Crashed
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Together, Poland and the UK accounted for 100 million citizens of the EU, 20 percent of the total, with governments pandering to the most skeptical Europhobic elements. It was unsettling to Brussels, but it had wider ramifications too. Historically, the UK was America’s preeminent ally in Europe, both in NATO and as the anchor of the transatlantic eurodollar system. Since the early 2000s Poland had been in the van of Donald Rumsfeld’s “new Europe.” It was the East European state most closely aligned with America’s geopolitical project. Earlier in the year, Syriza had tried in vain to gain leverage in Europe by interesting global actors in its predicament. The United States, China and Russia had all declined. They would not meddle in Germany’s sphere of interest. Poland and the UK posed challenges to the EU status quo that were far harder to contain.
Chapter 23
THE FEAR PROJECTS
The year 2016 began with the nationalist government in Warsaw picking fights with Brussels over the freedom of the press, the independence of the judiciary and abortion rights. In their challenge to the EU they could count on applause from Viktor Orbán’s self-proclaimed “illiberal democracy” in Hungary. Meanwhile, the British government was demanding negotiations over opt-outs from the European future. The British prime minister let Brussels know that he would be happy to take a pro-European position. But from the outset, Cameron’s approach was disconcertingly transactional. If he did not get the concessions he demanded, his threat was that he would lead the campaign against EU membership in a referendum scheduled for the summer of 2016.
Nationalism and xenophobia were the common denominators of the challengers from the Right. But, unlike the leadership of Law and Justice, Cameron was in an awkward position. He was struggling to square a groundswell of popular sentiment fanned by the propagandists of his own party with a broader agenda of business-driven globalism. Since the 1970s EU membership had shaped the competitive modernization of the UK economy. The Tories, as much as any party, had participated in that drive. The City of London in its twenty-first-century form had emerged as one of the most important strands of the UK-EU relationship. Its offshore relationship to the eurozone had defined both Britain’s and Europe’s places in the networks of financial globalization and their relationship to the United States. Now, in an extraordinarily high-risk bid to channel and manage the politics of popular nationalism, the Tory government was putting London’s position as a crucial node in the network of the global economy in play.
I
Less than ten years earlier, the City of London had been riding high. It was the prized jewel in New Labour’s economic crown. It was Britain’s ticket to global significance. It was the standard the deregulators of Wall Street aspired to, the location of choice for fast-moving, high-end global finance. All the more shattering was the shock of 2008. The City became a site of crisis and failure.1 Tens of thousands lost their jobs. The two most resilient UK banks—Barclays and HSBC—sidestepped Brown’s ballyhooed program of recapitalization. This left the government to nationalize not just Northern Rock but Lloyds-HBOS and RBS as well. In the wake of the crisis “rebalancing” was an agenda shared by both Labour and the coalition government that replaced it.2 British banking legislation went well beyond Dodd-Frank. The once widely touted FSA was abolished. Banking supervision was reincorporated into the Bank of England. The new conception of macroprudentialism did not allow for a neat distinction between regulation and economic policy functions. The Banking Reform Act of 2013 would divide up bank functions and ring-fence retail activity. Financial services were no longer part of Britain’s narrative of national success.
But unlike in the case of Wall Street, tightening the regulation of British banks is not the same as curbing the City of London. The City is not first and foremost a national financial center. Its main business is global. The conference in London on July 26, 2012, at which Draghi made his famous speech was an event for global investors designed to showcase the City. Ahead of the Olympic Games, Bank of England governor Mervyn King had sport on his mind. The City of London, he remarked, was like the All England Lawn Tennis and Croquet Club, the hosts of Wimbledon.3 The setting is quintessentially English. But it is a global tournament. Though King didn’t elaborate, the further implication of his remarks was that Britain’s banks stood to the City as Britain’s eternally struggling national tennis program stood to Wimbledon. They were a national preoccupation. They might produce the occasional champion, but neither they nor the rest of the British economy were the main attraction.
