Financialization – the reason why the vote was for Brexit

The referendum result came as a surprise to most people who naturally assumed that the electorate would seek to avoid the risks of change.

However, as the Prime Minister has been reported as saying “Leave supporters were not just voting against Europe but were delivering a cry of frustration about a range of problems afflicting British Society … Top among these concerns was the widening gap between working class voters who saw their wages stagnate…”

The loss of millions of well-paid jobs in manufacturing has been caused by the extreme financialization of the UK economy that has occurred over the last 35 years.

Financialization is the process whereby financial markets, and financial elites, gain greater influence not only over other sectors of the economy, but also over the economic policy of the country.

The financial sector has successfully resisted any attempts to restrict the UK’s takeover system. This has decimated the manufacturing sector while earning huge revenues for London and its financial sector. It is no coincidence that London voted Remain, while the former manufacturing regions voted Leave.

The irony of the situation is that every other EU country has successfully resisted financialization; and most impressively the EU parliament not only voted down the original European Takeover Directive, but has resisted attempts to alter the subsequent watered-down version of the directive.

An even greater irony is that the USA, the bastion of free enterprise, not only has effective anti-takeover laws, but has politicians including Hillary Clinton who continue to criticise Wall Street for short-termism.

The result of the referendum has meant that the world is now looking more closely at the fundamentals of the UK economy. It is not necessarily Brexit itself that concerns them so much as the worrying levels of debt, and the worrying fiscal and current account deficits.

Reforms are necessary. Theresa May has proposed that there should be measures to block takeovers of key companies. The supreme irony will be if Liberal Democrats find themselves to the right of the Conservative party on this issue.

 

* John Hann is a party member in Winchester

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23 Comments

  • Simon McGrath 25th Jul '16 - 5:41pm

    “The loss of millions of well-paid jobs in manufacturing has been caused by the extreme financialization of the UK economy that has occurred over the last 35 years”

    well no. Its true that many jobs have been lost but it has nothing to do with ‘financialisation’ – its because low value/low cost manufacturing has moved to low cost locations like China and because manufacturing productivity has been going up much faster than that of the service sector.

    ‘The irony of the situation is that every other EU country has successfully resisted financialization’. Not sure what this means – manufacturing employment has been falling across Europe for the above reason.

    ‘An even greater irony is that the USA, the bastion of free enterprise, not only has effective anti-takeover laws’

    Intriguing that you think this. What do you base it on ?

  • Yellow Submarine 25th Jul '16 - 6:28pm

    This is nonsense. We’ve deindustrialised because a high wage economy like the UK can’t compete on Labour costs. What industry we have left, and there is more than we think, has to compete on skills. Or ironically Single Market access. The first set of lost jobs won’t be coming back outside the EU. In fact we may lose even more outside the Single Market. But those arguments were last during the campaign and we are where we are. But financialisation is a seperate matter.

  • Simon,

    Thanks for the comment. What we used to make were generally high-tech items. Manufacturing of these has not gravitated to China, but in fact to high-cost countries like Germany, Japan and the USA.

    The proportion of jobs in manufacturing would certainly have fallen but not to the extent that has happened in the UK. Hence the lamentable trade figures which have impacted on the current account deficit.

    I am not the only one to have noticed travelling in Europe that, just like we used to have, there seem to be modern factories, with goods stacked up outside them, on the edge of almost every town.

    There is a lot of literature comparing the takeover systems in different countries. A recent example is by Professor Simon Deakin of Cambridge University.

    Regards John

  • Eddie Sammon 25th Jul '16 - 6:58pm

    I used to live near that bar in Canary Wharf and there is plenty of affordable housing in the area. I didn’t have a high paid job and I managed to survive fine. It would be more difficult for big families but for young professionals it’s great and the finance sector has done wonders for East London.

    If we attack financialisation then how will ordinary people insure their families and homes and save up for pensions? Buy buy to lets instead? But the same kind of ideology also seems to attack landlords too. Shares make company ownership affordable and are actually progressive.

    Takeovers should only be blocked when the new owners cannot be trusted with the company. You shouldn’t block a takeover just because the owners are foreign. The proceeds from the sale will benefit the UK economy. The problem is ultra wealth, not financial services.

  • Eddie,

    Thanks for the comment. As you say the financial sector, which includes insurance, pensions and retail banking is a very valuable part of the economy. The problem is with casino banking and the level of takeover activity.

    On my previous article in August 2014 “The UK’s takeover laws and short-termism” you asked about leveraged buyouts. You may be interested in page 44 of C.V.J. Simpson’s paper “The environment for business in Germany” published by Civitas.

    Regards John

  • How about these two for starters ?

