On 23 June the British will vote in a referendum to decide whether their country should remain in or leave (BREXIT) the European Union (EU). The importance of this event cannot be overstated, since it will impact the future of the UK – and very likely that of Europe – for decades to come.

The remain camp features an impressive membership. The poster boy is of course Prime Minister David Cameron, backed by his Tory government (which is ironic given that they had been the most euroskeptic party), joined by a great number of multinationals and captains of industry, as well as the main opposition party (also ironic, since their leader, Jeremy Corbyn, had historically been sympathetic to the idea of leaving the EU).

They also have the support of prominent international politicians, in particular US President Barack Obama. A few days ago he made a high profile visit to the UK to share his views on the matter, including a warning on what could happen to UK’s trade with the US – interpreted by some as a threat against leaving. Perhaps the special relationship between the two countries is not so special after all.

The BREXIT crowd is much more fragmented and colorful, consisting of a plethora of Tory “renegades” (the true conservatives in their mind), far left politicians, far right politicians, representatives of small businesses and a whole swath of euroskeptics. Not the most cohesive bunch really, but still able to put up a fight.

What is particularly interesting about this group is that many of its members would rather shoot themselves than share a stage with the others. And predictably there have been plenty of misfirings in recent weeks, including silly “part Kenyan” remarks.

The polls suggest that this will be a close contest. This means that a significant proportion of the population will be deeply unhappy with the outcome of the referendum, not really an encouraging sign given its profound implications.

 

But why on Earth are the Brits questioning their membership of the EU in the first place? Why can’t they just settle down like everyone else?

The Ashes of Empire

The historical context of the referendum is particularly important to understand its existence. British society has undergone a massive change over the last hundred years or so. And in a sense it is still trying to come to terms with it.

At the beginning of the 20th century Britain ruled over an empire where the Sun never set. They were really the top dog. Its navy controlled all the major sea lanes. British industry, located primarily at home, enjoyed preferential access to raw materials from its colonies overseas, in return supplying them with finished products under a virtual monopoly. The universities formed highly qualified professionals who would help run even the farthest outposts of the empire.

Cecil Rhodes, the quintessential British imperialist of his time, famously stated: “Remember that you are an Englishman, and have consequently won first prize in the lottery of life”.

But all empires suffer from the illusion of permanence. And that rigged lottery of life was soon to be challenged by the ascendancy of two world powers, Germany in Europe and Japan in the Far East. This set in motion a chain of events that would wipe out Britain’s supremacy in less than half a century, as a result of two devastating world wars separated by a brutal economic depression.

The growing fragilities of the British Empire were painfully exposed during World War II. Notwithstanding the valor of its soldiers – from all corners of the world, Britain was losing badly in the first years of the war, not only in the home front but also in Africa and Asia.

The tide only started to turn after the US formally entered the war. But such support came with strings attached. Along with many other conditions, the Brits would have to share their lead in key military technologies, such as aircraft design and the radar, and eventually withdraw from their colonies. There wasn’t much else Winston Churchill, the British Prime Minister, could have done.

As a result, while Britain and its allies prevailed its empire did not. This became obvious at the Yalta Conference in February 1945, where Churchill was for all intents and purposes relegated to a side role in the discussions that were taking place between the two new superpowers, the US and the Soviet Union, on how the postwar world should look like.

In a sense this was the smoothest transition of global hegemonic power in recorded history, with the Brits merely passing the baton to the Americans. Pax Britannica gave way to Pax Americana. And this has been the model governing world affairs since then.

What went much less smoothly was the retrenchment of Britain back into its islands in Northern Europe. Despite a general climate of prosperity in postwar Europe, by the 1960s the UK economy was starting to lag in trade and industry. As a response, the country experimented with different economic models (in large part to try to emulate the impressive success of West Germany), including its own version of socialism. It even joined, albeit reluctantly, the European organization that eventually became the EU.

Unfortunately all these changes failed to deliver the prosperity they intended to create. After enduring years of economic malaise, paralyzing strikes, two oil shocks and industrial bankruptcies, by the mid-1970s Britain had to go through the humiliation of applying for an IMF bailout in order to avoid the collapse of its currency.

