It is no surprise that President Obama has weighed into the Brexit referendum debate firmly on the side of the EU establishment. Nor is it surprising that the British PM Cameron should have given the opportunity to the president to threaten UK citizens that if they do not vote in favor of the establishment they will be punished by being put at the back of the queue for future trade deals with the US. The threat may indeed be empty, not least because the president will be out of office soon, but also because Washington could conclude a trade deal with the UK much more easily than with the EU. Thanks to French insistence on guaranteed safeguards for its agriculture and service sectors, as presently protected by tariffs and regulations, trade deals with the EU present many more roadblocks than deals with the UK alone.
Empty threat or not, President Obama, PM Cameron, and Chancellor Merkel, judging by their recent pronouncements and their long previous histories in office, all have a keen interest in the maintenance of the European status quo.
According to many financial market commentators, a challenge to this from a UK vote in favor of exiting the EU could bring a nasty shock, and the Federal Reserve would do well to plan for this in advance by not implementing a further 25bp rate rise in June. In principle, though, markets could welcome a vote against the EU establishment in June as a leap, albeit with dangers, into a less regulated and less taxed future, not just in the UK, but globally.
Why They Support the EU Establishment
Let’s take one step back. How can we explain the Obama administration’s support for the EU establishment?
This has a long history going all the way back to the existential crises for the European Monetary Union in the years 2010-2013 when Washington pressured Berlin to back the bail-out plans for the failing sovereigns and banks, including the gigantic assistance via the European Central Bank’s (ECB) backdoor. An immediate urgent factor at that time was fear that a collapse of the EMU would precipitate another Lehman-type crisis. That fear was never well-justified.
There were far cheaper ways for Germany to salvage financial stability than implementing a US-backed coup against the monetary constitution of the Maastricht Treaty (which though flawed in its construction, was designed to prevent monetary financing of governments and banks). But Chancellor Merkel was not the person to veer in that direction. And, in any case, more lay behind the Obama administration’s pro-EU establishment stance than crisis management. There was a sharing of belief in “progressivism” — high taxes, high government expenditure, and a “regulatory economy” especially now in the financial sector.
London Never Quite Fit Into the EU
The UK as a member of the EU has always presented a potential or actual threat from within for the EU establishment with its high tax and high regulation aims. After all, London’s role as a premier global financial center has been based historically at least in part on presenting an offshore challenge to the powers onshore. London flourished in the heyday of the euro-money and euro-bond markets in providing scope for investors and borrowers worldwide to escape the regulatory and tax environments onshore in the US and Europe. London’s sponsorship of offshore markets won widespread recognition in the age of Thatcher and Reagan as creating competition for — and imposing limits on — the would-be regulators and taxers onshore.
There has of course been no inkling of such sympathy for London’s traditional offshore role from any corner of the Obama administration. Nor has there been any covert support for London’s offshore defiance in the French or German chancelleries which have been seeking ways in which to raise the burden of taxation even more on their citizens — as made necessary by the widening and deepening malaise of the European Monetary Union.What has changed in the bigger picture is London’s turning against its own offshore “model.”
The UK Caves to EU and US Pressure
The Brown government responded to the 2008 financial crisis and its aftermath by fully embracing the EU and US led drive for intensified financial regulation. And, strikingly, the same government embraced the EU and US drive for a war on offshore centers, despite the UK’s traditional support for these as part of the international financial architecture. The Cameron government which came into power in 2010 fully endorsed the Brown policies on regulation and offshore center crackdown. It no doubt saw this as crucial to its populist message. And the Cameron government, devoid of free market or hard money ideology or pioneering, fully supported the Obama administration in its diplomatic efforts to pressure Berlin into salvaging the EMU.
Indeed, in many respects London’s joining in the crackdown on offshore centers, and the intensified regulatory push in financial markets, made the UK an unusually useful ally to Berlin and indeed the Obama administration. The latter’s Frank-Dodd and FACTA legislation (apparatus for taxing offshore savings of US citizens) would have been much harder to implement effectively if the UK had been adhering to a Thatcher-Blair traditional support for the offshore challenge to the EU establishment (based of course in large part on their view about the importance of the UK’s financial sector and how it would continue to thrive).
Berlin and Paris could likewise smile at the Cameron government turning against this tradition. And more than smiling, Berlin was even ready to do implicit deals with London in a wider context. For example, at the joint press conference with President Obama on April 22, PM Cameron stressed how the UK as part of the EU had helped further US policies, especially the sanctions against Russia. Why would Berlin listen to London’s pleading on these? It was surely not inconsequential that the Cameron government was offering something very valuable to Berlin (and Paris) in the drive for higher taxes and regulation.
The conventional view in the marketplace is that a win for the EU establishment and status quo in the UK referendum on the EU will be good for global equity markets and for the British pound. The truth of the matter could well be the opposite. A victory for the Cameron-Merkel-Obama trio in favor of the EU status quo could smother the prospects for a free market renaissance in Europe for a long time to come. Meanwhile the Cameron government’s Bank of England Chief Carney can be counted on to continue his loyalty to the Central Bankers’ Club and pose no challenge to the 2 percent global inflation standard by launching a hard pound regime. A Brexit followed by a reversal of UK policies on financial regulation, offshore centers, and perpetual 2 percent inflation might be cause for market joy, not panic!