    Sir Philip Green (knighted by Blair) – BHS scandal – supporter of Cameron – tasked by the Coalition Government to carry out a review of government spending and procurement. Green’s summary report, ‘Efficiency Review’ published in October 2010, alleged significant failings in government procurement processes.

    Sir James Dyson (knighted by Blair) …. 8,500 jobs to Malaysia.

    @ John Hann “The supreme irony will be if Liberal Democrats find themselves to the right of the Conservative party on this issue”.

    Why do you say that, John ?

  • Eddie Sammon 25th Jul '16 - 8:35pm

    Thanks John, yes, I am of the opinion that someone should put their own assets on the line when they take out debt to buy shares – only debt for business operations should be secured on company assets, which doesn’t include shares for new owners. Although I understand when a business is in severe trouble it might be justified.

  • Barry Snelson 25th Jul '16 - 8:56pm

    John,
    You beat me to the keyboard on the counter to “our manufacturing jobs have moved to low cost economies”, which is of course – Germany.

    There are too many causes to list here but one is that our society despises engineers (whilst loudly claiming that it doesn’t).

  • Peter Bancroft 25th Jul '16 - 9:31pm

    It was predictable that people would take advantage of Brexit to champion their own preferred forms of illiberal policies, but I don’t think that it’s appropriate that these should be coming from the Lib Dems. In the Brexit world we should be leading the fight to maintain the benefits of Europe’s liberal institutions as much as possible, rather than diving headfirst into protectionism.

    It also seems more than a stretch too far to link the referendum result to financial services to the decline of manufacturing to the EU’s regulations on mergers and acquisitions (which are arguably the world’s strongest and most effective). I’ve done an awful lot of pouring over every available analysis of the voting and there wasn’t even a hint of the above…

  • David,

    Thanks for the comment. You may be interested in the paper by Helen Callaghan of the Max Planck Institute “Who cares about Financialization”. On page 9 she suggests that the Labour Party’s position changed just before the 1997 election.

    Regards John

  • John Hann an interesting article. I think it probably correct that many people voted exit because of wider reasons, including the feeling of improvement in living standards enjoyed in post war society are evaporating.
    The causes of this have been, perhaps, more wide ranging than just financialisation.
    Yes there has been a UK culture of making money by selling businesses rather than developing them. After the manufacturing boom in the 1950s there was a poor level of investment. As an apprentice in the 1970s I trained on machines bearing the WD stamp from munition factories. But there was also a feeling of entitlement among the workforce, illustrated by the industrial relations environment. German manufacturing prospered while ours stagnated.
    It is not that the British workforce is poor. For example, while there are no British car companies British workers can build products equal to those from anywhere – under overseas direction.
    I feel it can not be disputed that the financial sector has gained control of our economy. How else do you explain the success of the view that large scale companies should pay a lower rate of corporation tax than workers on NMW (who everyone agrees are living in poverty) pay as an income tax rate. “Investment bankers” feel that they can run businesses as well, or better than, managers. Sometimes they do, but often they just deploy “financial engineering” to alter the “fundamentals” in the stock market listing. However, financial structures forced on small and medium business because of the way the UK finance sector operates make UK business more vulnerable to takeover, including from overseas. I do not see this observation as protectionist. Finally as a country which has run a balance of payments deficit for most of the last 40 years we have to accept that these overseas pounds have to go somewhere and buying up British shares and businesses is one destination.

  • Barry Snelson 26th Jul '16 - 10:27am

    Peter Martin,
    Because the world is not a steady state.
    Some nations are steadily climbing the prosperity ladder by creating wealth from new and attractive ideas.
    Others, like ours, are remorselessly sliding down to third world status with their citizens clinging to denial and a sense of entitlement.

    There are solutions to our inevitable destitution but the ones that would work are politically unacceptable and the ones that are acceptable won’t work.

  • David,

    Thanks again for your comment. To answer your question:

    In 2012 Vince Cable said that while he believed that they have “deleterious effects on the economy”, there was no “party view” regarding takeover deals. Unless this has changed then the party will be outflanked by any government reforms on this matter.

    Regards John

  • David Evershed 26th Jul '16 - 11:11am

    I speak as someone with a couple of degrees in production engineering.

    Uk manufacturing has declined in world market share because of comparatively weak quality, productivity and innovation.

    It is an economic truth that to prosper, weak businesses should be taken over by stronger businesses or go to the wall.

    True Liberals would not block the route to greater prosperity by stopping takeovers unless it was a critical issue of national security.

    It seems some Lib Dems are not liberal at all but believe the state knows best how to organise and run businesses.

  • Barry Snelson 26th Jul '16 - 2:30pm

    Joe,
    Sometimes I think I’m the only person left in Britain who can read a graph, or perhaps the only one who can face the chilling import of what the graphs say.