The modern City of London had been built on the eurodollar system. Thanks to the Fed, that had survived the crisis. But the American regulators understood London’s role as the platform for some of the most extreme risks that the American banks had built up. As it was put to a congressional committee in 2012 by a senior US regulator, the United States had allowed its risks to migrate to London only for them to “come right back here, crashing to our shores.”4 Within the capacious framework of Dodd-Frank, US regulators were now sharply tightening the regulations of foreign banks in the United States and of US bank operations overseas.5 The European banks that had epitomized the connection between the City of London and Wall Street, the likes of Barclays and Deutsche, UBS and Credit Suisse, were under huge pressure. By 2015, of all the European banks that had once challenged for top rankings on Wall Street, only Deutsche Bank was still competing for a top spot in global investment banking, and that was widely seen as a sign of its desperation.6 Deutsche had no other secure business line to fall back on. The traffic on the whole was from the United States to Europe. All the big American banks still maintained a major presence in London. But it was a sign of the times that in 2014, Wall Street was for the first time ranked above the City as a global banking location in Z/Yen Group’s widely watched report.7
How could London regain its edge? In the wake of the crisis, the major competitors of America’s global banks were not European but Asian. The “British” bank that had done best out of the crisis was HSBC. Driven by competitive pressure, London embarked on a remarkable twenty-first-century gamble. As it had done for the United States, the City of London would remake itself as China’s financial gateway to the world.8 Side-stepping the geopolitics of Sino-American competition, a special relationship to China would restore London’s competitive edge. In the spring of 2012, the City of London Corporation initiated a project to make the City into a key center for renminbi trading. The result was a series of spectacular firsts. Already in 2012, HSBC had issued the first RMB-denominated bond and London claimed 62 percent of all RMB payments business outside China. In June 2013, to backstop the expanding RMB business, the Bank of England entered into a swap arrangement with the PBoC. Beijing conferred on London-based asset managers the privilege of being the first Western firms to be allowed to invest directly in RMB-denominated shares. In October 2014 the UK Treasury itself issued a RMB 3 billion bond.9 The United States had long borrowed from China. Now the UK would borrow in the Chinese currency.
In making these moves the Bank of England explicitly cited the model of the eurodollar markets of the 1970s. The difference, of course, was that in facilitating the emergence of the eurodollar market, London had enabled global finance to escape government regulation. By contrast, in facilitating the internationalization of the renminbi, the City of London and the UK government were working hand in glove with the authorities in Beijing. London insisted on normalizing this relationship. China was a crucial emerging market. Liberalization would follow internationalization. What this turned a blind eye to was the fact that both the United States and China were playing for geoeconomic position. China’s proposal for the Asian Infrastructure Investment Bank brought this out into the open. Washington’s furious reaction to London’s eagerness to join the Chinese-led bank was telling.
The boldness of London’s move becomes even more remarkable when we consider the wider field it had to be situated in. In the 1980s Britain had positioned itself similarly as
an entrepôt for Japanese investment—by both Japanese banks and manufacturers. Britain as a gateway for global FDI was a voice for market liberalization inside the EU. In the twenty-first century, playing off the Americans and the Chinese in financial services might be thought of as analogous to Germany’s position as a global exporter of high-tech manufactures. On his visit to Beijing in 2013 this seemed to be Cameron’s vision. He offered Britain as a partner “uniquely placed to make the case for deepening the EU’s trade and investment relationship with China” and held out the vision of an “ambitious and comprehensive EU-China Free Trade Agreement.”10 But that made the question all the more pressing. How secure was the UK’s place in the EU?
