Policy Research in Macroeconomics

Brexit and its consequences

This is an Accepted Manuscript of an article published by Taylor & Francis in Globalizations on 25/10/2016, available online.


Globalization was, and remains, the utopian ambition of those many economists, financiers, politicians, and policy-makers that were once aptly defined by George Soros as ‘market fundamentalists’ (Soros & Woodruff, 2008). When more than 17 million British voters opted to end ties with the European Union on the 23 June 2016, they exposed the fragility and even futility of the ambition to build markets beyond the reach of regulatory democracy. By doing so, British voters rejected the advice of dozens of leading economists and several powerful financial institutions. The outcome threatens to undermine the pivotal role played by the City of London in ‘globalizing’ and financializing the world economy.

The background to this historic event can be traced to the economic theories and policies that led to the Great Financial Crisis. These underpinned the structures and operation of an increasingly globalized, autonomous, self-regulating market in finance, trade, and labour. A project that peaked just before the ‘debtonation’ of 9 August 2007.

Liberal finance prior to the crisis had led to unfettered credit (debt) creation, high real rates of interest for those active in the real economy and volatility in capital flows across borders. These in turn led to the rise of international imbalances and to fluctuations in exchange rates. Financial and trade imbalances were accompanied by policies for (i) the privatization of state assets (often acquired through the creation of debt, and at a loss to taxpayers), (ii) the ‘flexibility’ of labour, and (iii) for wage repression. The result? The build-up of vast mountains of private debt and repression of the incomes needed to repay those debts.

This financial house of cards began to collapse as early as 2006.

On ‘debtonation’ day, 9 August 2007, inter-bank lending around the world froze, and the Great Financial Crisis—still ongoing in both Europe and in emerging markets—began in earnest. Since then both the ideology of globalization and the economic reality of liberal finance have weakened. The former set off countervailing populist, nationalist, and protectionist movements in the US, Europe, and in many emerging markets. The latter is now subject to considerable contraction as financial flows are domesticated, and trade flows contract.

Unfettered Financial and Trade Flows—and Brexit

Unfettered global financial flows are intrinsic to the globalization ideal, but flows collapsed during 2007–2009 and nearly 10 years later remain well below pre-crisis levels. At their peak, the world’s 100 largest banks had a market capitalization of around $4.9 trillion, according to the Bank of England. That was around 8.5% of annual global GDP. At its trough, this had fallen to $1.4 trillion—a destruction of financial capital of $3.5 trillion. The market capitalization of the world’s 20 largest banks today remains around half its value in 2007 (Haldane, 2016). ‘Cross-border financial flows … are now as “globalized” as they were in the year 1983’ according to Kristin Forbes, of the Bank of England’s Monetary Policy Committee, in a speech made well before the Brexit vote (Forbes, 2014).

The decline in flows to and from the City of London has led a global decline in flows, according to Forbes.

The contraction in UK international lending and borrowing is larger—on an absolute basis—than for any other country for which data is available. In other words, the decline in bank flows into and out of the UK has contributed more to the global decline in banking flows than any other country. (Forbes, 2014)

That decline is now likely to be aggravated by the Brexit vote. As the Financial Times of 18 August 2016 reports, ‘the biggest fear for many City grandees is that financial services could face a “cliff-edge” moment if the UK leaves the EU without a trade agreement in place, cutting off (bankers’) access to the single market overnight’ (Arnold & Binham, 2016). Given the key roles played by Brexiteers in the newly formed Conservative government led by Theresa May, all of whom have an aversion to the unfettered migration that is central to the European project, and given that free movement is a condition of access to the single market, such a trade agreement seems increasingly unlikely to serve the interests of the City. British bankers have ‘given up hope of universal access to the single market’ (Arnold & Binham, 2016).

The financial crisis also dealt a blow to world trade, which has slowed markedly. The rate of growth of world merchandise trade (by volume) between 2010 and 2012 oscillated (according to United Nations Conference on Trade and Development [UNCTAD]) between 2% and 2.6%, significantly below the average annual rate of 7.2% recorded during the 2003–2007 period (UNCTAD, 2015, p. 6). And since 2008, the G20 economies have become increasingly protectionist. According to the World Trade Organisation, the advanced economies have, since then, introduced 1583 new trade restrictions and removed just 387. In a recent report, the WTO noted that between mid-October of 2015 and mid-May of 2016, G20 countries introduced 145 new protectionist measures, a monthly average of 21, the highest since the WTO began monitoring such measures in 2009 (WTO, 2016).

