Brexit 2030
As things stand, on September 4th 2030, Britain sits atop a currency crisis, its economy tanking, its public finances in shreds, unemployment approaches ten percent, pension and investment funds have collapsed, and it has no Prime Minister. It is facing a crisis like no other in the modern era. An entire economic model and who knows, political model, appears to have collapsed. And, as things stand, unlike the crash of 2008, there doesn't appear to be an obvious way out.
The proximate cause is the collapse of the Axis hedge fund. In itself, the fund was never seen as systemically significant. But the regulators took their eye off the ball - or, rather, chose to avert their gaze if you believe some of the most trenchant critics. The critics have a point - a good one in fact. Axis was a prime conduit for the new Silk Road. That is the trillions of investment in Remnimbi denominated securities that has been the major source of growth for the City. And almost every significant financial player was involved. Axis was a single point of weakness.
But don't confuse proximate with structural causes. There is a lot of 'I told you so' from remainers currently. In a sense, every Cassandra has her day. The collapse wasn't quite as foretold, however. Sure, the years after Brexit meant anemic growth as the UK had to wrestle with the slow unwind of international business investment and a persistent fiscal deficit as new demands from an ageing society began to bite. But the collapse didn't come immediately. In this, the more cautious remainers were right - over time, Brexit would cost. A decade in and the 'beast from the east' financial hurricane has hit. Brexit is part of the story for certain; so are the choices made in the development of a post-Brexit statecraft. And so, the 'Apex Britain' strategy of Sajid Javid, the Prime Minister who quit this week over appointments to the Bank of England in which he was seen to intervene, warrants scrutiny.
Given a sluggish post-Brexit economy, the return of violence to the North of Ireland, and continual crises in the NHS and social care (with twenty-two local authorities bankrupt at the last count) it is remarkable that the now departed Javid managed two election victories - albeit with slender majorities. His optimism and personal story were without doubt attractive features in a nervous environment. Of course, the minor split within Labour and formation of the Modern Democrats have given him a helping hand. Experts estimate that split cost Labour upwards of thirty seats in 2022 and 2027. The mountain was to high to climb. But Javid's enthusiastic embrace of the 'global' statecraft embedded within 'Apex Britain' have him a plausible post-Brexit growth and geo-political prestige story.
Apex Britain had two core elements - economic and geo-political. Britain's economy was to be situated at the apex of three intersecting links. The problem post-Brexit, given that the UK was in neither the customs union nor the internal market, was that it struggled to find new sources of growth. Not even by Liz Truss, the Chancellor, cutting the corporation tax in half was she able to restore its long run place in international supply chains with the EU market as their destination. Dublin would always be at an advantage. London's lifestyle was attractive for some tech giants and the proximity to key global universities remained attractive. But this was not enough to compensate when, to take one example, Nissan downgraded its production in the North-East.
When you add to the mix the demands placed on Government finances by exploding health and care needs and the perpetual cost of insecure employment on the public purse, a new growth model was needed. This was the genesis of Apex Britain. The UK Government played the same strategy it always does when it's under severe pressure - let the City rip. So the City was to become an offshore powerhouse for three global currencies: the Euro, the Dollar, and the Remnimbi. It was the latter that was the real growth opportunity. The Euro was a tricky customer with the EU and its member states creating regulatory hurdles every step of the way. The Dollar was also a tricky proposition as the Trump presidency engaged in bouts of financial protectionism (US securities for US investors) - which became more pronounced in his second term. These often coincided with moments where the UK steered a differentiated geo-political line to the capricious - indeed unstable - President. The Remnimbi was different.
China's President Xi had decided that the growth of the national economy needed the rocket fuel of international capital. That is where London came in. Already under the Cameron and Osborne Government, there was an agreement for London to be an offshore Remnimbi market (indeed, the UK Treasury had issued a bond in Remnimbi). And now that would be turned from a market of a few billion to a few trillion pounds. The Silk Road was a loop. UK financial institutions would aggregate global Remnimbi, with many borrowing in the Shanghai money markets, and buy into securitised Chinese corporate and local Government debt. And so it went round - faster and faster, bigger and bigger.
