“Levelling-up” is the latest unrealisable dream to enter the lexicon of the establishment media. The idea – which merges the Covid-19 recession with the anticipated shock of a no-deal Brexit at the end of December – is that to remain in government beyond 2024 Boris Johnson’s Tories will need to deliver renewed prosperity to Britain’s ex-industrial, impoverished rural and rundown coastal regions. That is, the places that delivered the largest votes in favour of leaving the European Union in June 2016; including the so-called “red wall” seats which gave the Tories their majority in last year’s general election. But as Richard Partington at the Guardian observes, thus far this is no more than wishful thinking:
“Levelling up is still no more than a phrase, social care is not fixed, Brexit is not done. Many voters would give the prime minister a pass on these issues during a global health emergency. But as the summer months provide distance from the initial shock, and as the government attempts to shift gear from crisis management to the recovery phase of the outbreak – with the prime minister promising to “build back better” – patience will be tested…”
As Partington explains, levelling up the post-pandemic UK economy will be no mean feat:
“Britain has a hyper-centralised state structure, with too much power concentrated in Westminster… For decades this inequality has been allowed to develop, with the worst of the damage done amid the dismantling of Britain’s manufacturing base in the 1980s, just as a bonfire of financial regulation allowed the City of London to boom – fuelling a gulf between the capital and the rest of the country, particularly former industrial heartlands. Councils have been left unable to invest in their local areas – fostering regional inequality and crimping national growth.”
Although the 1980s mark a watershed in the fortunes of the majority of UK regions, the origins of the current crisis go back much further. Britain’s economic woes date back to at least 1913 – the peak of its coal extraction – leaving its leaders presiding over the largest Empire the world had ever seen, but with far less productive power than competitors like Germany and the USA. Add to that the squandering of decades of financial reserves in an entirely unnecessary European war, and by the early 1920s – having grown to its geographical and demographic peak after swallowing former German colonies in the peace deal – the Empire had become a millstone around the neck of the UK economy. By the time the combined arms of the USA and the Soviet Union had put an end to the Second World War, Britain had slipped into the second division of national economies; and Europe was no longer the centre of world affairs.
Money laundering was the main means by which post-1945 Britain kept itself going. With the US dollar the only currency left standing in the ashes of war, the financial alchemists in the City of London were well-placed to act as a go-between for Eastern Bloc countries who needed to trade in dollars but dare not risk setting up accounts in the USA; where they could easily be frozen. And so the Eurodollar was born. Britain would use the ties that the City of London had built with Wall Street to ensure a steady flow of dollars back and forth across the Atlantic. The City’s special status – it is almost a separate city state similar to the Vatican – allowed currency to be exchanged anonymously and to evade tax by taking advantage of the network of tax havens across the former British Empire.
While this set up made a minority of people fantastically wealthy, it ultimately depended upon the British pound continuing to be a strong currency. This, in turn demanded that the wider, non-financial sectors of the economy continued to produce goods which the rest of the world still wanted to buy. In some sectors – such as aerospace – the UK was successful to begin with. However, Britain’s still largely coal-powered economy and its prior investment in now outdated coal technologies rendered its manufacturers uncompetitive when pitted against the oil-powered USA. Arguably, Britain would have fared better if its coal infrastructure had been bombed to the same extent as the bombing inflicted upon Germany and Japan; as in the aftermath, those nations were able to shift directly to oil and electricity when they reconstructed their infrastructure.
The tension faced by British governments of the 1960s and 1970s was between devaluing the currency – which would be good for British industry by making its goods cheaper abroad – and maintaining the strength of the currency to favour the money laundering activities of the City of London. It was a tension which was never resolved.
The big shocks to the UK economy came in the early 1970s. First, when Nixon took the US dollar off the gold standard; thereby exporting US inflation to Europe. Second, when OPEC took advantage of US peak (prior to fracking) oil extraction to impose an oil embargo upon the western economies. The result in the UK was a wave of double-digit inflation just at the point when rising energy costs rendered its industry uncompetitive in world markets.
