Steve Davies on Theresa May, Brexit, and Europe (BONUS)

The prospects for the European left-wing and the populism underneath it all.

The UK is holding a big election on June 8, so today we’re bringing you some bonus audio on that topic featuring Tyler and Steve Davies of the London-based Institute of Economic Affairs.

They talk about how the general election could shape the terms of Brexit, how much further the EU and even the UK will splinter, the prospects for the European left-wing, and the populism underneath it all.

Note: this was recorded at event in late April shortly after May called for the snap election in June. Got it?

Listen to the full conversation

Read the full transcript

COWEN: OK Steve, you’re the one with the British accent. Your country has called a snap election, June 8th. Why did Theresa May do it and how is it going to change the terms of Brexit? What’s your take?

DAVIES: The simple answer, of course, as for any politician is she’s called it because she thinks she’s going to win and improve her position in parliament. That’s almost certainly going to be the case. As somebody very unkindly observed recently, Abraham Lincoln’s prospects when he picked up those theater tickets were better than the Labor Party’s right now.

[laughter]

DAVIES: More seriously, there are two other reasons for her doing this. One of them is that she wants a mandate for the kind of Brexit she wants to pursue. The big argument now, I think, in Britain is not should we leave the EU or not.

I think the British public broadly thinks, “Yes, we’ve decided to do this. Let’s get on with it, now,” including most people who voted remain. The big argument now is what kind of Brexit should there be.

Should there be one which involves Britain remaining in what’s called the European Economic Area, which would mean access to the regulatory regime, the single market, but also accepting a whole lot of European regulations, obviously, and also free movement of labor.

Or should the UK go for a much more independent role, not apply for membership in the EEA? That seems to be the one that the government wants to go for, and so, she wants a mandate for that strategy. That’s what the other party is going to argue against.

The other thing is she wants to stamp her own authority on the Conservative Party. I think what this election will do is complete a transformation of the Conservative Party away from what it has been for quite a long time, actually.

I think there’s going to be a significant generational change in the British Conservative Party. It’s going to become much more of a traditional Conservative Party than it has been for quite a long time.

COWEN: What struck me about the announcement, which to many people, including in her own cabinet, seemed to have been a surprise, is that the pound went up 2.7 percent right after the announcement. That’s quite a significant currency movement.

Is this the right way to think about that, that she had her own back ventures who are deep Euro skeptics. Now they’re actually cut out of the equation. They don’t have a veto any more so she can, on one hand, give a more centrist way of leaving the European Union.

But on the other hand, due to your Fixed Term Parliaments Act, when the next election has to be, that doesn’t have to be right after March of 2019. She can, again, do the kind of Brexit she wants without the next election being a referendum on that. That’s now more put off.

No one thought she would do this, but I see the pound going up. I think of those two factors. I actually think she’s much smarter than all the people who thought this wouldn’t happen. Don’t you agree with that?

DAVIES: I agree completely with that. She’s postponed the…otherwise it would be very, very awkward. They would be having an election a year after the Brexit negotiations were concluded. That could have been very, very difficult. Now, there’s going to be a big gap.

She will have time to sort out any problems that arise from the actual way in which we leave the EU. Also, a lot of people like the prospect of there being a decisive and conclusive result in the election, which there’s clearly going to be, I would say. Yes, I think it is probably a very smart move on her part.

COWEN: How hard will the hard Brexit be? Theresa May has said she’s not going to take in migrants from the EU as a matter of law. Some may be taken in on a discretionary basis. She’s making that a campaign pledge. That would seem to rule out an arrangement like that of Switzerland or Norway and an EEA‑like arrangement.

That seems to mean hard Brexit, since the European Union doesn’t seem to be giving in. What rights will the London financial sector have to sell product on the continent? What will the raise of tariff be? Will it be default double UTO rates? What will it look like, say, five years from now?

DAVIES: That is very tricky because, in terms of…there’s three different issues there. One of them is that the government is deciding to go for, I think, a very hard Brexit. I agree with that. Mainly, I think, for the very bad reason that they want to impose controls on immigration from the EU.

They can’t do that if they’re part of the European Economic Area because the European countries, quite reasonably, I think, say, “Look. There’s a whole package deal here. Free movement of labor is part of the package deal. You can’t pick and choose what you get.”

They’ve decided, I think very incorrectly, that they, for political reasons, they’ don’t want to do that. Therefore, they’re not going to be part of the EEA.

Now, the question then is, well, are they going to be able to get a trade deal with the EU of the kind of Swiss type before the deadline, fall of 2019 when the two‑year ticking clock finally hits midnight?

