Brexit is essential for the UK to free itself from market rule

The EU acts as the principal constraint on member states reshaping their national economies through citizens’ democratic decisions.

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The idea of leaving the European Union in order to pursue more radical policies is often met with an incredulous response. If progressive policies are pursued in EU member states such as France, Germany and Denmark, how can membership be an obstacle to rolling out a radical agenda aimed at reducing social inequality?

This sort of view rests not only on a romanticised and outdated view of continental Europe, but also relies on a misconception of what the EU is and what membership entails.

Worker representation on boards and vocational labour market entry persist as features of German capitalism. The remnants of the 35-hour week remain in place in some parts of the French labour market, giving rise to a fortuitous combination of decent working hours and long, paid holidays. But continental European economies only bear a distant resemblance to the mixed economy models which characterised the “glorious thirty years” of economic growth after the Second World War.

The Harz-Vier reforms of the 2000s have transformed the German economic landscape. They involved a radical shake-up of the labour market in favour of more flexibility, more part-time working and more insecurity. Germans refer to the “Harz Vier generation” in the same way we refer to millennials: an economically vulnerable generation stripped of the advantages and security experienced by their parents and grandparents. In France, only permanent jobs - the much sought-after contrats a durée indéterminée (CDIs) - come with a decent package of social rights. For years, job creation in France has been via fixed-term contracts, often of less than one month long.   

The UK economy is hardly a Thatcherite island in a European social democratic sea. Europe as a whole is composed of market economies each with their own capitalist growth models. With its very open and flexible labour market, unemployment rates in the UK are less than half those in France. Low productivity and low wages, combined with the high cost of privatised services and a housing market that has lost all connection to people’s earnings, are the worst features of the British model. They require a radical political response which combines state action, institutional constraints and new models of corporate governance. On the continent, the German export miracle has come at the cost of wage growth for German workers. In France, very high levels of state spending as a proportion of its GDP co-exist with declining levels of social cohesion. A recent report by the Jean-Jaurès Foundation referred to this as the “secession of the rich”.

Is it possible to reboot a national economy in a radical way, with the aim of reversing the trends of growing social inequality and dislocation that have characterised all European societies since the first crisis of post-1945 capitalism in the 1970s? This is where the EU comes in as a severe impediment.

The EU functions as a major obstacle to pursuing such policies. The EU did not dismantle the post-war social democratic model: this was the work of national governments and companies, who were no longer willing to accept that so much of the national wealth should be absorbed by workers’ wages. But the EU provided the institutional context for this reduction in the wage share and it is now the legal guardian of the status quo. The retrieval of lost practices is made much harder by EU membership and the direction of travel across the EU is uniform.

Why should this be? The answer is that much of the economic activity of the EU is decided on the basis of judicial interpretation of the founding treaties, and in particular the famous “four freedoms” - of goods, services, capital and people. These treaties cannot be changed without a comprehensive renegotiation, in which each country would have a veto; and in the absence of such a renegotiation, the judges of the European Court of Justice determine economic policy.

The old social democratic model has not disappeared altogether. Public services and public broadcasters still exist, even if competition has steadily encroached into most aspects of the public sector. In strict legal terms, the EU is agnostic as to whether economic activity is carried out by the state directly or by the private sector. In practice, the EU’s development since the mid-1980s has had to privilege market competition as the desired framework for all economic activities, simply because the four freedoms define the single market as an arena of free competition.

Market integration is central to the existence of the EU. It is not for member states, whose roots lie in a historical process of nation and state-building wrapped up in nationalism, democratisation and the continuity of inherited civic institutions in the governance of the economy.

Take the famous Cassis de Dijon case of 1978. This was a dispute between a German importer of the French liquor and the German government, who sought to restrict the drink's sale on grounds of public safety. The German authorities argued that this liquor fell below the requirements on alcohol content designed to limit the spread of low alcohol drinks in Germany. The ECJ decided that such public safety arguments amounted to an unjustified form of protectionism. As long as a good had been lawfully marketed in one member state – in this case, France – it could be sold without restriction in another member state.

This is the basis for the principle of mutual recognition, so central to the development of the single market and so corrosive of the idea that an elected government can set rules that limit the operation of the market in the name of a wider public interest.

