The UK in the post-Covid world

6 May 2020

In the second in a series of articles on the impact of the global pandemic, Roger Liddle considers the place of the UK in a dramatically changing global economy

Roger Liddle
Editorial credit: pxl.store / Shutterstock.com

For the previous instalment in this series on ‘Covid-19 and Brexit’, click here.

A new strategy for growth

Higher taxes will not be enough in themselves to bring down debt and finance an expanded state. Britain will need a strategy for the revival of UK economic growth. If it proves impossible to cut the numerator of public spending, the only strategy is to raise the denominator of national output with a comprehensive growth strategy. This strategy will need to be investment led, productivity enhancing, innovation dynamized, entrepreneurially driven, sustainability fool-proofed and export focused. The success of this effort will in large measure depend on prospects for overseas trade and the strengthening of UK international competitiveness. Here, the Covid crisis also contains within it other uncomfortable lessons for the Brexiteers, on the need to intensify European and international cooperation and the problems of having opted for a Brexit which prioritises an independent trade policy for Britain.

The British economy is so integrated into the European and world economy that the threat of depression can only be averted by effective international coordination. The priority now is for a coordinated international stimulus to offset the fall in private investment and consumer demand. But this also requires actions that are politically much more difficult, including: properly coordinated support for weaker economies that find higher levels of public sector deficit and debt difficult to finance and sustain, because we need their contribution to global growth and we cannot afford the risk of a debt crisis where holders of their debt lose confidence in their ability to repay.

This is an existential issue for the Eurozone. As President Macron has made crystal clear; if Italy is left to its fate, then key countries in the whole European Union construct could succumb to the forces of populist nationalism. Criticism of the European Union’s initial patchy response to the Covid crisis is easy to make, and in many respects justified. For some Brexiteers, the break up of the European Union would be the culmination of all they hope from Brexit – that it would herald the start as they see it, of the ‘liberation of Europe’, as Michael Gove put it in his one of his more notorious flights of rhetoric in the 2016 referendum campaign. They positively look forward to a crisis that they believe will create unsustainable tensions within the Eurozone and the EU. Those tempted by this view should be careful what they wish for.

We have of course been here before. Many similar predictions were made at the time of the Euro crisis: they were proved wrong then, and in my judgement, they will be proved wrong now. Brexiteers consistently underestimate the political will to keep the European show on the road. In a crisis it may be slow off the mark; its solutions may eventually fall short of perfection; but it will do enough to keep the EU together. Already we have seen commitments by the ECB to buy unlimited quantities of Italian bonds. A huge financial rescue package is in preparation by Brussels that will not be conditional on acceptance of difficult and politically unpopular domestic reforms by individual member states.

The UK should be backing these measures, not washing its hands of them. The idea that Britain should reject any extension of the Brexit transition period because the UK might then be expected to contribute to a common effort to revive the European economy reflects a profound misunderstanding of the UK national interest. In the first half of the 2010s, it was not just UK domestic austerity that stunted growth. It was also its coincidence with the Eurozone crisis which was a significant obstacle to UK domestic recovery. Indeed, renewed growth only took hold after Mario Draghi had made his dramatic “we’ll do whatever it takes” intervention.

The gloomy global outlook for trade    

Britain continues to play a positive role in international debt relief for the world’s poorest countries without which they would almost certainly lack the resources to fight the spread of Covid. But what is striking so far about this crisis, as opposed to 2008, is the virtual absence of coordinated action among the richer nations. President Trump has abdicated the United States’ role as leader of the free world. Instead of working with China to tackle the Covid crisis, he crudely seeks to stigmatise the Chinese as the source of the problem. In the absence of global cooperation and a coordinated stimulus, a strong economy quickly comes to be seen as a zero-sum game. The political pressures for post-Covid protectionism and less open borders are on the rise. The simple verities of free trade are being called into question. The world is undergoing a profound de-globalisation shock.