And the regulators? Over time, they were populated with more 'market friendly' leadership (hence the unbearable pressure on the Government over the past few weeks). Besides much of this trade was taking place in the dark through vehicles such as Axis. The banks looked safe - they had no problem raising capital to meet Basel III regulations (not least through the issuance of equity in Remnimbi ironically enough). Balance sheets were exploding but the safety ratios were met. The Government reassured the regulators that the Chinese Government very much saw these arrangements as areas of mutual responsibility. That may have been a misunderstanding. The Chinese Government had said mutual 'interest' rather than 'responsibility' - a case of willful deafness on the part of the British perhaps?
These reassurances point to the other dimension of Apex Britain - geo-politics. The foreign secretary in the early 2020s, Jacob Rees-Mogg, set about creating a new Palmerstonian doctrine of equidistance between the EU, the US and China. In his arresting phrase, 'when the big beasts start growling, comfort each in equal measure.' Again, there was continuity here from the Cameron-Osborne years when the UK had become a founding signatory to the Chinese led Asian Investment Bank. So when China threatened Taiwan with increasing frequency in the early 2020s, the UK stood aloof, much to the continuing irritation of the Trump administration (it was rumoured Rees-Mogg was doused in Acqa Frizzante by the US President at one G7 conference in Genoa - an incident they both deny).
All this meant that by the mid 2020s the UK had returned to a healthy growth rate but at the cost of some erstwhile international relationships. A 'Brexit miracle' was declared by the Chancellor. London was booming but grotesquely unequal - the city of 'high towers and homelessness' as it had become known. The rest of the UK was economically suffering - eye catching pre-2027 election investments in transport infrastructure in great northern cities failing to mask to re-emergence of regional inequality, on heat this time. Inequality was greater than ever and poverty persistent and deepening. The NHS was now will funded - the deal for the country going along with Apex Britain. It was not a deal acceptable to many as relentless violence and protest could attest. Police budgets soared. A split opposition meant there was no alternative to seemingly perpetual Conservative rule. It was all very, well, 1980s but on a much bigger scale and devoid of the great pop music. And it now has gone pop. Or, at least, things have swivelled around Axis.
As one commentator put it, 'the UK was at the hub of three great open roads, the question has always been down which would the financial nuclear bomb be traveling? Prizes to those who answered the new Silk Road.' Crisis management stepped as soon as Axis crashed - following a Chinese economic slowdown and widespread corporate failure - but it failed to catch the chain reaction. In contrast to 2008/9, the UK was alone to begin with and by far the heaviest hit from the China fallout. So the tools of response, quantitative easing and the like were less effective. Capital fled the UK to safer shores (there were fewer such options in 08/09). The pound collapsed and the Bank of England was burning foreign currency at an alarming rate. The Government turned to China to help it recapitalise the UK financial system. To its shock, China turned away. President Xi said he was reasserting a policy of the 'National Remnimbi' as the offshore haven had contributed to instability. The UK now stands alone. All three of Rees-Mogg's big beasts have turned on it simultaneously. The scale of the national calamity can not be overstated.
From Apex to nadir, the UK has gone from Brexit to bust. Even in the context of Brexit none of this was inevitable. Given the increasingly apparent knock on from the UK financial system to the European, some salvation package could well be made available. The German Finance Minister has described this as the 'Lehman dilemma 2030' - to allow the UK to fail as the US had done with Lehman Brothers in 2008 or save it? As with Greece, Ireland, Italy, Portugal and Spain in the 2010s, the pain will be immense and the UK may have to rejoin the EU and join the Euro. Scotland, the one area of the UK to develop industrially and economically since Brexit thanks to a smart industrial policy, is very likely to leave the UK to pursue this course itself anyhow. The populist backlash in the UK could be severe - the True Brexit party, formed as the UK and the EU been talks, of Johnson and Farage already stands at 20% in the polls. And this is where once great Britain now stands- in supplication. And this, it seems increasingly likely, is where the Brexit story concludes. The aftermath, however, will continue for decades to come.
NOTE: I have used real names in this blog but it is a work of fiction — the characters are fictionalised versions of the real individuals. And this is merely a scenario (with no doubt major technical errors) but hopefully will elucidate some post Brexit decision making.
This was inspired by the brilliant 'Crashed' by Adam Tooze. Buy it. Read it.