It took decades under the leadership of Margaret Thatcher and then Tony Blair for the country to regain its footing and international prestige. However, this was only achieved under an evolving political and economic configuration that promoted greater integration with Europe’s markets. While this process was essential for the UK’s reversal of fortunes, it also came with strings attached.

As a result, the UK is now one out of 28 member states of the EU (albeit a very important one), having relinquished much of its trade, industrial, judicial and foreign policies to Brussels. It did manage to retain its currency, some control of its borders and other exemptions, perhaps to appease its more euroskeptic proponents going back to the Thatcherite days.

Given all of this, just how influential is the UK today?

A Symbolic Corporate Dispute

There is a recent corporate event that in our view reveals the waning influence of the UK in world affairs: the battle for the control of PT Bumi Resources, a major coal mining company in Indonesia. While this was fundamentally a private matter, there is a high degree of symbolism given the parties involved.

On one side we had Nathan Rothschild, heir apparent of one of the branches of the most prominent banking dynasty in the world, involved in financing the British government and enterprise for centuries.

Rothschild astutely noted China’s insatiable demand for all kinds of commodities, and in particular coal to power its galloping growth. As such, in 2010 he envisaged the creation of a vehicle that would enable international investors to gain exposure to natural resource plays around the world, but governed by the well-established rules of UK capital markets.

Indonesia was highly attractive in this regard, given its proximity to China and leading position in coal mining.

This is when the opposing side entered the picture. The Bakries are one of the most powerful families in Indonesia, having established a business empire on the back of their deep political and business connections. At that time their family-run company had over 200 holdings in businesses ranging from media to mining.

The two sides came up with an innovative deal in 2011: the Bakries would inject their stake in PT Bumi Resources, a major coal business in Indonesia, into a cash shell company listed on the London Stock Exchange. Rothschild’s vision had become a reality.

However, the deal immediately attracted criticism, especially in Indonesia where the Bakries were accused of selling valuable national resources to foreign interests.

That turned out to be the least of their worries. Coal prices started a major correction largely as a result of slowing demand from China. Accordingly, the value of the shell company plummeted, and pressure was mounting on its backers.

It also became apparent that the two sides had very different views on how the company should be run. This dispute eventually turned acrimonious – and very public in 2012, after Rothschild made allegations of major financial irregularities at the Indonesian subsidiary, where the Bakries had retained significant influence. An independent probe into the matter revealed that not all was well with the company as Rothschild suspected, but some serious questions emerged on how he had obtained such information.

From then on the gloves were off. Rothschild, also feeling the pressure of his reputation being on the line, resigned from the board and later attempted to regain control of the company by replacing its directors through a shareholder vote. In the end, the shareholders rejected his proposal, and that was that. One of Asia’s most powerful families had prevailed over the blue blood of British (and Western) finance.

It really is a new world order, and one much less accommodating of British interests in its different forms. A hundred years ago there wouldn’t have been a contest; whatever court was in place would have likely ruled in favor of the British. And if it came to blows, the British Navy would have come to the rescue and typically enforce a blockade around a major port. And any of that would have carried the day, for better or worse.

Obviously we’re not advocating for gunship diplomacy here. And a shareholder vote is certainly an incomparably more civilized way to settle a dispute. But it opens the question of how the UK can regain any semblance of its former world influence – if at all possible.

Should the UK go for BREXIT and strike its own deals with its fast growing Commonwealth partners, its historical stomping ground? Or instead irrevocably commit to the EU project and hope that the sum ends up being greater than its parts?

Surely the answer would be pretty straightforward if the EU was performing as originally sold to its member states. But is it?

A New Roman Empire?

We all know the positives. The EU has brought together states which chronically had been at war for generations, with more severe consequences each time. European companies now have unfettered access to a market with 500 million consumers covering an entire continent. There are regulations in place that safeguard important labor and environmental rights. And it’s really wonderful to be able to live, study and work anywhere in the EU.