The destabilizing consequences of the crisis and the reversal of the globalization agenda triggered countervailing nationalist and protectionist movements. These should have come as no surprise. First, the financial crisis was a self-inflicted wound. Re-regulation (not de-regulation) of the global economy to favour, detach, and strengthen the rentier (title-holders of money) sector was achieved by deflationary policies. These imposed substantial costs on the real, productive economy where millions expect to be employed, and both enriched and protected the rentier sector from oversight, penalties, and punishment.

Re-regulation of Finance

In Britain in the early 1970s, the Treasury and the Bank of England made a series of regulatory changes that served the interests of financial markets at the expense of UK industry.

Based on the ideas of Adam Smith, Thomas Malthus, and David Ricardo, the liberal finance argument that fuelled these changes ran thus: only the price mechanism could effectively bring the supply and demand for money into balance and assure the optimal use of financial resources. These ideas ushered in the new regulatory framework, Competition and Credit Control in 1971. From then on, bank lending would be determined not on the basis of the viability of a project or borrower; not on the likely revenue to be generated by the borrowing, but on the basis of cost, that is through interest rates. Loans would be granted to those companies and individuals that could pay the highest rates rather than to those that fulfilled the authorities’ qualitative criteria. As the financial historian Duncan Needham has definitively explained: ‘credit based on cost replaced years of rationing based on “control”’ (Needham, 2014).

There followed a series of re-regulatory measures that strengthened the hands of Finance and weakened the hands of Industry and Labour. These have been documented by Aeron Davis and Catherine Walsh in an article published in Political Studies in April 2015. They explain that:

1979 and 1980 brought the release of exchange and credit controls and thus initiated a new credit boom. Big UK-based institutional investors started switching far more of their funds abroad and away from UK industry. Stamp duty on the purchase of shares and bonds was cut in stages from 2 to 0.5 per cent. Dividend payment controls were abolished in 1982. In contrast, although corporation tax was cut for all businesses, this was paid for specifically by removing capital investment allowances for machinery and plants—measures which primarily hit manufacturing. There were steady value-added tax (VAT) rates rises on goods and services, but financial and insurance services were made VAT-exempt. This doubly disadvantaged industry next to finance as the former made much greater use of real world goods and services than the latter.

Although the UK has had a strong financial sector for centuries, it expanded significantly from the late 1970s, as Davies and Walsh evidence:

From 1979 to 1989, investment in financial services grew 320.3 per cent next to investment in manufacturing, which rose only 12.8 per cent (Coates, 1995, p. 6). Until the 1970s, UK bank assets had been equal to roughly half the value of UK GDP for a century. Following changes, by the mid-2000s, they had risen to five times the value of GDP (Haldane, 2010). In 1979/80, the equity value of the stock market (£30.8 billion) was roughly 40 per cent of government income (£76.6 billion). By 2012, it was worth £1.76 trillion, or three times government income (£592 billion; HMSO, 1980–2014). From 1997 to 2013, the UK’s debt rose from £34 billion in 1997 to £1.3 trillion, or 88 per cent of GDP in 2013. By the time of the financial crisis in 2007–8, the UK’s financial sector relative to its economy was bigger than any other G7 nation.

In contrast, UK industry has suffered a faster decline than all its economic rivals in that same period. In 1970, UK manufacturing accounted for 30 per cent of GDP, 16.3 per cent of total world exports (Coates, 1995, p. 7) and had trade surpluses of 4–6 per cent annually. Furthermore, 35 per cent of UK employment was in this sector. By 2010, 13 per cent of GDP and 10 per cent of total employment was in manufacturing, and the UK was running a trade deficit in this sector of 2–4 per cent (Chang, 2010, p. 90). (Davis & Walsh, 2015, p. 2)

Re-regulating the British economy in favour of finance and enriching the 1% while shrinking labour’s share of income resulted in rising inequality and lit a still smouldering fuse of popular resentment. Resentment made most explicit in the Brexit vote.

The Failure of Economics

Finally, the economic profession’s deflationary, liberal finance bias, and the failure to include money, debt, and banks in economic analyses and modelling made it nigh impossible for the profession to correctly predict, prevent, or mitigate the ongoing crisis. Perhaps most symbolically, even the Queen suggested that they did not know what they were doing.

The economic model that fostered the crisis remained intact after 2009, with only some tinkering at the margins of the banking system. As a result, today’s policy-makers struggle to stabilize an unbalanced global financial system, and doggedly oppose expansionary policies needed to ensure employment and recovery. The necessary restructuring and rebalancing of the global economy have been postponed.

