Starmer chooses decline

Labour has hitched Britain to an EU in economic freefall

Towering Columns

In The Spectator, Michael Gove says Starmer’s Labour never understood that Brexit was a popular revolt against international economic elites and mass migration.

Starmer was once again laying down Labour’s ‘red lines’. To nods from his colleagues, he stressed how important it was to be in the European Union’s single market. In other words, to accept that a newly sovereign Britain could not control its borders, could not direct investment to infant enterprises, could not alter regulations, could not change procurement rules to favour British business, and in all these and thousands of other areas would have to accept foreign jurisdiction. ‘I’m sorry,’ I replied, ‘but I thought the whole point of Labour, the whole purpose of its creation, was to allow democratic control over capital? The single market was designed to fetter the discretion of democratically elected governments and allow business interests to prevail over the popular will. It’s only outside the single market that a UK government can decide UK economic policy in the interests of UK workers… That’s why Labour were committed to withdrawal in 1983. That’s why my parents voted Labour then.’

…People have voted repeatedly for change – in 2010, and then with increasing force in 2016, 2019 and 2024. They want a move away from an economics that favours the rich and an immigration policy that hurts the poor. It’s been noted extensively elsewhere what the government prioritised in this week’s ‘reset’ with Brussels – shorter airport queues for business travellers and Erasmus scholarships for top graduates – and who they let down – our already declining coastal towns. But what has scarcely been acknowledged is the path never taken, the potential use of Brexit powers by a government of the left to invest more in state capacity, support nascent industries, protect critical manufacturing interests, restrict reliance on cheap foreign labour, remove VAT on fuel and shift power away from distant bureaucracies to local communities.

The fault, however, lies at least as much with past Tory governments, and me, as it does with this Labour government and the PM. We defined Brexit success in a way which the people who voted for it did not recognise. The Vote Leave campaign, which I helped lead, was not a crusade for greater globalisation but a plea to put our own house back in order. During the referendum, we deliberately avoided mentioning trade and instead argued for using EU funds for the NHS, more state investment in science and greater economic equality across the country.

For The Times, Juliet Samuel says Starmer’s EU deal is wafer-thin, but Brexiteers must take responsibility for failing to grasp new freedoms.

The economic argument about Brexit was always a question of which factors are most important for growth. Remainers generally believe it is better for our firms to have access to a bigger market, even if the governance of it is slow, inflexible and cautious. Leavers tend to believe it is better to be nimble, able to tailor your regulations to your own circumstances and be quick to correct errors, even if it means the immediate market is smaller, because the businesses fostered by such a system will be more innovative and competitive. This is the core of the disagreement about “divergence” — the possibility that our regulations will differ substantially from Europe’s.

But as we know, most of the Brexiteers never engaged seriously in their own project. If they had, we wouldn’t be hearing overwrought arguments about “betrayal” but concrete examples, such as precision breeding, where rejoining the EU would snuff out exciting new British industries. The Brexit vote would have been followed by a flurry of activity to come up with a better set of rules that would let our economy thrive, whose existence would itself make it more and more costly, over time, to go back into the EU.

But that didn’t happen. Nothing was made ready; no entrepreneurial spirit was unleashed. On the contrary, we doubled down on everything the Brexiteers said they hated about the EU: uncontrolled migration, stifling regulation, excessive and ineffective environmental policy, and so on. They showed, in short, that they were just as cowardly and inept as the governing apparatus they aspired to leave. No divergence meant no gain, only cost.

In The Telegraph, Rian Chad Whitton says British heavy industry is facing near complete collapse.

In the short term, what can the government do to cauterise heavy industry’s bleeding? It can extend exemptions for heavy industry. Current schemes exempt energy-intensive activities from renewable-related levies and capacity market costs while compensating them for network costs. The scheme intends to reduce electricity costs by £30 per megawatt hour. In 2023, such exemptions covered about 10 per cent of industrial electricity demand and cost somewhere around £400 million, paid for by consumers.

The problem is that when industrial electricity prices can be as high as £260 per MWh, such exemptions amount to little more than a sticking plaster. The government will be pressured to shift more levies away from producers and onto consumers, likely costing billions of pounds. Meanwhile, our energy strategy is tilting us toward higher electricity prices for the long term.

There is a further complication. While cheap energy is essential to these industries’ survival, it may not be sufficient. The US, despite enjoying very cheap energy inputs due to fracking, has seen its industrial production, including steel, decline or flatline since 2008. Such stagnation is due to overcapacity from East Asia, currency manipulation, the dominance of the US dollar, and a host of other issues. For British industry to become self-sustaining, a saner energy strategy needs to be married to serious discussions about addressing our current account deficit. Such a task is a lot to put on the plate of a government that is already struggling for bandwidth.