    There is no sign of any plateau in our decline, let alone turn round. When will the turn round come? What new venture/mineral find/technology will drive it ?
    None can say. Our party, like the others is just hoping for a miracle to emerge.

    We boast of being the sixth biggest economy. That’s just “turnover”. We trade at a massive loss (which we don’t boast about so much).

    I’m sorry to be bleak. I realise the rest of the country has its fingers in its ears and is playing the “la la la we’re not listening!” game even though the sirns of growing impoverishment are all around.

    The only way out is for the British to shake off their air of smug self satisafction and look at themselves in a radical new way. Then they can rebuild.

    But that is a long way off. They are still happy to listen to the optimists.

  • David Allen 26th Jul '16 - 4:01pm

    Yes, manufacturing has shifted to lower cost locations. That does not prove that other factors such as financialisation have had no influence.

    One exacerbating factor for Britain has been North Sea oil, which for a generation has kept us wealthy enough to buy the food imports we need, and reduced our need to sell manufactured products. By promoting a strong pound, it has also made it harder to export our goods. It’s called the resource curse: countries which can dig or drill for valuable resources end up poor because they lose the ability to export anything else: https://en.wikipedia.org/wiki/Resource_curse . It is of course most evidently a curse when the resources run out, as North Sea oil is now doing.

    A strong City has much the same effect. It eats up the brightest graduates who might otherwise go into manufacture and export. Its foreign earnings create a strong currency, again depressing our capacity to export goods in just the same way as the oil did. Let’s call it the financialisation curse. Like North Sea oil, its curse will soon bite, as Brexit and an end to passporting sees an end to City prosperity.

  • “There is no sign of any plateau in our decline, let alone turn round……What new venture/mineral find/technology will drive it ?”
    Shale gas perhaps?

    I’m not sure it was financialization so much as de-industrialisation and it was the Blairites to blame as much as the Thatcherites. I used to cringe every time a Blairite described engineering as ‘metal-bashing’. Post-2007 crash there were a few came on TV who admitted the economic ‘experts’ (yes the same ones the Remainers still unaccountably trust) had all been wrong, that indeed the financial sector was not a net earner for the UK when you include bailouts, QE, unfair charges plus general financial trickery and that we needed to refocus on manufacture – something the Germans facing exactly the same globalised marketplace had never lost sight of.

    Having said that, I have for some time believed that like in France, Germany and Japan, only engineers should run engineering companies. It was bean-counting p#ss-poor management that did for us. We should be bringing in more German managers, like Jaguar-Landrover did.

    And yes the asset-stripping takeover culture definitely harms us because UK businesses become short-termist cost-cutters in order to look good each coming quarter, rather than long-term reinvesters. Again the German business system which does not need to disclose so much information to corporate predators should be used instead.

  • Some interesting points here. There is no doubt that in the traditional industrial areas, there is an awareness that there is less manufacturing than there used to be, and regardless of fact, the British “establishment” and Europe have taken much of the blame in the broadest terms. There is some merit in that, but the British consumer must also shoulder some responsibility. We have a culture of seeking out the cheapest option, and feeling cheated if prices aren’t rock bottom.

    On a recent trip to Germany, my friends there told me how they always expect to pay full cover price for books, which they get at the local book shop. If they are not in stock, as if often the case for the English language books they enjoy, they will be ordered and arrive the next day. We compared the cost of getting a new bathroom, and it’s much more expensive in Germany, because people expect to pay more for good quality, German built fittings, and for quality tradesmanship. Sofas are also more expensive, because they just don’t have shops like DFS with permanent sales, and everyone expects to pay more for something that will last for years. These sorts of products can be produced locally, because the shops aren’t on the constant look out for a supplier that can make it for £10 less.

  • Steve Treveth 30th Jul '16 - 7:38pm

    When returns on financial activities are higher than those from “real life” goods and services then money will be moved to the “finance economy” from manufacturing, research etc. which is what has happened and will continue until an economic theory which benefits the many comes to power.
    “Off shoring” of manufacturing and tax responsiblities will turn our country into a “third world” country, as has already started.
    When you export jobs, you export skill, research, national confidence and something for the most of us to do and, most importantly, the power of independence.
    2008 shows what a damaging part of our national economy the financiers are.
    How much interest do you get on your savings?

  • Eddie Sammon 30th Jul '16 - 9:05pm

    Without shares a lot of money wouldn’t simply “go into the real economy” but into vaults instead and global growth wouldn’t be any high. In fact it would probably be lower.

    This is what I think people allude to when they try to separate the “finance economy” from “the real economy”. Going back to storing coins in vaults, or everyone getting 0.4% return from savings accounts.

    Most people don’t have the time to set up their own businesses, so investment funds serve a purpose. They also allow for diversification.

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