Oil arrived as Britain’s (temporary) saviour. The events of the 1980s related by Partington were only possible because of the flow of North Sea oil and gas which began to arrive in Scottish terminals just as Margaret Thatcher’s Tories took over the reins of government. Despite British industry all but disappearing, the guaranteed tax revenue and dollar exchange from the sale of North Sea fossil fuels kept the UK currency artificially high while allowing the prosperity of millions of British households to grow despite their apparently producing little with which to earn it. As Ian Jack writing in the Guardian seven years ago recalled:
“I had the idea… when I was walking through a London square around the time of the City’s deregulatory ‘Big Bang’ and Peregrine Worsthorne coining the phrase ‘bourgeois triumphalism’ to describe the brash behaviour of the newly enriched: the boys who wore red braces and swore long and loud in restaurants. Champagne was becoming an unexceptional drink. The miners had been beaten. A little terraced house in an ordinary bit of London would buy 7.5 similar houses in Bradford. In the seven years since 1979, jobs in manufacturing had declined from about seven million to around five million, and more than nine in every 10 of all jobs lost were located north of the diagonal between the Bristol channel and the Wash. And yet it was also true that more people owned more things – tumble dryers and deep freezers – than ever before, and that the average household’s disposable income in 1985 was more than 10% higher than it had been in the last days of Jim Callaghan’s government.”
The industrial economy upon which the British Empire had been built stood upon three legs:
- Vast surplus energy (in the shape of coal)
- A manufacturing sector producing goods desired around the world
- A banking system which supported the flow of trade.
In the 1980s, the Thatcher government used a far smaller surplus of energy (in the shape of oil and gas) to dispense with a large part of the manufacturing sector in order to foster a banking and financial system which became an end in itself. Even with the North Sea, with an insufficient manufacturing sector, the strength of the currency – essential to maintaining the banking and financial sector – could only be maintained through the sale of national assets (privatisation) to foreign investors; a process which continues to this day.
If the fossil fuels beneath the North Sea had been infinite, we could have gone on like this indefinitely. But North Sea oil and gas extraction peaked in 1999. By 2004 Britain had become a net importer of gas. It became a net importer of oil the following year. By the end of the decade, the North Sea had flipped from being a cash cow which governments could exploit to being a liability which requires increasing subsidies and tax breaks to keep producing (and to maintain the fiction that £60bn of decommissioning will happen at the end). By then, of course, the entire world was engulfed by the 2008 financial crash and the ensuing depression.
In effect, two legs of the economic stool – energy and manufacturing – had been kicked out from beneath Britain long before SARS-CoV-2 arrived. The visible result was a growing retail apocalypse – the decline in discretionary consumption which resulted in the decimation of non-food retail across UK towns and cities – as most people’s prosperity fell between 2008 and 2020.
This raises the dilemma which is currently playing out behind the scenes in Tory circles and which is gradually entering the establishment media. Should the government attempt to restore the economic status quo ante? Or should the government attempt to build an entirely new economy out of the ashes of the Pre-Covid one?
Clearly, rekindling Britain’s banking and finance-based consumer economy would be the preferred choice of most media commentators and most Tory politicians. But profound structural changes have already taken place. For example, Hugh Wilson at Raconteur observes a degree of re-localisation which may shape future economies around the world:
“When China went into lockdown early in the pandemic, many businesses in the West struggled to source the equipment and components they needed. International supply chains crumbled in the crisis. With the pandemic far from over and the worst economic shocks of climate change and Brexit adjustments to come, crisis might be something business has to get used to.
“And at the pandemic’s peak, domestic manufacturers stepped in to fill important gaps, seamlessly transitioning to produce personal protective equipment, ventilator parts and other equipment for the NHS. John Woodruffe, founding director of Lancashire-based business performance consultancy Cube Thinking, thinks this might come to be seen as a transformative moment.
