brexit, imperialist rivalry…’ op cit for background discussion.

4 See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January 2007 at http://tinyurl.com/88po6dx for a discussion on the parasitic character of British capitalism and the importance of the City of London for the British economy.

Fight Racism! Fight Imperialism! 262 February/March 2018

 

 

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