Also in The Telegraph, Ambrose Evans-Pritchard says there is no case for Starmer’s EU deal, and that Europe itself is in rapid decline.

There is no coherent case for what Sir Keir Starmer has just agreed with Brussels. It breaches a large constitutional and democratic principle by submitting Britain to the EU’s law-making machinery over food and farming as a satellite state without voting rights, which is what “dynamic alignment” means. It violates the terms of our membership in the Asia-Pacific trade pact (CPTPP) and guarantees lawsuits that will put us in an invidious position. It shows that Britain cannot be trusted to uphold a treaty arrangement that it has just joined. It signals to the world that there is no longer much point trying to do a deal with Britain since the country has given up part of its regulatory autonomy…

…I would advise Labour ministers to shut themselves away for a morning and read the Draghi report. All illusions will fall away. They will learn just how far the EU has fallen behind America in digital tech, and how far behind China in green tech. Why is this still a model in the Labour mind? I don’t wish to be stubbornly purist about an EU reset. I backed Rishi Sunak’s Windsor deal. I back closer defence ties, though not if presented as a British “ask”. I am relaxed about free movement – within limits – because we are in a new era of cut-throat global competition for high-skilled labour.

If the plan is to shoehorn the UK back into the EU, Labour should have told us in its manifesto last year. It went to great lengths instead to disguise any such intention. Why might that be? This is to repeat the insidious practice of both the EU priesthood and the British establishment over the last half century of slipping through European integration by stealth, with hooks in the fine print of seemingly innocuous texts, and lying to the people at every stage.

The Pimlico Journal argues that Trump’s tariffs, while misguided, are responding to the reality of global imbalances arising from trade distortions.

The fact remains that Trump’s tariffs were attempting, at least in part, to confront a very real structural problem in the American economy. America does not produce a large proportion of the durable goods which it consumes, such that its gross trade deficit with the rest of the world now consistently exceeds one trillion dollars. There are a number of obvious reasons why this is bad, including some which have recently become far more politically salient: a domestic industrial base is more resilient to instability in international supply chains; it provides stable jobs outside large cities; and it can be repurposed to produce weapons in the case of war. But the deficit is also symptomatic of larger imbalances which lead to excessive borrowing, financial instability, and asset price bubbles. The link between America’s trade deficit and its other woes, especially those which led to Trump’s election, goes far beyond cliché images of shuttered factories in provincial towns: it encapsulates an entire ecosystem of finance-orientated globalisation which has been draining the life out of Middle America. Trump is right in thinking it needs to change.

The fundamentals of this argument are no longer even particularly controversial. While it has long been a neoclassical shibboleth that free trade is basically the closest thing you can get to a free lunch, growing geopolitical tensions and the sheer scale of international imbalances have made such a belief increasingly untenable. The turning of the tide is visible in more than just Financial Times columns and interviews with academics. There is now a growing literature on trade imbalances which makes two key points:

1. America’s role in accommodating the excess savings of other countries is a major (though not the sole) cause of its very large trade deficit.

2. The glut of excess savings entering America’s economy from abroad is, to a substantial extent, the result of years of conscious economic policy on the part of the governments of surplus countries.

This new consensus can be traced back to before even the Great Recession, with Federal Reserve chair Ben Bernanke giving a speech in 2005 on the connection between other countries’ excess savings and the American trade deficit. Around this time, there was also a renewed interest in the role that excess savings played in running up demand for debt: without foreign, especially European, countries’ demand for safe American assets, there would have been much less demand for mortgage-backed securities; indeed, Chinese investors held so many that preserving ties with the country was one reason the American government declined to impose losses on Fannie Mae and Freddie Mac bondholders. All this and more is discussed in Michael Pettis and Matthew Klein’s 2020 book Trade Wars Are Class Wars, which provides the most expansive and lucid formulation of the argument yet. Pettis and Klein are, granted, somewhat controversial among the economic policy establishment. Yet even the very mainstream Maurice Obstfeld, an IMF economist who worked with Douglas Irwin (of anti-tariff pamphlet Free Trade Under Fire), has to concede in his Brookings Institution paper that the view of excess savings affecting the balance of payments is fundamentally ‘right’, even if other factors also remain important.