Some of this questioning of globalisation is legitimate. In an article for Foreign Affairs in March 2020, Henry Farrell and Abraham Newman ask, Will the Coronavirus End Globalisation as we know it?”, and argue that the crisis is demonstrating how deep interdependence has made us all “vulnerable to unexpected shocks…forcing a major reduction of the interconnected global economy”. The globalised division of labour has created great wealth, as has the elimination of slack or inventory with the development of ‘just in time’ production processes and global supply chains, but until now, no one has thought through the risks.

The Covid crisis raises very difficult questions. Is it right that our present dependence on components and materials manufactured on the other side of the oceans – which globalisation has brought about – can make us short in this dire emergency of key pharmaceuticals and medical equipment such as respirators? The French Finance Minister, Bruno Le Maire, has declared that Europe should no longer tolerate a situation where 80-85% of medicine ingredients are manufactured in China. But people will be asking similar questions in Britain. Why is it that hospitals and care homes, desperately short of protective equipment for medical staff, are anxiously awaiting flights from Turkey or the uncertain delivery of orders from China? Why is it that even if Britain’s proud strengths in medical research can produce a viable vaccine, we no longer have a factory in Britain that can produce vaccines at scale?

How the orthodoxies of globalisation need to change.

These are big questions that profoundly challenge the orthodoxies of globalisation, but they also contain within them huge dangers and risks. Fifteen years ago, a group of us then working in the European Commission became acutely conscious that the existing political economy of globalisation carried within it great economic, social and political risks for the European Union. The trigger for this reassessment was the loss, in the early summer of 2005, of the referenda on the Constitutional Treaty in France and the Netherlands, two founding member states of the bloc. We analysed these defeats for the European project in terms of the tensions between the “winners” and “losers” from globalisation which, prior to any thought of the 2008 banking crisis, was already triggering a new wave of anti-EU populism in several EU member states, each distinctive but with common roots. Tony Blair seized on this analysis and called dramatically for a new model of Social Europe. In one of his best ever speeches as Prime Minister, he warned the European Parliament that “the trumpets were sounding outside the walls of Jericho”.

The Barroso Commission made tentative efforts to rethink and relaunch a social agenda. The EU Services Directive, originally conceived as a classic liberalising measure to strengthen the Single Market’s capacities as a driver of the Union’s own very powerful mini-globalisation, was heavily amended to protect public services – under pressure from the European Parliament. Peter Mandelson as Trade Commissioner argued that if Europe was to avoid a reversion to trade protectionism, it had to promote better policies to be “a Europe that protects its citizens”. In truth citizens in EU member states were already experiencing wrenching social change as a result of globalisation. The footwear and textile industries were decimated by the removal of quotas and fierce Chinese competition. This particularly hurt Southern Europe, especially Italy and Portugal. Even in booming Britain, manufacturing employment halved in the New Labour years.

Calls for a new European political economy, based on a stronger commitment to a more social Europe, that works with the grain of market driven dynamics, made some progress in the Brussels bubble, but gained little traction among the member states. They had little appetite for ‘more Europe’ in the social field, in the wake of the blows to European integration inflicted by the French and Dutch referenda and the rise of the populists. Calls for a new political economy were then overwhelmed by the financial crisis followed by the Eurozone crisis.

The other historic development of the mid-2000s was the EU’s enlargement from fifteen to twenty-seven members. The new member states were largely resistant to a stronger Social Europe as they saw it, wrongly, as an attempt at social protectionism by the old EU-15. In the meantime, enlargement gave a huge impetus to mass migration from the poor ex-Communist East to the job-rich West, adding further profound social and political change to the wrenching economic dislocation globalisation wrought in its wake. The clear beneficiary from these developments in Britain was rising support for Brexit.

For pro Europeans in Britain the experience of the past fifteen years has shown the limits of what can be achieved at European level in creating a more progressive political economy that attempts to shape globalisation, rather than simply let it rip. This has led to a switch in focus to what can be achieved nationally in order to combine more successfully economic dynamism with greater social justice. Some political scientists interpret the experience of Corbynism within the Labour Party through that lens. It was also evident in the Blue Labour thinking that preceded it.

In the next instalment in this series, available here, Roger Liddle considers the case for the EU, despite its deficiencies.