My own view is probably not, actually, because any deal has to be agreed by the 27 remaining members. Getting all 27 of them to agree to it is very, very difficult. Now, this is a case of British strategy coming back to bite them, if you will, because it was British strategy to expand the EU so enormously in the aftermath of the collapse of the Soviet Union.

As Sir Humphrey explained very lucidly to Jim Hacker in a very famous episode of “Yes, Prime Minister,” the reason for this was to actually make it so that nothing could get done. That was, indeed, the reason.

As he told Jim Hacker, “The goal of British foreign policy for a thousand years had been to bring about a disunited Europe,” which is completely true. The problem is, therefore, I think we’re not going to have a deal at the end of the two years.

I think we are probably going to need either to revert to WTO rules or, I think more likely, we will have an interim agreement put in place. That’s where the hard argument will be, about what that interim agreement is.

Now, as to the city of London, there’s a lot of talk at the moment the city of London is going to lose its so called passporting rights, which means that it can conduct business in Euros. Last year, before the referendum, the city of London did just under a trillion Euros worth of Euro denomination business. It’s a lot of business.

If they were to lose that, that would be an enormous blow to them. The European Central Bank would dearly like to yank that privilege because it didn’t want them to have it in the first place.

COWEN: They have nowhere to put it.

DAVIES: They have nowhere to put it. The problem, for the Europeans, however, is that you can’t build a major financial center like the city of London in somewhere like Frankfurt or Paris overnight. It’s a much more drawn out process.

I think, in the medium term at any rate, the city of London probably will be given passporting privileges but in the more medium term a lot of business will shift to the continent. Frankfurt, primarily, but also Paris. You’re talking about a 15‑year kind of time horizon than that, rather than an abrupt cliff edge transition.

COWEN: Now, if you don’t consider me too rude, I’d like to ask if your country is falling apart? In Scotland, Nicola Sturgeon is asking for, some would say demanding, a second referendum.

You could argue that ever since devolution the attention of the Scots is focused on their own politics in a way that makes them feel much more separate from England. That won’t change. Of course, they feel that their votes were disregarded in the decision for Brexit.

Brexit is now quite hard. SMP, the independence party, has done very well in the most recent elections. It’s at least…we’re not sure how well they’ll do this time around. Is Great Britain going to splinter because Scotland will leave?

You might say, “Oh, that would be insane. What currency would they use? How would they bail out their banking system? The price of oil is down,” but given that the United Kingdom voted to leave the European Union, which many people advised against, it seems we can’t dismiss the possibility that having said A one then says B.

Is Scotland going to leave? Yes or no?

[laughter]

DAVIES: I would like to say yes but I think no.

COWEN: You want them to go.

DAVIES: Oh, I definitely do.

COWEN: Tell us why.

[laughter]

DAVIES: My attitude and the attitude of the majority of English is that it would be pretty good to get rid of the bloody Scots. If there was a referendum on Scottish independence purely in England there would be a clear majority in favor.

[laughter]

Audience Member: With or without the oil in the North Sea?

DAVIES: That’s a diminishing asset anyway, actually. The production rate loss is climbing dramatically. I think Nicola Sturgeon has a perfect right to call another referendum because she did say that if there was a major change in circumstances they would call another one.

Quite clearly, there’s been a major change in circumstances. As you rightly say, Scotland’s view on Brexit is radically different from that of England and Wales. Now, whether or not she will get a vote in favor of leaving the UK is more open to question.

Because the problem there is that leaving the UK, if the UK is still in the EU, is not quite as frightening as the prospect of leaving the UK if the UK is outside of the EU because, A, that requires the EU, if the goal of it is the same, the EU should give Scotland membership.

Spain, in particular, is probably going to veto Scotland becoming a member of the EU because they do not want to give encouragement to separatist movements for obvious reasons. Also, the other problem is that would mean a hard border between England and Scotland.

That’s a lot more scary than the prospect of being two separate countries but with still no hard border at all. The Scots, as a nation, are actually very “small c” conservative. I think that, actually, if push comes to shove they will very narrowly vote to remain in the union. Actually, personally, I wish they would vote to leave.

All joking aside, I think there’s a very good reason for that, which is…two good reasons. One is that my general view is that small to medium sized countries, countries up to about seven million people, empirically do better, have better governance, better economic policy than large countries because public choice problems are less severe in small countries.

The other thing is that Scotland has very, very severe social problems. Basically, greater Glasgow. They’re not going to address those problems in a mature way as long as they can blame them all on the English.

At the moment, all the problems of Glasgow are pushed onto the English taxpayer, whereas if it was the Edinburgh taxpayer who was having to pick up the tab that would concentrate some minds very sharply.