With the historic Brexit vote, the British people rejected this flawed brand of economics—and in particular the dominant liberal finance narrative. And they did so because the hardship they are experiencing—repressed wages, diminished public services, rising housing costs and shortages, and insecure employment—is indirectly a consequence of the theories and policies of the mainstream economics profession. Economists led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years and to soaring levels of debt, crises, and financial ruin. Economists dictated the terms for austerity that has so harmed the British economy and society over the past ten years. On 14 February 2010, 20 of the most senior UK economists wrote to The Sunday Times castigating the Labour government for inadequate efforts on deficit reduction and setting the tone not only for the general election of that year but seemingly ever since (Chick, Pettifor, & Tily, 2016, p. 3). As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternatives. It is hardly surprising, therefore, that the British public did not find the opinion of the ‘experts’ backing the Remain campaign compelling.

The Remain campaign chose to focus on the economy—to the exclusion of almost all else. All the heavyweights of the economics profession—10 Nobel Prize-winning economists, the OECD, the IMF, the Federal Reserve, the Bank of England, the NIESR, the Institute of Fiscal Studies, the London School of Economics—were wheeled out to warn the British people of economic facts known, and understood apparently, only to ‘experts’. The Financial Times amplified their voices and repeated their dire threats and warnings over and over.

But the ‘experts’ and the economic stories they tell have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international and in particular European cooperation and coordination are vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets—in money, trade, and labour—must be unfettered, detached from democratic regulatory oversight, and must be left to ‘govern’ whole countries, regions, and continents.

The British people by voting Brexit rejected this mainstream, orthodox economics, a strain of fundamentalism that they rightly judge has proved deleterious to their own economic interests.


I voted to Remain. I do not believe that Brexit is a wise decision. I fear its consequences in energizing the Far Right both in Britain but also across both Europe and the US. I fear the break-up of the UK, and the political dominance of a small tribe of conservative ‘Little Englanders’. They will diminish this country’s great social, economic, and political achievements.

But Britain’s ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the economists’ globalized, marketized society. And if there should be any doubt that these movements are both nationalistic and protectionist, consider Donald Trump’s campaign threat to build a wall between Mexico and the US, to deter migrants, ‘gangs, drug traffickers and cartels’ (Trump website). Trump’s plan for financing the wall involves the introduction of controls over the movement of capital. If the Mexican government resisted, argued Trump, the US would cut off the billions of dollars that undocumented Mexican immigrants working in the US send to their families annually. ‘It’s an easy decision for Mexico’, Trump wrote in a note to the Washington Post on 5 April 2016. ‘Make a one-time payment of $5–10 billion to ensure that $24 billion continues to flow into their country every year’ (Woodward & Costa, 2016).

Nationalism, protectionism, and populism are not confined to Western nations. In India, a BJP MP, Subramanian Swamy, fired a salvo at the Reserve Bank of India (RBI) governor Raghuram Rajan that led to his unexpected decision not to seek a second term when his three-year reign ended in September 2016. Swamy made clear that ‘the governor should have known the inevitable consequence of rising and high interest rate and (that) his policy was wilful and thus anti-national in intent’ (my emphasis). The RBI governor’s post, Swamy added, ‘is very high in the Warrant of Precedence and requires a patriotic and unconditional commitment to our nation’.

Karl Polanyi predicted in The Great Transformation that no sooner will today’s utopians have institutionalized their ideal of a global economy, apparently detached from political, social, and cultural relations, than powerful counter-movements—from the right no less than the left—would be mobilized (Polanyi, 2001). The Brexit vote was, to my mind, just one manifestation of the expected resistance to market fundamentalism. The Brexit slogans ‘Take Back Control’, ‘Take Back Our Country’, and ‘Britannia waives the rules’ represented an inchoate and incoherent attempt to subordinate unfettered, globalized markets in money, trade, and labour to the interests of British society. Like the movement mobilized by Donald Trump in the US, the Five Star Alliance in Italy, Podemos in Spain, the Front National in France, the Corbyn phenomenon in the UK, the Law and Justice Party in Poland, Brexit represented the collective, if (to my mind) often misguided, efforts of those ‘left behind’ in Britain to protect themselves from the predatory nature of market fundamentalism.

By doing so, they confirmed Polanyi’s firm prediction that

the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society … . Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way. (Polanyi, 2001, p. 3)

Brexit has endangered British society in yet another way, but the vote was, I contend, a form of social self-protection from self-regulating markets in money, trade, and labour.


Arnold, M., & Binham, C. (2016, August 18). UK financial sector targets Swiss-style deal for EU market access. Financial Times. Retrieved from https://www.ft.com/content/5cebe746-655a-11e6-8310-ecf0bddad227

Chick, V., Pettifor, A., & Tily, G. (2016). The economic consequences of Mr Osborne. Prime Economics.

