Europe

Will Brexit Undermine London’s Financial Power? An Interview With Tony Norfield

Tony Norfield is a London-based economist. For eight years, he worked as an economic consultant, and for close to 20 years in the dealing rooms of London banks, most recently as executive director of a major European bank, in charge of analyzing global foreign-exchange markets.

October 19, 2018

Image From The SRPSKA Time

In 2016 he published The City, a Marxist analysis of London’s financial power and British imperialism. That year, on June 23, a majority of British voters chose to [leave the European Union, in what is known as Brexit.

In this interview for Left Voice, Marxist economist Esteban Mercatante discusses with Norfield some ideas from The City and the consequences that Brexit (set to begin March 29, 2019) could have for London’s role in global finance.

You show in your book that the City of London is the preeminent international financial center , even though the U.K.’s own currency, the pound sterling, is not as globally important as it was before World War II. What are the main global transformations in the flows of capital that London could take advantage of to maintain its international status? And in what way has it been favored by geopolitical processes?

The financial business of the City of London was damaged by World War II and the disruption to international trading and investment in the immediate years afterward, in addition to the U.K.’s weaker economic position. However, the City had many established international links, arguably more than New York, despite the very powerful position of the United States in the world economy. These links evolved in the 1950s to use the U.S. dollar rather than sterling as a financing mechanism, and this was helped by the restrictions the U.S. government placed on the domestic U.S. financial system at the time.

Big corporations demanded access to funds on a scale that was not easily available in the domestic banking markets, and by the end of the 1950s a “eurodollar” market had evolved to supply this new form of credit. It was mainly located in London, but it could draw upon U.S. dollar funds from around the world. A “eurobond” market was also established in the early 1960s. Both types of euromarket grew very rapidly, and the City of London benefited most from this. So the business of the City changed from the prewar forms of dealing, and it also became less directly dependent upon dealing with the British Empire/Commonwealth countries. Britain’s close political links with the United States undoubtedly helped this process, limiting the risk that there would be any constraint on U.S. companies and banks dealing in the London euromarkets.

By the early 1970s, the operation of global financial markets was in turmoil, as international imbalances and the changing positions of the major powers were no longer compatible with the previous Bretton Woods exchange rate system. The City of London’s position benefited further from these disruptions and from the later removal of nearly all restrictions on international financial dealing.

You have elaborated a power index that includes five measures to define the relative status of each country: gross domestic product, foreign direct investment, banks,foreign exchange, and military. As expected, the United States is at the top of the list, followed among others by Germany, China and Japan. But it is surprising to see Great Britain in second place. To what extent does this index reflect the effective global power of the U.K. today?

My Index of Power is a summary measure that brings out significant features of the distribution of power in the world economy. It is a very simple tool based upon publicly available data. While it cannot capture everything, especially the relationships between countries, it throws an interesting light on where each country stands in the global system. I was also a little surprised to see that the U.K. ended up in second position, and you will have to take my word that the index was not planned to give this result! The U.K.’s position reflects the international investment, trade and finance components of the index, but these are also very important in the world system. I think it is also an endorsement of the value of the index that the highest-ranking countries benefit from other aspects of international power that are not directly measured. For example, the U.K. is a key political partner of the United States and is also a permanent member of the U.N. Security Council.

Relative positions in the Index of Power have changed over time and will change further, as with, for example, the rise of China. The U.K. remains in a prominent position now, but its status will be damaged by Brexit. Brexit’s impact is likely to show up in at least one of the index components, such as the volume of international banking conducted from the U.K. base.

In your book you criticize the notion of “finance capital” as developed by Rudolf Hilferding because it misrepresents how the rule of capital is expressed. What are the risks you see in this notion that the banks control the whole national capital, as Hilferding assumed in his book “Finance Capital”?

While Hilferding’s “Finance Capital” was an important work, ironically, it showed a poor understanding of the relationship of finance to the power of capital. It discussed new forms of finance in the capitalist economy, and was far ahead of other Marxist work in this respect. Yet when Hilferding examined aspects of the financial system, especially the role of banks in Germany, he drew the conclusion that these could be taken over—by a progressive government, of course—for the benefit of the mass of people. In this respect, Hilferding’s ideas continue to have resonance today, when we see left-wing people call for banks to be nationalized, or for there to be a “radical” national economic policy that would take more control of the credit system and investment.