“’Coronavirus had a severe detrimental effect on the UK’s supply chain,’ he says. ‘So is manufacturing coming back home? Some trends are starting to show it, starting with healthcare where supply chains have quickly diversified and domestic supply has become crucial. There are opportunities in other sectors, too, supporting the power generation, automotive and aerospace industries, for example’.”
Elsewhere, Jack Sidders and Donal Griffin at Bloomberg point to banking and financial corporations pulling out of London even before the pandemic began:
“The giants of Wall Street and European banking are giving up their strongholds in London.
“In the coming months alone, Barclays Plc may ditch its investment bank’s headquarters in the capital; Credit Suisse Group AG is offloading nine floors of office space; and Morgan Stanley is reviewing its entire London footprint.
“And all of those moves were planned before the coronavirus hit. Now, with thousands of job cuts likely to follow what’s forecast to be the worst recession in three centuries, the tenants of the glass and steel towers that dominate the City of London and Canary Wharf may face an even bigger retreat.”
This looks set to further undermine a commercial property sector – another mainstay of the UK money laundering sector – which has already been seriously undermined by the response to the pandemic:
“Firms in central London have sought to offload almost one million square feet of office space since the lockdown began in mid-March, with about 16% of that coming from banks, according to latest data from Savills. Just over a third of offerings through mid-June were directly in response to the virus.”
Returning to the economy of February 2020 is already beyond us. As Chris Giles at the Financial Times reports:
“The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July.
“Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.”
In part, this is due to the loss of demand which has already resulted from millions of workers losing their jobs. In part, though, it is because nothing much has changed about Covid-19. As Stephen Bush at the New Statesman reminds us:
“Speaking personally, I have serious doubts about the operational competence of the Prime Minister and the institutional ability of a state that has had ten years of devolved austerity to contain new outbreaks on a local or regional basis. But who knows? One way or another, the proof will be in the eating if England does properly unlock over the coming weeks and months… large numbers of British people may not believe that the UK has successfully flattened the spread of new cases, and therefore ‘reopening’ merely triggers wave after wave of bankruptcies and closures… Don’t forget that large numbers of people were reducing their social contacts before the government formally locked down – and there is no evidence that they are going to take their cues from the government about when to emerge from lockdown either. The United Kingdom locked down ‘from below’ and will unlock the same way.”
In such circumstances, government be better served by going all-out for building a different type of economy rather than trying to resurrect the corpse of the previous one. For example, given the growing number of corporations pulling out of commercial property and following the apparent increase in productivity resulting from home working, the government could do a lot worse than to shamefacedly steal the 2019 Labour policy of installing high-speed fibre optic broadband across the UK. More broadly, some attempt to bring manufacturing home – even if it requires a devaluation of the currency to a level which properly reflects the UK’s decline – may be the best option for the government both economically and politically. As Hugh Wilson notes:
“Boris Johnson won a general election partly on a promise to ‘level up’ the country. The phrase is vague, but hints at rebalancing the economy in a way that favours left-behind regions over the soaraway South East. The Conservatives won scores of traditionally Labour ‘red wall’ seats in the North and Midlands in 2019. A London-centric recovery from a long and painful downturn could see these voters switch back in 2024.
“So, the political motivation is there, but do the opportunities to ‘level up’ exist? Some experts think the coronavirus pandemic has provided the best chance in decades of starting to rebalance a lopsided economy dominated by services and the City of London. Promoting manufacturing and engineering could reinvigorate the regional towns where many businesses in these sectors are based.”
None of that, though, is going to happen without the energy to power it. The double-bind from the North Sea is that in the absence of a thriving manufacturing sector, the UK has no means of maintaining the pound at its currently inflated level. But without an over-inflated pound, there is no way that an energy-importing state like the UK can afford the fuel with which to run a thriving manufacturing sector. Britain may well face the very worst of all worlds – a nation which relies upon imports faced with a collapsing currency which renders those imports unaffordable. Rather than “levelling up,” the immediate future may involve a considerable levelling down.
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