The explanation of why this is ‘right’ is simple. While classical economics presupposes that the purpose of selling exports is to gain currency to buy imports, for various reasons, which themselves can be debated, many modern economic actors simply do not behave in this way, usually due to deliberate economic distortions created by foreign governments. As a result, certain countries consistently, year after year, export far more than they import, and so accumulate excess savings. Due to the magic of international finance, instead of using this currency to increase domestic consumption (including through imports), these countries invest their excess savings abroad. In doing so, they help finance increased consumption in the deficit countries, ensuring that the demand for their exports remains steady, rather than the deficit country having to make adjustments. By holding their excess savings abroad, their own currency is devalued; ceteris paribus, this makes their exports more competitive, and any imports less competitive. The cycle can therefore continue for an extraordinarily long time with no adjustment required on either side of the equation.

Wonky Thinking

On his Substack, author David Goodhart argues that the failures of late liberalism and mass migration make a rebalancing between “Somewheres” and “Anywheres” essential for democracy to survive.

Populism is the democratic push-back against these Anywhere priorities. But they remain entrenched. Mass immigration continues, partly driven by the needs of ageing societies, with less numerous but more aggravating illegal immigration trampling on secure borders thanks to the universal rights framework established after 1945. Deindustrialisation also continues, driven by a uniparty consensus favouring the dash to net zero.

Meanwhile, not only has the expectation of generational improvements in living standards been disappointed in most of Europe but wealth is increasingly centred on a few metropolitan centres. French historian Pierre Vermeren calculates that the 12 biggest metropolitan centres in France account for 25% of the population but 60% of national wealth and more than two-thirds of high earners, not to mention almost all of the political and media class.

The UK has an even more unbalanced economy with only one town outside London, Bristol, making a positive fiscal contribution. The demoralisation felt by many citizens in the periphery is reinforced by the perception of a rapidly changing ethnic demography and the failures of integration, especially of Muslim minorities.

There are many stories for populists to tell and they can now tell them in a new media landscape by-passing elite filters. The recent prominence of extreme liberal causes, such as BLM or trans activism, has provided a constant source of offence for populist “rage entrepreneurs” to exploit.

The upshot is that Somewhere populists have placed limits on Anywhere power and shifted national priorities in many countries, see the greater focus on illegal immigration. And note the evolution of Emmanuel Macron’s stereotypically Anywhere party En Marche in 2017 to today’s more hard-edged Renaissance.

This Somewhere veto has led to a kind of impasse. The power of populist parties and opinion has prevented the further liberalisation of economies and societies, at both the European and national level, but the populists are not yet strong enough to impose their own agendas. It is reminiscent of the stand-off in mid-1970s Britain between organised labour and business/the middle class, before Margaret Thatcher broke the log-jam.

So, can the Anywhere/Somewhere impasse be broken? The Conservatives had a chance in 2019 to shape a new Anywhere/Somewhere settlement and blew it. Can Labour do any better?

The opening of European societies over the past 30 years brought many benefits. The Anywhere baby-boomer settlement - often led from the centre-left - produced decent levels of GDP growth and upward mobility (though never again achieving the levels of the post-war decades), a new phase of European integration promoted by German unification, big advances for women and ethnic and sexual minorities, and the start of the energy transition. And the Cold War victory enabled a further (now reversing?) shift from warfare to welfare economies.

But this settlement has now breached the limits of democratic consent and created too many losers. In economics it elevated the consumer above the producer and the knowledge economy too far above the industrial one. In politics it required transferring too much power from national politics to supranational institutions or courts.

The political alternative to uniparty Anywhere liberalism surely starts with refocusing on national citizens and national sovereignty, both economically and politically, while acknowledging the continuing necessity of high levels of international co-operation and interdependence. I have never met anyone who wants to live in a closed society but the form that openness has taken has benefitted Anywheres far more than Somewheres.

Propelled by the Trumpian winds blowing across the Atlantic, and the need to respond to the disrupter populists at home, European politics requires a new democratic settlement. Such a settlement needs to accommodate that ‘missing majority’ of decent populism: a social democratic-conservative hybrid leaning somewhat to the social market left in economics and somewhat to the right on social and cultural issues.

This hybrid, sometimes labelled ‘post-liberal’, is also a reaction to modern liberalism’s reticence on many human needs: for belonging and community, for tradition and authority, for status and recognition for those who cannot thrive in the cognitive meritocracy race, for meaning and purpose in a post-religious age.

Mainstream liberalism has tended to see such concerns as beyond politics, a matter for private individuals. And many individuals endowed with agency and self-control do flourish under modern conditions. Others are left demoralised, especially in a world with weaker families, widely available drugs/alcohol and the constant distracting hum of the internet.

When life was visibly improving for the majority the silences of liberalism mattered less. Now, the combination of several unforeseeable events - the 2008 crash, Brexit, the pandemic, the Ukraine energy crisis – plus the sclerosis of low fertility/ageing societies requiring ever higher taxes have dampened spirits. Compare the optimism that even non-political people felt about New Labour’s thumping victory in 1997 with the justifiably low expectations accompanying the 2024 Labour landslide.

