Rules, Britannia
March 12, 2019
As the March 29 deadline for the withdrawal of the United Kingdom from the European Union approaches, I’m reminded of a commentary I wrote in July 2016 in the immediate aftermath of the ill-fated “Brexit” referendum. In the piece, I argued that Britain still has a vital role to play in the world—especially in governance of the global economy—if only it could overcome its “Little England” mentality.
In hindsight, I should have put even more of an accent on the value—for Britain, Europe, and the world—of the United Kingdom’s role inside the European Union as a rule maker and made a case for Britain to reconsider its decision. An excellent piece by Philip Stephens in the Financial Times the other day uses the example of regulation of lawnmower noise to argue that Britain has benefited enormously from being able to shape EU rules from within. As Stephens also points out, it is only through the European Union that Britain will be able to have a significant impact on global rules in the twenty-first century. Nowhere is this more important than in the realm of digital governance, a topic the Simon Chair has begun exploring in more depth.
Otherwise, the July 2016 piece holds up surprisingly well, and we reprint it in full here:
On my desk at work I have a small acrylic paperweight with the Millennium Dome etched inside. This souvenir of London’s tent-like white elephant, built to mark the year 2000 celebrations, is my own small reminder of Britain’s “Little England” mentality. Instead of showcasing the country’s many contributions to the world over the past 1,000 years—parliamentary democracy, the English language, and golf, to name just three—the exhibitions inside the ill-fated structure evoked, at best, a 1950s-era technology trade show.
Many explanations have been given for British voters’ decision last month to withdraw from the European Union: anti-immigrant feeling, anxieties about globalization, disdain for Brussels bureaucracy. All of these factors probably played a part. But at its core, I believe the Brexit vote stemmed from the same psychology that limited the vision of the Dome’s planners: lack of confidence about Britain’s place in the world. Most Britons today see their country as just a small island nation off the mainland of Europe with little influence over regional or global affairs.
Nothing could be further from the truth. Whether measured by economic weight or values that most of the world aspires to, Britain remains a formidable power. At nearly $3 trillion, its economy is sixth largest in the world. London is the leading center of global finance. And Britain’s longstanding commitment to markets, democracy, and rule of law, as well as its permanent seat on the UN Security Council, gives it enormous clout in international affairs.
Historically British governments used these advantages to build and champion the liberal world order. In the decades before World War I, Britain’s adherence to a fixed rate of the pound to gold, coupled with its political stability, economic growth, and support for open trade and capital flows, anchored the first wave of globalization. In the interwar years, London hosted an economic conference in 1933 to win agreement on measures to fight the Great Depression, revive international trade, and stabilize exchange rates. And the United Kingdom’s representative to the Bretton Woods conference in 1944, John Maynard Keynes, played an important role in shaping the institutions that underpinned the postwar global economic order, including the World Bank and International Monetary Fund (IMF).
Even as it lost its empire and relative economic position, Britain remained a driving force in global economic governance. As a founding member of the Group of Seven (G7) advanced market democracies, London was a strong advocate for growth, free trade, and financial stability. It was also a leader of the G7’s work on development, championing debt relief for highly indebted poor countries at the Gleneagles Summit in 2005, for example. Britain remains the only G7 country to have met a commitment to spend 0.7 percent of its national income on overseas development assistance.
As the global financial crisis erupted in the autumn of 2008, it was British prime minister Gordon Brown, along with French president Nicolas Sarkozy, who took the initiative in calling for “a new Bretton Woods” meeting of world leaders. London hosted the G20 summit in April 2009 at which leaders agreed on a historic package of coordinated fiscal stimulus, substantially increased IMF resources, and a foreswearing of protectionism, in a successful effort to stabilize a teetering global economy. At subsequent G20 summits, Britain has been a global leader in working for international coordination against tax evasion.
Yet it is difficult to ignore a creeping parochialism in Britain’s foreign policy, including its approach to international economic affairs. The typical presentation by a British official or scholar on this topic begins with, “The United Kingdom is a medium-sized economy,” belying its position as one of the largest in the world. The David Cameron government’s breathless efforts to curry economic favor with China, including its decision to break ranks with other G7 countries in March 2015 and hastily sign up for membership in the Asian Infrastructure Investment Bank (AIIB), are what one would expect of a small, vulnerable country, not a traditional champion of the high-standard, rules-based order. And the more confident Britain of old would have stayed in the European Union—did in fact stay in—and tried to shape it from within.
At a time of stress in the global economy, the world needs Britain to buck up and stop punching below its weight. Global demand is weak, financial uncertainty is growing, and the liberal economic order is under attack. Britain has a leading role to play in tackling all these issues. It could start by putting its weight behind a successful G20 summit in Hangzhou, China, in early September.
Priority one on the G20 agenda is strong, sustainable, and balanced global growth. Unfortunately the Brexit vote has already done damage to this objective by lowering the outlook for Britain’s own growth; the IMF has revised down its 2017 forecast for the United Kingdom by 0.9 percentage points, with ripple effects on the euro area’s growth outlook. Moreover, by undermining sterling’s position as a safe-haven currency, Brexit has raised the specter of greater exchange-rate volatility and even-less-balanced growth in the period ahead.
The silver lining here is that the weakened growth outlook in Britain could tilt the debate within the G20 in favor of fiscal stimulus. The Cameron government had emphasized fiscal consolidation, lending support to Germany’s parsimonious position, but there are already signs that Theresa May’s new government will pursue more stimulative policies to counter the uncertainties created by Brexit. It would be encouraging to see the new prime minister position herself as a vocal champion of pro-growth policies at the G20 summit.
The world could also benefit from Britain’s traditional voice in favor of free trade at the moment. There is a troubling trend around the world toward creeping protectionism; the specter of beggar-thy-neighbor policies—from currency manipulation to export subsidization—is growing, and multilateral trade negotiations are virtually stalled. Britain has added another element of uncertainty to this scene by deciding to withdraw from the European Union and thus presumably from major EU- led negotiations such as the Transatlantic Trade and Investment Partnership (TTIP) with the United States. In the run-up to Hangzhou, London would do well to clarify its plans for quickly reordering its own trade arrangements, then get behind a robust global trade agenda, including early completion of multilateral deals on environmental goods and services.
Two other items on the G20 agenda where Britain has traditionally played a critical role are financial regulatory reform and international tax cooperation. Here again the implications of Brexit are worrisome. With the inevitable blow to London’s position as a financial center, it is possible that the British government will try to water down financial regulatory standards and pursue a more competitive tax policy in order to keep business flowing into the City. Prime Minister May should make clear at Hangzhou that she has no intention to lead a race to the bottom in these areas.
More broadly, the existing rules of the liberal order are under challenge from new players who clearly want more voice in the international system but may also advance lower standards to gain commercial or geopolitical advantage. While making room at the table of global governance, as they have by supporting China’s leadership in the G20, Britain and the United States share an interest in upholding the rules-based order that has brought such broad benefits to the world for over 70 years. From a Washington perspective, one of the biggest questions about the Brexit vote is whether London can still be counted on to help defend that order or whether the “Little England” mentality prevails.
Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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