There are several big problems with these views. First, they all operate in the framework of national capitalism and pay little attention to how the international system works. Second, they assume that controlling banks is the same as controlling finance, when actually the banks play only a limited role. Third, they ignore how the financial system necessarily pervades all capitalist market relationships. The financial system is not something external to “good” capitalist production or a mechanism that could be managed by a progressive government to produce better economic results.

It is true that capitalist policy makes mistakes and there have been many stupidities. However, it is not the job of socialists to offer less stupid capitalist policies. Those who get into this game end up betraying the people they claim to represent and endorsing capitalist solutions.

You say that Marx’s analysis in “Capital” described interest-bearing capital as parasitic, while other aspects related to the financial sector (like money dealing) are not. But you argue that “all forms of financial operation” can be a form of parasitism, since they “can potentially assist in the transfer of surplus value from one country to another and so contribute to increasing the power of the dominant countries.” Today, what are the main mechanisms of this parasitism, and how do they benefit London and other financial centers of the world?

My discussion of parasitism in “The City” showed the different ways in which this term was used by Marx and Lenin and related this to the forms of finance that we have today. I would not see “finance” as something narrowly defined and to include only banks or other financial institutions. I think that it is best to understand finance as what Marx called the “form of value.” To understand the forms of capitalism today, one has to go well beyond the notions of commodity production, buying and selling. For example, many large corporations use their equity as a means of payment when they take over other companies in a “share swap.” They do not necessarily use a bank loan or pay in cash, and they may not even use a financial institution to broker the deal.

If a country has an internationally important financial center, then it can get revenues from dealing with capitalists from all over the world, not just in its national sphere. It can provide all capitalists with short-term or long-term funding, or with a market for their financial securities (bonds, equities). These may often look like specialist financial operations, but they are also closely tied in with the commercial and productive power of big companies, as reflected in trade relationships, investment deals, control of intellectual property and patents, and so forth.

New York has the world’s biggest bond and equity market, but much of it is U.S.-based. London has the world’s most internationally linked financial center. These and other centers generate big revenues for the country concerned—through dealing profits, high-paying jobs, government tax revenues, etc. However, it is difficult to pin down where this money originally comes from! A French bank in London might gain commissions from dealing with a German company. But the German company’s transaction might be related to revenues from goods supplied by factories in Asia and sold in North America.

In March 2019, Brexit is supposed to conclude. But the negotiations with the European Union are at a dead end, and U.K. Prime Minister Theresa May’s government is in crisis. How do think this process will evolve?

The Brexit process has been a complete mess, and I have been astonished at how stupid the British ruling class has been. It is amazing how the current political establishment does not seem to understand the E.U. political mechanisms, which British advisers played such a big part in developing over the past 45 years.

What makes this an unresolvable problem is also what makes it interesting politically, although it can be tedious to follow all the details. Brexit is clearly a mistake from the point of view of British business, and it is also damaging for the U.K.’s political status. That should have made it avoidable, but the Conservative government made an unusual mistake and put a major foreign policy decision up for a popular vote in the 2016 referendum. A narrow majority Leave vote resulted. This was made up of many working people who blamed the EU for their economic problems, especially those who opposed the immigration of workers from other EU countries. Leave voters also included the more traditional anti-European British nationalists, and some misguided leftists who thought that reactionary popular sentiment could somehow be given a positive, anticapitalist gloss.

Both major political parties in the U.K., the Conservatives and Labour, probably have a majority of members of Parliament who think Brexit is a mistake. But they cannot easily turn their back on the referendum result and snub the electorate without risking a big drop in support at the next election. It would even be difficult for them to try and organize another referendum to try to get the result overturned, by arguing that the circumstances have changed since 2016 and there is now a clearer idea of what Brexit will actually entail.