Getting together also makes sense to better tackle the complexities of a globalized world, where emerging powers like India and China seek to regain the spotlight after centuries of underperformance. The negotiating leverage of the economic block is strengthened by becoming larger, not smaller. Moreover, the prevailing Pax Americana is showing signs of exhaustion, with unpredictable consequences if the world turns multipolar. Why not entertain the thought of merging all the armies in Europe?

These may all be very valid reasons to remain in the EU. But there is a flipside to this story, and potentially a very serious one.

We have recently written about the EU’s dire state of affairs, so there’s no point in regurgitating it here. But it’s worthwhile revisiting a number of important points.

Most of Western Europe has blown through the inheritance bequeathed by their forefathers, and is now foisting upon its descendants a huge amount of debt to fund its current standard of living. Several member states around the Mediterranean have already gone past the solvency point and can only obtain the liquidity to fund their daily commitments with some type of backing from the European Central Bank and other EU institutions.

Europeans no longer make enough babies to replace the elders who expire (which begs the question of who will actually be around to pay for all those newly minted debts). Changing culture plays a role, but so does record youth unemployment and massive increases in the cost of housing, taxes and so on. Much of that can be traced back to unsustainable electoral promises, Keynesian follies and the gigantic European welfare state, and it’s incredibly unfair that it’s the young ones picking up the tab for all that.

Facing a demographic cliff, European governments have opened their borders to mass immigration, at such a scale that the native populations are progressively being replaced. This is already apparent in most major European capitals. And that’s fine provided that everyone is singing from the same hymn sheet. But increasingly that’s not the case. There are growing pockets of disenfranchised communities, which in many cases end up becoming hostile towards their host nations.

As a result, social cohesion is breaking apart in many member states. Take France for instance. A big portion of its military has now been deployed *domestically* to protect its cities, nuclear power plants, schools and synagogues against the ever expanding and seemingly unsolvable threat of islamic terrorism. Even Brussels, the capital of the EU, is effectively under military lockdown today.

And what has been the EU’s response to all of this? The typical bureaucrat’s response: more central planning, more federalization and less member state democracy. Jean-Claude Juncker, the President of the European Commission, recently stated that “the EU always has problems with its member states and our lives would be much more comfortable without member states”. At least he seems to have more spunk than a damp rag.

Oh, and there are more planned expansions too, with countries like Serbia, Albania and Turkey on deck to join the EU at some point in the near future. And why stop there? Why not recreate the old borders of the Roman Empire? Except that this time there won’t be any Roman soldiers to ensure the propagation of Roman values; that may only be achieved through increasing monetary contributions from those childless ageing Europeans, and probably not for very long.

Seeing things from this vantage point, why would any Brit vote to remain in the EU? Why negotiate to get a better view in the Titanic rather than running for the life rafts?

Arguably many of these existential problems can be better solved by a smaller EU, not a bigger one (no Chancellor Merkel, dilution is not a solution). The Brits have enough domestic and foreign problems to deal with already, which is why they are having this referendum in the first place. And an enlarged EU will all but guarantee new waves of economic migrants rushing into the UK.

The idea of engaging with the Commonwealth on its own certainly has a lot of merit. The average Brit has more in common with an Indian, a Pakistani, a South African, a Canadian or an Australian than with a Greek, a Slovakian or even a German, hence the name of that organization (except that the participating emerging countries always argue that unfortunately the wealth is not common…). And those markets are growing much faster than the EU’s.

A BREXIT is not all smooth sailing though, not by a longshot. Breaking up is never easy and there is a lot of disentangling to do. What would happen to all the expats and migrant workers in the UK? The Scots might also decide to do another referendum to split from the UK and in all likelihood go back to the EU (whatever happened to Braveheart?)

This is why both sides must have the opportunity to clearly and fairly present their arguments to the British public. The stakes are way too high to make any decision based on just a hunch, emotion or political propaganda. It’s a pretty serious matter and any regrets will last for generations.

And that’s the world we live in today. There are no easy solutions to the problems we face. To BREXIT or not to BREXIT… that is indeed the thorny question.