If any of you know anything about the rivalry between Glasgow and Edinburgh, well, you realize that something would be done to sort out Glasgow pretty quickly if that was the case. I think Scotland actually would have to sort its own problems out in a way that it’s not going to do if it can blame everything on the hated English.

I would actually wish that they would vote to leave but I fear that they will narrowly decide to stay with us. Now, on the other hand, Ireland, which I know…

COWEN: The Shetland Islands first. There’s a growing separatist movement in the Shetland Islands. There’s now 400 people in support. Are you hoping for them to leave Scotland?

DAVIES: I would. Actually, yes, I would. The Shetlands would have a wonderful future as a Nordic little island. That’s where the oil is, actually. The Forties and the other two major fields are both in Shetland waters. Shetland actually, historically, are a part of Scotland, a part of Norway. Came to Scotland just a few hundred years ago.

COWEN: My people, the Irish, now there’s no border whatsoever between Northern Ireland and the Republic of Ireland. When you drive from one to the other the sign changes from kilometers to miles. You get a different cell phone signal, but so many people from Ireland proper now have summer homes in the north or they’re connected in some way.

There are actually homes built that straddle the border. You go from one room of the house to another and you go from one country to another. There’s been peace since the Belfast agreement.

Is it now not truly inconceivable to reinstitute a hard border between the two Irelands? What will be done because of this fact? Will we not end up with a border being between Belfast and Heathrow Airport rather than along Donegal County between the two Irelands. Tell us.

DAVIES: I think what will happen is that the Irish government and the British government will agree that the Irish government will do the British government’s dirty work and have all the border controls and checks in places like Waterford, Cork, and Dublin rather than…

Which is what happened before 1971, rather than what you suggest, because nobody, I think, in their right mind wants to have a hard border between Northern Ireland and the Republic. It’s a complete joke anyway.

The kind of things you talk about are not new. Even when the Troubles were going on, the block houses and the fences were around, it was still very hard to tell where the border was in places like [inaudible] and South [inaudible] .

Nobody really wants that. I actually think, though, while I think Scotland will stay in the UK I think there is quite a realistic chance that Northern Ireland will vote to join the Republic or join the Republic under some kind of condominium scheme.

I think that’s actually quite possible because, for one thing, the demographics are changing. The next census is probably going to show a Catholic majority in Northern Ireland, which doesn’t necessarily mean a majority for union of the Republic but it’s a major shift.

Also, increasingly, the younger generation of the Protestant population in Northern Ireland are not as attracted to the historic Ulster identity as the older generation are. I think that it’s quite likely that there will be a significant move, if not fully toward a united Ireland, in the direction of a united Ireland as a result of Brexit.

I think that’s one of the…which, also, I think would be a good thing, in many ways. I think that’s another one of the consequences falling from it.

COWEN: Why is it there’s a movement…it has different names. Some people call it populism. I’m not sure that’s the right word because it’s not always that popular. In England, we’ve had it. In parts of the United States…you don’t really have it much at all in Ireland. You don’t have it much at all in Spain.

It’s growing in France, especially with young people. We’ll see how strong it is. It was strong in the Netherlands but it failed, though, because the more centrist parties moved sharply to the right.

Two interrelated questions. Why have left wing parties in so many countries become so weak? Labor in England is just a joke. It’s not even a joke. It’s one reason why Theresa May can call another election.

Social democratic parties across the continent are looking extremely weak, pretty consistently. In some, but not all, other countries there are these rising populist or alt‑right movements. What’s your take on the broader developments that are driving this new and actually pretty startling configuration of loyalties? How do you see that?

DAVIES: The thing is, this is the predominant trend. The thing you described is a predominant trend throughout most of Europe and, I think, many other parts of the world.

COWEN: Some parts are immune, too. We want to explain the cross‑section variation.

DAVIES: The immune bits are places like Spain, Portugal, Ireland, Japan.

COWEN: Is it a Catholic thing?

DAVIES: I don’t think it is because Italy’s got populism. France has got it. It’s pretty strong in parts of Germany, as well.

I think there are two things going on. One, firstly, a lot of people say this is due to economic factors. It’s due a feeling of disaffection by the losers from globalization. I don’t think that is actually true. You may disagree with me on this. I’ll come back to you on that in a moment.

I think this is about the politics of identity. I think what is happening in many countries is that a lot of people feel that their identity is threatened by globalization, by the social, cultural, technological changes, mass migration, a whole range of other things that have taken place in the last 20 to 30 years.

These are people who basically want the world to stay roughly the same. They feel threatened by radical, dramatic change. They feel that their identity is under assault. What they are coming to support is a kind of very unpleasant politics which combines, as indicated Marine Le Pen, for example very left of center economics.