Something similar has occurred around state aid. There is some flexibility for member states. Allowances are made for a range of activities by governments, from subsidising a shift to renewable energy to public investment in targeted industries. France spends 0.65 per cent of its GDP on EU-sanctioned state aid and Denmark 1.63 per cent. The UK could increase its spending by 1 per cent of GDP and still be within the EU’s rules.

The EU, however, is very clear that any government initiative which distorts competition and which affects trade between member states will fall foul of the rules. Recently, the Commission has used this as a way of attacking favourable tax deals granted to companies like Amazon and Starbucks. But state aid restrictions would also apply to any radical attempt at overcoming enormous national disparities in economic wealth.  

Were the UK to create a regional investment bank in an effort to tackle the massive over-concentration of capital in the City of London, there would be a clear impact on the free movement of capital within the single market. Indeed, that would be the whole point of the exercise: a regional bank of this kind would provide loans only if certain conditions related to boosting the regional economy were met. But such overt political control over the movement of capital would also make it likely that such a policy would be in violation of the state aid rules.

Something similar would occur with a policy to nationalise the railways: EU rules would not prevent nationalisation as such but they would require that any newly constituted public service comply with the requirements of market competition that are the bedrock of the EU’s legal framework. This makes the goals of nationalisation – such as the creation of decent public sector jobs with good wages and defined benefit pensions, or the rolling out of a rail network determined by need, instead of just profitability – almost impossible to achieve.

This is what we are seeing in France. Reforms of the national railway initiated by President Macron demonstrate how difficult it is to introduce competition at the same time as maintaining the quality of the service and of the jobs that come with it. 

As things stand in the Brexit negotiations, were the UK to make it clear that it would wish to pursue a radical regional policy, then any chances of signing a preferential trade agreement with the EU would disappear. This is why “regulatory convergence” is so dangerous: it would forbid effective state engagement with the economy. The “level playing field requirement” sounds innocuous but is insidious.

There is, of course, the EU’s own regional policy, aimed at boosting economic development in backward regions. But this is no match for what a national government could do were it to decide to throw its institutional and financial resources at the problem. The Italian Mezzogiorno has suffered from economic stagnation for decades in spite of being a principal recipient of the EU’s structural funds. In fact, these funds have preserved a set of social relations that absolve local elites from investing directly in their own economies. We see this in the newer eastern member states where a reliance on EU funding inhibits the development of national growth plans that would go much further in boosting growth and reducing social inequality.   

As there is so much confusion on this issue, on the British left in particular, it is important to be as clear as possible. Relatively speaking, Europe still leads the way in terms of social equality, mainly thanks to its social democratic heritage and the development of national welfare states. The more recent rise in inequality has its roots in the difficult transition from industrial to post-industrial societies, which has left many European states struggling to find a place in the global economy. The EU itself is founded on the principle of non-discrimination, which it uses both to expand markets and to create some kind minimal social protection at the European level.

Nevertheless, all things considered, it is difficult to deny that non-discrimination can only go so far as a principle for tackling inequality. After all, many policies intended to reduce inequality - through boosting growth and through redistribution - are inherently discriminatory. No legal community founded on the principle of non-discrimination can ever become an effective agent for achieving social equality unless it repudiates its own founding principle. And there is no sign of the EU doing that.

What is, therefore, at stake in the Brexit negotiations is the balance between politics and markets in a post-Brexit United Kingdom. The question at the heart of it all is whether a democracy has the power to shape its political economy. The EU acts as the principal constraint on the exercise of that power if the democracy chooses to depart from the commitment to reducing barriers to the movement of goods, services, labour and capital. There is little evidence that something can be put in place at the European level that would replace the reduced capacities of the national state.

For all of his grandstanding on this issue, Yanis Varoufakis’s card is a joker. Leaving the EU is not a quixotic project pursued by utopians. It is a necessary step in building a national growth model that benefits a majority of citizens through democratic decision.

Chris Bickerton teaches at the University of Cambridge, Maurice Glasman is a Labour peer and director of the Common Good Foundation, Richard Tuck is the Frank G. Thomson professor of government at Harvard