The 2008 crisis marked a break in Britain’s relations with the EU. As the UK economy went into recession, the popular mood toward Europe soured. Nor did the Tories in Opposition do anything to dampen that resentment. The huge surge in Eastern European migration welcomed by the Blair and Brown governments made an excellent stick to beat Labour with. Once the Tory-led coalition began to force through its austerity agenda, the strain that immigration allegedly imposed on the NHS and social services provided a lightning rod. Britain’s lopsided growth added further to the sense of frustration. Whereas the production sectors of the UK economy—manufacturing, construction, etc.—stagnated, between 2010 and 2014 financial services surged ahead by 12.4 percent.11 Driven by the wealth of the City, in London and its environs, house prices rocketed by 50 percent between 2013 and 2016, spectacularly outstripping growth in the rest of the country. London was the cosmopolitan global city par excellence, the preferred home of oligarchs. In economic terms “rebalancing” was a myth. In political terms it was not. Across much of the UK, London’s cosmopolitan affluence aroused a deep antipathy. For conservative commentators friendly to UKIP, “‘London’ has become shorthand for faraway people with no grasp of the nation’s problems.”12 London was one capital of this elite, Brussels another. The populist tabloid Daily Express began campaigning for Brexit in November 2010 and became the first newspaper to align itself with UKIP.13 In October 2011, as the eurozone crisis reached its height, eighty Tory backbench MPs broke with government demanding a referendum on the Lisbon Treaty and further EU constitutional change.14 Polls in the fall of 2011 showed barely one-third of the British electorate approving of continued EU membership, with over 50 percent against.15
If the modernizing, big-business wing of the Tory party wanted to maintain its grip, it clearly needed to resolve the European issue once and for all. And the pressure came from two sides—from outside as well as inside Britain.16 The reaction to the crisis visible in Europe was ominous for London. As usual the French were the enemy. Sarkozy and Trichet seemed bent on displacing the City of London, which they regarded as a source of financial instability, from the center of euro-denominated finance. With the governments of Europe struggling to contain the eurozone crisis, it could not help but seem anomalous that most trading in euros and most transactions in euro-denominated derivatives took place in London. Many member states liked the idea of a financial transactions tax. From the opposition benches, both the French Socialists and the German SPD were pushing the idea. Given the political weakness of her coalition partners, Merkel could not afford to ignore them. A study by the commission came to the inevitable conclusion that any such tax would generate 62 percent or more of its revenue in the City of London.
It was these tensions that unloaded in December 2011 in the disastrous clash between the UK and the rest of the EU over the fiscal compact. Tellingly, Cameron came to the do-or-die eurozone talks in Brussels with one key agenda item, to protect the City of London.17 The plans being touted by Van Rompuy for deep integration, up to and including eurobonds, were unacceptable to both Berlin and London. So Cameron believed that he had the basis for a deal. In exchange for his support in blocking the federalist agenda, Merkel would promise Cameron to exempt the City from any onerous regulations. That proved to be a misunderstanding. To navigate the eurozone crisis, Merkel needed Sarkozy and the SPD in the Bundestag far more than she needed Cameron. Feeling betrayed, Cameron vetoed the deal, leaving him looking like a narrow-minded lobbyist for the City of London.18 Meanwhile, Merkel and Sarkozy’s grand fiscal compact was reduced to an intergovernmental bargain.
The clash was appallingly badly handled by Cameron, but it was not without logic. To get a grip on the eurozone crisis, Berlin and Paris clearly did need to move toward deeper fiscal and financial integration. At every meeting of the European Council, at the G20, at the G8, in public and in private, the British government urged this logic on the eurozone.19 To Anglophone economists, the functional necessity was simply inescapable. Draghi’s “whatever it takes” came as a profound relief. But though eurozone consolidation was a necessity, for the leaders of the Tory party it had serious political implications. The banking union and a fiscal union were unacceptable to a broad swath of opinion in Britain, not just the Europhobes. If deeper eurozone integration was a matter not of whether but of when, London would have to force Brussels to openly embrace the model of a multispeed and multitiered Europe.
It is easy to forget in retrospect, but the Brexit referendum was not conceived as an in-out choice on UK membership in the EU “as is.” Nor was it merely a means to extract minor concessions. London operated from the hubristic assumption that Britain could change the EU’s course. While the euro countries continued on their path toward deeper integration, Britain would force Brussels to formally recognize not just a multispeed but a multidirectional model. The UK was not heading more slowly to ever closer union. If the Tories had their way, it was not heading there at all. Brussels needed to be brought to accept that fact as well as its implications for the political economy of Europe. The “offshore” status of the City of London as an inside-outside financial hub had to be permanently recognized. Not only was this confrontation inescapable, but now was the moment for London to force the issue. To move forward from the crisis of 2010–2012, to consolidate the institutional structures of the eurozone, its members would have to face the difficult business of treaty change. Those complex negotiations would have to start in 2013 once the eurozone had stabilized. They would culminate in 2016 at the latest. It was during those delicate negotiations that Britain would have maximum leverage. The eurozone’s agonizing efforts at consolidation would open the window of strategic opportunity for Cameron to negotiate a new dispensation.
