Brexit calls up ghost of Kennedy decision
AMID shock at the UK’s unexpected referendum vote to leave the EU, various historical events have been cited as parallels, notably the fall of the Berlin Wall in 1989. It reminds me of another destructive decision with unanticipated consequences more than half a century ago.
In 1963, the US government under president John F Kennedy passed capital controls to tax investment in foreign securities. The law revived the City of London as the primary centre for international finance by encouraging the creation of the offshore eurodollar bond market. Fiftythree years later, New York has not regained the crown.
It sounds like a minor change compared with the economic and political effect of Brexit but it was the first in a series of events, leading through the Big Bang deregulation of the city 30 years ago this year, and the creation of the European single market in the early 1990s. They were the foundation for the global transformation of the city and the UK economy. It is unclear what precisely the UK’s voters wanted, or what the next prime minister will manage to negotiate on their behalf.
But history shows why a future decision that is also in danger of sounding technical — whether the UK remains within the European single market even though it leaves the EU — is so crucial in limiting the economic damage.
The map of UK districts that voted Remain is oddly revealing about how the economy has changed. The cliché that London and Scotland voted Remain, while England and Wales voted Leave is a half-truth.
The biggest Remain splodge is London but then it spreads along the western motorway corridors through Oxford to Bristol, south to Hampshire and Sussex, and northeast to Cambridge.
Here are the university cities and knowledge hubs of the modern economy, the towns full of highpriced houses and high-paid jobs for graduates (quite a few of them economic immigrants). This is the place that was once dubbed Roseland, an acronym for “rest of the southeast” outside London, where employers must compete to recruit and retain skilled staff.
Roseland was a novelty in the late 1980s, when the term was invented, and ribbon development of insurers, banks, and technology and healthcare companies throughout the southeast was less familiar. Now, a vibrant UK service sector with clusters of high-value enterprises is taken for granted.
The referendum result revealed to those who were not looking closely the impact of industrial decline in other parts of England and Wales — northern and coastal towns quite unlike Roseland. As manufacturing has shrunk, the services sector has grown from 44% of UK employment in 1948 to 85%. In Leave territory, many of these jobs are poorly paid. But do not ignore the other story — the tradeable services sector has flourished and the British are good at it.
From bankers and investors, to lawyers and consultants; to architects and industrial designers; to creatives and media buyers in advertising; to software and video game developers, they have mastered a complex set of skills.
That originated well before the European single market. “This country in general is the bank for the whole world … all transactions in India, in China, in Germany, in Russia … are guided here and settled through this country,” said Nathan Rothschild in 1832.
Pop music and advertising had a creative explosion in the 1960s.
But being economically joined to Europe has been enormously helpful in two ways. First, it has bolstered the UK’s strength as a European hub through the services passport.
This allows companies of all sizes, from technology start-ups to large investment banks to gain regulatory approval in the UK, and then operate seamlessly through-
The referendum result revealed to those who were not looking closely the impact of industrial decline in other parts of England and Wales
out the 27 other EU countries.
The loss of the services passport would force many to relocate operations and employment into EU locations, as US investment banks have signalled they may. Some would move headquarters, as the telecoms group Vodafone, whose main UK office lies west of London in Newbury, will now consider.
Second, freedom of movement has enabled technology companies, for example, to operate in London with British, Swedish and French software developers. The mixing of skills has combined with liberal regulation and a deep capital market to create a strong technology cluster. It would inevitably suffer if the UK leaves the single market to curtail immigration.
Leave voters in Sunderland might not see the relevance to their lives, but tearing up the UK’s postwar recipe for growth and highpaid employment will hurt them, too. In normal times, a Conservative Party that stands for financial stability and wealth creation would know better than to risk them — but it is blinded by ideological fervour.
With emotions running high and UK politics in turmoil, it will not be easy for anyone to ease the self-inflicted crisis. But here is a piece of advice for the next prime minister: Before you do irreparable damage to economic growth, read some history and reflect very, very carefully. © Financial Times 2016