Davis, A., & Walsh, C. (2015). The role of the state in the financialisation of the UK economy. Political Studies. http://psx.sagepub.com/content/64/3/666 

Forbes, K. (2014, November 18). Financial “deglobalization”?: Capital flows, banks, and the Beatles. Speech given at Queen Mary University, London.

Haldane, A. (2016, May 18). The great divide. Speech given at New City Agenda Annual dinner, London. Retrieved from http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech908.pdf

Needham, D. (2014). UK monetary policy from devaluation to Thatcher, 1967–8. Basingstoke: Palgrave Macmillan. http://link.springer.com/book/10.1057%2F9781137369543

Polanyi, K. (2001). The great transformation. Boston, MA: Beacon Press.

Soros, G., & Woodruff, J. (2008, May 15). The financial crisis: An interview with George Soros. The New York Review of Books. Retrieved from http://www.nybooks.com/articles/2008/05/15/the-financial-crisis-an-interview-with-george-soro/

Trump/Pence website: Make America Great Again. Retrieved from https://www.donaldjtrump.com/positions/immigration-reform

UNCTAD. (2015). Trade and development report. Retrieved from http://unctad.org/en/PublicationsLibrary/tdr2015_en.pdf

Woodward, B., & Costa, R. (2016, April 5). Trump reveals how he would force Mexico to pay for border wall. The Washington Post. Retrieved from https://www.washingtonpost.com/politics/trump-would-seek-to-block-money-transfers-to-force-mexico-to-fund-border-wall/2016/04/05/c0196314-fa7c-11e5-80e4-c381214de1a3_story.html

WTO. (2016, June 2). Report on G20 trade measure (mid-October 2015 to Mid-May 2016). Retrieved from https://www.wto.org/english/news_e/news16_e/g20_wto_report_june16_e.pdf

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3 Responses

  1. This article is thought provoking and insightful. I have two comments:
    1) The figures about how and why finance has come to dominate the UK economy over the past forty years was a great explanation. Another factor that I think should not be forgotten is that British industrial relations were in significant decline during the 20th Century. Dire management failed to get everybody pulling in the same direction. This lead to bitter strikes and no investment in manufacturing efficiency or quality control. Union leaders became powerful and militant. The Government, consciously or unconsciously, started to promote the financial sector in preference to the manufacturing sectors.

    2) I voted Leave because I wish to live in a democratic society where I can observe the people I vote for and the actions they ultimately take. If I like what I see then I will vote for them again and vice versa. The Common Market morphed into a Federal State of 28 nations with different languages, histories, agendas, economies etc. Whilst I like Europe and her people I don’t want to be controlled by 27 other countries.

  2. Ann’s – absolutely correct – argument is also made by Guy Standing in his last-minute preface to his new book The Corruption of Capitalism, which argues more generally that the main threat to social stability is the switch to rentier capitalism and financialisation, also the theme of Michael Hudson’s magisterial Killing the Host. The idea that Brexit is primarily political shows a total disconnect from the attitudes of people at the lower end of the income scale.

  3. Yes some of this economic data is explanatory but it is also confusing to all who know it. I find the real explanation for Brexit in the confusion in politics rather than in the confusions in economics, which is of course a great instigator of confusion. The confusion in politics stems from the fact that we appear to have two governments competing for agency over the one British State. There is the elected government called the Crown in Parliament and then we have a potential rival Government nominally based in Brussels. I say nominally based in Brussels because the rival government has something of an ephemeral identity . It is a cause of great confusion to have two rival governments seeking agency over the one State. It can work when there is certainty as to which government is the superior one, say when the superior government devolves some role to the inferior one, as it currently does with the current Devolution arrangement. The British Devolved form of political arrangement does not adequately describe the always changing arrangement that pertains between the competing governments of the British Crown in Parliament and of the EU. If you happen to live in Greece or even in Ireland it is likely that you have already concluded that superior political authority has certainly shifted in favour of the ephemeral government of Brussels. These governments already know they have to seek approval from the Other Government on the most important matters. In Britain the economic condition is less drastic and so the political situation is more confusing. The vote in favour of Leave should be seen as a plea for an end to confusion and a return to political certainty, meaning a return to the certainty of knowing that there is only one government in charge of all of the most important matters. The irony is that it the vote has not diminished the political confusion in Britain. The current political leadership in Scotland is now agitating for the Breakup of the Devolved certainty that currently exists in favour of a jump into even more political confusion. I recall that it was England’s one great political philosopher T. Hobbes who demonstrated that if the peace of politics is to be maintained only one Government is virtuous, add a rival claim to Government and trouble is surely due.

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