She’s well to the left of most socialist parties in economics, with anti‑globalism, cultural traditionalism and authoritarianism, and anti‑immigration policies. This is politics which is on the rise in most parts of Europe.

The other question you asked is what’s happened with the social democrats? Well, the big story in the Dutch election, actually, which did not get public, was the complete collapse of the Dutch labor party, one of the great historic parties of Dutch politics. It collapsed from 24 percent of the vote to just under six percent of the vote.

COWEN: Why are these parties so weak? Labor in England?

DAVIES: For a very simple reason. Because, basically, they are trying to appeal to two radically different and increasingly hostile blocks of voters. On the one hand, traditional, typically older, white, working class voters who are economically left wing but culturally very traditionalist and very conservative.

On the other hand, a more metropolitan, younger, very green, very environmentally conscious, very PC, you might say, culturally leftist group who basically have the same kind of left‑of‑center economics as the first group, but in every other respect are simply on a totally different agenda. It’s almost impossible to appeal to both of those two groups at once.

Social democratic parties in most parts of Europe are losing their traditional working class base to the new populist politics. That’s what’s happening now. If I may, I’d like to put a question to you now.

COWEN: Sure.

[laughter]

DAVIES: What I would say is, first of all, how do you see recent events in the United States as fitting into this broad scenario? Do you think that the kind of account I’ve given to populism in Europe is a good way of understanding or explaining what happened in the election last November, or other trends in American politics in the last few years?

COWEN: I think it’s much cultural and less economic than people think. If you look even at a state such as West Virginia ‑‑ I just wrote a column about West Virginia ‑‑ we all talk about how poor it is, but per capita income in West Virginia, it’s about three‑quarters of the US national average.

If you take into account the fact that it’s cheaper to live there, it’s actually not that far from the national average. There are obvious problems with opioids, low labor force participation, but that actually means the other people in West Virginia have to be awfully productive.

That per capita income in West Virginia in real terms is about equal to that of France of Japan. Those are poorer countries than the United States. If you’re theory is all about the extreme poverty of West Virginia and the state is falling apart, when in fact it’s been growing a bit.

It’s gained 50,000 residents over the last 15 years, not a lot, but it’s not being massively depopulated ‑‑ and your theory is they’re all opting for Trump, or populism, or alt‑right because they’re so poor, it doesn’t make sense.

There’s increased sorting of this country by education and what is sometimes called the coastal elites phenomenon, though you find it in Ann Arbor, and Austin, Texas, and some places that aren’t the coasts.

Part of it is because of the Internet. There is a split of sympathy. Say parents, they might have once said, “I don’t want my daughter to marry an X,” some ethnic or racial group. Now it’s, “I don’t want to my daughter to marry a Republican,” is a much strong sentiment.

[laughter]

COWEN: Parts of the country are realizing they should rebel against that. I don’t feel they’re doing so in an especially effective way, but that’s what I think is happening here.

There is slow wage growth, and that creates grievances where expectations are not met, and that feeds into the cultural problems, but also in Europe it’s very often a more cultural thing. Spain has relatively recent fascism, so they’re somewhat inoculated because there’s been a lot of immigration to Spain.

Ireland didn’t have fascism, but it had the issue…obviously a lot of violence. The idea that some kind of alt‑right view comes along that flirts with the idea of being violent on Twitter, it’s not going to be a big seller in Ireland. It’s really history being recreated in different places in different ways.

DAVIES: I tend to agree very much with that, actually. What I then ask you further is you say ‑‑ and I agree with you, as I said ‑‑ that the economics is not what’s really driving this. It’s more a cultural phenomenon.

On the other hand, how do you think politics is reacting to something you’ve been writing about for a while now, which is what you see as the stagnation of innovation, the problems of lack of income growth for large parts of society? What effects do you think this is having on the broader political media that we’re living in?

COWEN: I’m told after my answer we must move to Q&A. I would say we have so much debt and have some high implicit liabilities. Furthermore, we’re committed to paying off interest groups that we’re actually now at a margin. We can’t do that for everyone now.

You have Republicans controlling every branch of government. They can’t agree on tax reform. They can’t agree on how to alter Obamacare, at least not yet. Those are signs. It’s not really gridlock in the 2011 sense, but we don’t have the resources to make deals by paying off the complainers.

On all sides, a lot of parties are ceasing to cooperate. It’s more incoherence than a gridlock, but with that we must end. Now Q&A. We turn it over to all of you. Ask what you want, please. Thank you all for listening. Thank you, Steve.

DAVIES: Thank you, Tyler.