It is possible that Labour’s high command will press on from the white paper and steal even more populist clothes. A Somewhere-sensitive moderate left politics of recognition based around the priorities of the average provincial voter, rather than highly educated metropolitans, would focus on: reviving the abandoned levelling up programme; vocational training and good jobs for people of average ability; privileging national citizen access to housing, work and the social state with the help of digital IDs; ensuring welfare support incentivises work and enterprise and is focused on those who really need it; rewarding parenthood and supporting stable families; securing orderly, crime-free neighbourhoods.

This requires not a victory of the Somewheres, to replace that of the Anywheres, but rather a rebalancing and a new compromise between different interests and outlooks. The moderate left should offer itself as a bridge between what is best in both worldviews.

For RUSI, Oleksandr V Danylyuk and Jack Watling argue in Winning the Industrial War: Comparing Russia, Europe and Ukraine, 2022–24 that Europe must revive its defence-industrial base in the face of the Ukraine war and diminishing US support.

Protracted wars are won by the party able to generate new, competitively trained forces and the armaments with which they are equipped and sustained. The ability to generate a second and third echelon of forces is an important aspect of a state’s deterrence posture.

During Russia’s full-scale invasion of Ukraine, the Russian defence industry has managed to significantly increase defence production. Ukraine has also done this, although to a lesser extent. European members of NATO, meanwhile, faced substantial problems in expanding defence-industrial output, despite an abundance of funds. This paper examines the processes of military-industrial mobilisation in each of these areas to assess the causes of radically different outcomes.

First, Russia had a well-developed plan for military-industrial mobilisation which it implemented early in the war. Ukraine did not have such a well-developed plan but could draw on its Soviet legacy to regenerate industrial capacity. Europe, meanwhile, lacked both a plan and the data with which to build one; this made investment into defence production inefficient.

Second, Russia and Ukraine maintained a highly centralised level of coordination over their respective defence industries and had an understanding of the supply chains to enable a relatively coherent orchestration of investments. Europe, meanwhile, lacked control, and could only incentivise industry, while governments and industry lacked an understanding of their own supply chains, leading to massive internal competition and uneven expansion.

Third, while Russia d id achieve a much more efficient military-industrial mobilisation, it also cost far more than is generally acknowledged. Russia has not only expanded defence spending but also rerouted money from other budgets to expand military-industrial recapitalisation and has advanced credit to defence companies to enable rapid growth. This will pose challenges in the medium term. It is not reasonable to expect Europe, which is not at war, to mobilise investment to a comparable level. However, the fragmentation of the European defence market has meant that money is spent very inefficiently. Greater European coordination of spending could improve the return on investment.

The regulatory environment in Russia and Ukraine should not be held up as a model. In Ukraine, regulation of core defence industries has necessitated a large unregulated non-traditional defence ecosystem to emerge. In Russia, practices are manifestly unsafe and have often led to accidents. In Europe, however, the burden of regulation is often self-defeating in raising the cost and slowing the production of equipment. Incentives for stockpiling equipment and taking risk, meanwhile, are skewed in such a way as to lead to systemic policy failure. Regulatory reform and harmonisation for the testing, procurement, storage and transportation of defence materiel are essential.

In an environment where Europe must be able to deter Russia with reduced US support, Russia’s full-scale invasion of Ukraine should spur significant efforts to address what has been demonstrated to be a manifestly inadequate defence-industrial base.

Quick Links

The yield on 30-year gilts is at its highest since 2000, exceeding yields at the time of the Truss minibudget.

The Government agreed to hand sovereignty over the Chagos Islands to Mautitius at a total cost of £30 billion.

Sir Keir Starmer announced an in-principle agreement with the EU including alignment on regulatory standards and linking carbon pricing mechanisms.

Two Israeli embassy staff were murdered outside the Washington DC Jewish Museum.

The Deputy Prime Minister called for a suite of tax rises, including cutting child benefit to middle-class families, in a leaked document.

The former head of MI6 said Labour’s dash to net zero risks UK national security, given Britain’s reliance on Chinese technology.

Teachers and doctors were offered 4% pay rises, above the level of inflation.

The British Medical Association (BMA) is threatening strikes despite the offer.

The energy price cap is set to fall by 7% from July.

UK productivity fell by 0.6% in 2024, having fallen by 1.7% in 2023.

BYD now sells more electric vehicles in Europe than Tesla.

Chinese “kill switches” were found in US solar farms.

Alasdair Macintyre, the leading philosopher and critic of liberalism and relativism, died.