There is a different problem for big business. Despite growing signs of concern now that there will be trouble if the U.K.’s loses access to the EU single market, companies had been reluctant to get involved in the political debate much earlier. They have now probably left it too late to have much influence. Previously, the British business elites were confident that their interests would be secured by the major parties, and they could keep aside from taking any public positions and just have a quiet word with the relevant minister. That view has now been shattered, but it is not clear what they can do about it.

Britain’s political idiocy is shown by those pro-Brexit U.K. politicians who imagine a marvelous world outside the E.U., one that will more than make up for the losses born of having less access to the European market. Political leaders in Europe and elsewhere cannot believe they are witnessing this unprecedented act of self-harm from what had previously been considered the most sophisticated ruling class in the world!

So far, has the Brexit vote had any impact on the business of the City of London?

There has been little impact on the City of London so far, but many banks and other financial institutions have made plans for relocating some of their business operations to elsewhere in the E.U. I cover this question in the afterword to “The City.” Apart from Brexit, the City’s business has in any case been impacted by a general downturn in European financial dealing over recent years, a result of the broader economic crisis. Brexit will make this worse, especially if British-based banks do not get a “passport” to deal with other banks in the E.U. However, the City of London has a range of skills that is not easy to replicate elsewhere, at least not for some years. There are also less visible items, such as the English commercial law that underpins many financial contracts, which make leaving the City of London more complicated than it might at first seem.

In the pre-Brexit years, London had rivals elsewhere in Europe, and some were bigger in certain areas of finance, such as Luxembourg in fund management. But London has been the biggest, or one of the biggest, in a very wide range of operations, from banking, to venture capital funds, to financial derivatives and foreign exchange dealing. If, post-Brexit, London’s position is greatly reduced, then no one center elsewhere in Europe really stands out as a likely winner to take on London’s former role. Paris and Frankfurt each have some advantages, but so do Dublin and Amsterdam.

Besides Brexit, what are the most important challenges for the preeminent position of London, and how is British imperialism responding to them? In your book you consider Islamic finance and China as the most important avenues of parasitism to pursue. Are there any others worth mentioning?

There has been little news of significance reported on the City and Islamic finance in the past year, but developments continue. In early September, there was an Islamic Finance Week held in the City, while in late September the Lord Mayor of London visited Istanbul to boost Turkey’s business links with the City, in particular on Islamic finance. Regarding China, City foreign exchange dealing in the renminbi has grown by some 30% in the year to September, and it remains the biggest hub outside Asia, while there are plans to develop links between the London Stock Exchange and Shanghai. I am not aware of anything important outside of these developments.

In your book you point out that the development of financial assets and derivatives is closely related to what happens in profitability. Ten years after Lehman’s bankruptcy, global debt is much higher than it was in 2008, and there are several stress factors (rising interest rates by U.S. Federal Reserve, the trade war instigated by Trump). What is the outlook for world economy? May we be heading another global slump?

Yes, debt levels are higher now than they were in 2008, not just in absolute terms but also as a share of GDP. This is the clearest sign of a continuing structural problem for the global economy that has not been overcome. Whereas 10 years ago the debt was very much concentrated in the major economies, now it is far more widespread, having risen sharply in “emerging” economies too.

While this indicates a vulnerability of the world economy, for the major economies the outcome may be stagnation or slow growth rather than a dramatic slump. The banking system is less overextended now, and there are probably fewer high-risk debtors, so there is less of a chance that a wave of defaults will cause a credit crunch. Debts in the major countries are more concentrated in the government sector, which means there is less risk of a series of defaults and the related panic, although this means there will be continued pressure to curb government spending.

For the emerging economies, there is far more risk of a serious economic setback, which is already occurring in several. The level of foreign currency-denominated debt can be a high proportion of GDP for some countries, notably Argentina, while the tightening of U.S. monetary policy is both raising interest rates and boosting the value of the U.S. dollar versus their domestic currencies. At the end of September, the U.S. Federal Reserve raised its funds rate to 2.00-2.25%, the first time it had been above U.S. consumer price inflation for 10 years, and five-year U.S. Treasury yields had also risen to just under 3% from less than 2% 18 months ago. These are low levels still, but they remain a big problem given the high level of debt.




Related

Brexit   /    London   /    Europe