Diverge or converge? The choices facing Ireland, the United Kingdom and the European Union revolve around whether UK policy and its socio-economic model diverge from those of the EU or remain close to them in coming years.
The issue becomes all the more important as the crisis turns either to an election in which Brexit will loom large or a similarly polarised second referendum. Paradoxically what divergence actually means in practice is obscured by nationalist xenophobia and coarsening humbuggery.
Those interests driving the most radical versions of Brexit are not prepared to reveal their hands until they leave. For the moment divergence is their preferred term – and it hinges around the Irish backstop, which they say prevents them realising it. The greater the divergence the more important the Irish Border becomes as a geopolitical and geoeconomic divide.
In his letter to EU Council president Donald Tusk, after becoming prime minister Boris Johnson said: “Although we will remain committed to world-class environment, product and labour standards, the laws and regulations to deliver them will potentially diverge from those of the EU. That is the point of our exit and our ability to enable this is central to our future democracy.” He said the same in New York this week, speaking to media and a business group about new competitive corporate tax rates, faster public procurement, free ports and enterprise zones.
Disruption and volatility
Hedge funds are among the most enthusiastic supporters of a radically divergent Brexit agenda. They make their money on disruption and market volatility, investing in rising or falling shares and currencies. Jim O’Neill, formerly of Goldman Sachs, says Brexit is a free lunch for them. Many support Johnson and a number of them like Crispin Odey and Michael Hintz have made huge sums on his victory and on other turbulent episodes in this drama, not least the June 2016 referendum itself.
The real prize is fewer protections for workers, no controls on banker bonuses, and, most likely, further privatisation of public services
Hedge funds make up about one third of financial services in the City of London, as the riskier and more mobile investment end of the spectrum, in contrast to the fixed capital mainstream banks which favour a more convergent UK-EU relationship. These banks risk losing access to the EU markets they thrive on if they don’t get passports to trade for what remains a dominant sector of the UK economy. But they have lost out in the games of statecraft and access to power surrounding the domestic politics of Brexit which have favoured the hedge fund sector.
The hedge funds especially resent the EU regulation imposed on their “vulture capitalism” after the 2008 financial crash, particularly the 2011 alternative investment fund managers directive steered through by one Michel Barnier – then internal market commissioner. Proponents of the French and German varieties of capitalism saw them then and see them now as exemplifying the British-American alliance of interests around privatisation and deregulation.
Privatisation and deregulation
A rare articulation of these issues from within the hedge fund sector comes from Rami Cassis, chief executive of Parabellum Investments in the City. In a letter to the Financial Times and a recent article, he says hedge funds may be among the chief beneficiaries of a cliff-edge Brexit. It enables the UK to “cut loose from EU regulation and compete as a low-tax haven on its doorstep”. That could turbo-charge inward investment in the UK. A weaker UK economy may only be able to deliver higher public spending through privatisations and deregulation of environmental and working conditions.
Cassis says “this is an investment-driven agenda which appeals to international investors, like myself, but has little obvious benefit for millions of ordinary people who voted Leave . . . The real prize is to create a business-friendly environment with fewer protections for workers, no controls on banker bonuses, lower corporation taxes and, most likely, further privatisation of public services . . . Far from being pilot of its own destiny, it also looks like the UK may be willing to trade one master for a more business-friendly one – the US instead of the EU”, notably in employment and healthcare rights.
Such a contradictory prospect seems tailormade for exposure in an election or referendum by determined Labour and other oppositions. Can they overcome their factionalism and polarisation to reveal such interests at play?
Brexit is aptly described as a coalition of those with nothing to lose. Hedge fund investors and wealthy retired voters with pension funds drive it politically far more than workers who have lost out from globalisation. This coalition would rapidly disintegrate after such a diverging Brexit.
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