It was this triple calculation—the effort by the metropolitan leadership of the Tory party to assert control over its party base; the hubristic assumption that London had enough clout to force the structural questions on the EU; and the judgment that now was the time to do it—that culminated in Cameron’s fateful speech at the new headquarters of the Bloomberg news corporation in the City of London on January 23, 2013.20 It was not an overtly anti-European speech, but Cameron insisted on the need to redefine the purpose of the EU beyond the eurozone. He had promised that he would curb immigration to the UK. To do so he wanted to limit the rights of EU citizens to claim benefits in the UK. He wanted safeguards for the noneurozone members of the EU against further decisions on integration by the Eurogroup core. He wanted, at least as far as the UK was concerned, to draw a line under the basic European promise of ever closer union. He called for negotiations and on that basis promised that there would be a referendum by 2017 at the latest.
It was a coherent strategy but a risky one. As spring turned to summer in 2013, it became obvious that the British were overoptimistic in imagining that the eurozone would move from the crisis of 2010–2012 to full-scale renegotiation of the treaties. That might make sense from the point of view of economic governance, but Berlin, Paris and Brussels understood all too well how vulnerable treaty talks would make them. After the shocking result delivered by the May 2014 European elections, treaty renegotiation was postponed for the foreseeable future. Cameron’s window of opportunity never opened. The idea of a grand bargain between Britain,
the Dutch and the Germans to negotiate a new liberal vision of the common market was stillborn.21 In the summer of 2014 the choice of Juncker as the new commission president, in the face of a bitter campaign of British opposition, was a sign that London’s leverage was dwindling fast.22 In 2014–2015, Europe was struck by the Ukraine crisis, the struggle over Greece and the refugee crisis, all of which made the EU look bad, the UK look grossly uncooperative and Cameron’s reform agenda look trivial. Cameron spoke grandly of his new vision of the European future. But didn’t it all come down to irresponsible xenophobic pandering and the selfish interests of the City of London?23
But Cameron could not pull back, all the less when in May 2015 the Tories unexpectedly won an outright majority. The countdown to the promised referendum was ticking. Even without treaty talks, could Cameron negotiate any significant concessions from Brussels? Berlin wanted to help. Merkel was keen to avoid the lurching upset to the balance of power in Europe that would result from Brexit. But after the December 2011 debacle and London’s tasteless campaign against Juncker, Britain’s brand was toxic.24 Even the nationalists in Warsaw were hard to win over to the demand to limit the freedom of movement. It was, after all, directed against Poles. There wasn’t very much that Tusk, as president of the European Council, could offer Cameron. The EU couldn’t allow the UK to dictate the future course of integration. Freedom of movement and the equal treatment of EU citizens were nonnegotiable. Desperate to be able to present the British voters with some sort of deal, on February 20, 2016, Cameron settled for an “emergency brake” that would allow the UK to limit benefit payments to migrants for a “one-off” seven-year period.25 In addition, Tusk agreed that the EU should recognize “that the United Kingdom . . . is not committed to further political integration in the European Union. . . . References to ever-closer union do not apply to the United Kingdom.” As one experienced British member of the European Parliament commented: “Left as they are, the words mean little of substance. Indeed, nothing might change. All Treaty articles could just continue to apply to the UK.”26 It would be up to London to assert itself. It was a far cry from Cameron’s promise of January 2013 that Britain could initiate a fundamental rethink of the EU’s purpose. It was much less than the British prime minister needed to hold the Tory party together. Immediately, two Tory heavyweights—mayor of London Boris Johnson and education minister Michael Gove—broke away to launch the “mainstream” Tory wing of the Brexit campaign in the referendum that was now set for June 23, 2016.