Brexit: A rational choice for the wrong reasons? – Financial News & Project Syndicate

11/03/2020 by

The motives and thinking behind Brexit were even less worthy than those behind US President Richard Nixon’s move in 1971 to ditch the Bretton Woods system. But, as with the “Nixon shock,” there is a singular underlying historical factor that explains Brexit.

ATHENS – At pivotal historical moments, rational political ruptures often are brought about for all the wrong reasons. UK Prime Minister Boris Johnson’s Brexit may prove to be a case in point,

When US President Richard Nixon ditched the Bretton Woods system in August 1971, his reasons were shortsighted. Overwhelmed by domestic pressures to impose ineffective price controls and placate his blue-collar supporters, Nixon took his eye off the larger picture. Still, he was following a sound instinct: historical forces had ruled against the sustainability of that remarkable post-war global monetary system. Once America went from being a net global creditor to being a debtor economy in sustained deficit to the rest of the capitalist world, Bretton Woods was condemned to extinction, because the Federal Reserve could no longer guarantee a fixed exchange rate with the Deutsche Mark, yen, franc, and so on.

To be sure, the median American worker’s income and living standards have never recovered from the so-called Nixon shock, and the resulting financialization of capitalism has been detrimental to humanity. But that does not take anything away from the deeper rationality of Nixon’s decision.

The motives and thinking behind Brexit were even less worthy than those behind Nixon’s move. Nurtured by austerity-fueled discontent, trading on xenophobia, and riding on the coattails of false promises, Brexit and its backers won the day for many bad reasons. And, like the Nixon shock, most of those who voted for the man who implemented Brexit will, most likely, lose out, while many others will profit handsomely. The working-class neo-Tories who enabled this historical rupture will suffer in quiet desperation the consequences of their choice.

But is there, as with the Nixon shock, a singular underlying historical factor that explains Brexit? There is: the creation of the euro.

Portraying necessity as a virtue, euro-loyalist politicians, opinion makers, and bureaucrats extol the European Union’s flexibility by describing the eurozone as a union within a union, or a club within a club. While this description is formally correct, it fails to capture the centrifugal forces that the euro unleashed. Once the single currency was created, in the designed absence of common debt instruments and a common deposit insurance facility, the EU train was put on a track leading inexorably to a junction. There, it could turn sharply toward federation or continue on the same route until, running out of track, it disintegrated.

The euro’s fathers, German Chancellor Helmut Kohl and French President François Mitterrand, knew this. They were convinced that once the fork was reached, their successors would bow to the inevitable and steer, however reluctantly, toward federation. That was also the view of UK Prime Minister Margaret Thatcher, who, observing the construction of a European central bank, began to ring the alarm bells that summoned a renewed Euroskepticism and, ultimately, Brexit.

Ironically, Kohl, Mitterrand, and Thatcher made the same mistake. All three leaders assumed that the euro was, as Thatcher put it, an effort to build “a federal Europe by the back door.” It wasn’t. As we now know, when the euro came close to imploding in 2011, the EU’s decision-makers did the opposite of what Kohl, Mitterrand, and Thatcher had anticipated. With the critical junction approaching and confronting them with the federate-or-disintegrate dilemma, the locomotive’s drivers demonstrated that they preferred derailment. That was the moment when Brexit acquired a stealthy rationality.

Every historical force needs a multitude of agents to give it purchase. Brexit’s greatest agents were, ironically, two people who opposed it: Gordon Brown and Angela Merkel.

As UK Prime Minister Tony Blair’s Chancellor of the Exchequer, Brown became an enabler of Brexit by keeping, for a variety of excellent reasons, the United Kingdom out of the eurozone. Had he acceded to Blair’s preference to adopt the euro, events would have unfolded very differently. Given the size of the City of London, no EU bailout could have re-floated Britain’s banks after the 2008 financial crisis without ditching the euro’s rulebook and without forcing an immediate, clean decision: federate or return to national currencies.

Brown thus became the unwitting enabler of Merkel’s penchant for kicking the can down the road. By keeping the UK out of the euro, he permitted Germany to continue resisting federation while ensuring that Brexit remained a relatively low-cost option for the British.

Unburdened by the mammoth task of bailing out the City, Merkel concentrated on suspending democracy in deficit member states such as Ireland, Greece, and Italy, in order to impose, with the help of the European Central Bank, years of austerity that ended up miring the entire eurozone in permanent stagnation. Without that ugly suppression of democracy, and the millions of continental Europeans fleeing to a UK economy that had been re-floated by the Bank of England, the Brexit referendum would have gone the other way.

Nixon and Johnson’s ruptures confirm that whatever is unsustainable eventually finds the political agents of its collapse. Such ruptures can be simultaneously detrimental to most people’s interests and intrinsically rational and self-perpetuating.

In the United States, the long-term diminution of blue-collar workers’ prospects was counter-balanced by the stupendous gains of the top 10% and the expansion of America’s global hegemony. In this sense, the Nixon shock passed the test of history, even if it diminished most Americans’ life prospects.

Brexit may well be similarly vindicated. If Johnson ends austerity and succeeds in attracting investment in artificial intelligence and green energy (which the EU is failing seriously to fund), Brexit may come to be viewed the same way as Brown’s decision to keep the UK out of the eurozone is today: a smart move.

Taking a broader view, there are international systems that have the potential to deliver massive benefits for majorities in every participating country. Bretton Woods and the EU are prime examples. But when political leaders fail to consolidate such systems, their tragic (in the Ancient Greek sense) disintegration eventually takes on a rationality of its own, thus coming to seem inevitable and, equally important, irreversible.

For the Financial News site click here. And for the Project Syndicate site click here.

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