UK’s Brexit referendum is about peace and prosperity

40 years ago, the vast majority of the British people were in favour of joining the European Economic Community. 67% voted in favour, in the 1975 referendum to confirm the UK’s entry.  Virtually all mainstream politicians were in support, with only the left-wing of the Labour Party strongly anti on the grounds that it was a “capitalist club”.

As the photo shows, the Conservative Party was overwhelmingly in favour of entry, with Margaret Thatcher campaigning strongly for a Yes vote.  Later, as prime minister, she welcomed the 10th anniversary of membership:

“The unity of Europe is a goal for which I pledge my government to work”

Today, of course, that bedrock of support has disappeared, if the opinion polls are right.  Why has this happened?

  • One argument is that Europe changed direction, and began to focus on social reform rather than wealth creation
  • A second is that many Conservatives never got over the trauma of being forced out of the European Exchange Rate Mechanism by George Soros in 1992
  • A third is that the UK doesn’t admire the economic performance of the eurozone, in the way that it used to admire Germany’s economic achievements

All these arguments have some truth in them, but they miss the critical point.  As the Nobel jury noted when awarding their Peace Prize to the EU in 2012:

The dreadful suffering in World War II demonstrated the need for a new Europe. Over a seventy-year period, Germany and France had fought three wars. Today war between Germany and France is unthinkable. This shows how, through well-aimed efforts and by building up mutual confidence, historical enemies can become close partners.”

In 1975, everyone in the UK knew about the dreadful suffering in World War II.  The older generation had endured years of nightly bombing raids, even if they weren’t actually fighting for the lives.  And the younger generation could still see evidence of destruction all around them, as bombsites were a prominent feature in the major UK cities.

Families also retained powerful memories of the horrors of World War I and its aftermath:

  • Millions of people had died in the trenches between 1914-1918, and countless others had been maimed for life
  • Tens of millions died in the inter-War years, as political instability led to the rise of the dictators, Hitler and Stalin
  • This political failure also led to economic failure and the immense hardship suffered in the 1930s Depression

Today, of course, all of this history has largely been forgotten.

The facts also show that the UK today has a vastly improved standard of living compared to 40 years ago:

  • Young people’s earnings today are twice what they were in 1975, when adjusted for inflation
  • The basic rate of tax has fallen from 35% to 20% today and the top rate has fallen from 83% to 45%
  • Millions of people every year now routinely travel across Europe for business or holiday
  • Nobody now has to go to their local post office with their passport, in order to claim their allocation of £50 travel money – which only ended in 1979, when capital controls were finally abolished

Was this all due to the European project?  Could the UK have done better outside Europe?  Who knows?  Life is not a spreadsheet, where we can go back and decide to do a different “what if?” calculation.  But clearly, the UK has done well since it joined the EU.

The UK referendum is not about immigration, or whether Brussels should decide the shape of the UK’s sausages, or any of the other populist issues being raised by the Leave campaign.  It is about one over-riding issue – namely the best way to preserve peace and prosperity in the UK and across Europe.

The great statesman Winston Churchill wisely remarked that “democracy is the worst form of government, except for all the others.”  We can all argue about aspects of the EU today, but in terms of safeguarding peace and prosperity, all the other alternatives would be worse, and probably far worse.

Political risk rises as polls boost Corbyn, le Pen, Trump, Sanders

My local MP, Jeremy Corbyn, won the UK Labour Party leadership election on Saturday with a 60% majority.  An anti-NATO socialist, he has represented the constituency for 32 years, and has never held even a junior ministerial post.  Now, he could possibly become the UK’s next Prime Minister.

His path to power depends on two developments taking place, neither of which are impossible to imagine.  First, he needs to win back the 40 seats that Labour lost to the Scottish Nationalists in May.   And then he has to hope the ruling Conservative Party tears itself apart during the up-coming Europe Referendum.

Corbyn’s easy win highlights the major change taking place in Western politics:

Of course, protest movements always face problems when taking power, as they generally lack the discipline needed to be in government.  This pattern may already be playing out for Syriza in this month’s new Greek election.  But as Corbyn’s win shows, the populism they represent is now impacting mainstream parties in both the USA and Europe.

In the USA, the establishment candidacies of Hillary Clinton for the Democrats and Jeb Bush for the Republicans are being upstaged by the two populist candidates – Bernie Sanders and Donald Trump:

  • Clinton’s campaign has stumbled badly over the email server controversy
  • Sanders is polling only 8% behind Clinton, and leading her in Iowa and New Hampshire primary polls
  • Bush’s campaign has fared even worse, as he is no longer seen as the front-runner
  • Donald Trump has taken an early lead, with another outsider, Ben Carson polling strongly

Meanwhile in France, polls show Marine le Pen of the National Front party with an early lead ahead of 2017′s Presidential election.  Europe’s failure to act in an united way over the Syrian refugee crisis is adding to her appeal.

This highlights how anti-establishment protest is moving slowly but surely into mainstream politics.  Of course, it is fashionable amongst political commentators to say that Corbyn, Trump, Sanders and le Pen are “unelectable”.  But this is to ignore the critical fact that governments lose elections when they become out of touch with the electorate.  As the Wall Street Journal noted last week:

“The biggest thing leaders don’t do now is listen. They no longer hear the voices of common people. Or they imitate what they think it is and it sounds backward and embarrassing. In this age we will see political leaders, and institutions, rock, shatter and fall due to that deafness.”  

The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat.  People no longer needed to argue over “who got what” as there seemed to be plenty for everyone.  But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.

Companies and investors have had little experience of how such debates can impact them in recent decades.  They now need to move quickly up the learning curve.  Political risk is becoming a major issue, as it was before the 1990s.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 54%
Naphtha Europe, down 52%. “Many market participants continue to observe the market. Concerns over a slowing Chinese economy linger, especially on the country’s appetite for plastics”
Benzene Europe, down 61%. “The lower spread between naphtha and benzene in recent months was driven by sluggish downstream demand in the phenol and cyclohexane markets and increasingly weak signals from the Chinese economy”
PTA China, down 44%. “Plant turnarounds in China had tightened PTA supply, sources with more market participants looking for cargoes”
HDPE US export, down 35%. “there was talk of more slippage in light trading in a market where material is plentiful.”
¥:$, down 18%
S&P 500 stock market index, unchanged