In the second part of his interview with Merryn Somerset Webb, Bernard Connolly talks about the corporate oligopolies developing in the EU, and how smaller companies would be better off out of it.
Watch the first part of Merryn's interview with Bernardhere.
If you missed any of Merryn's past interviews, you can see them all here.
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Merryn: OK. I think we better get back to Brexit before all our readers rush out to buy new cars. Now, we were at the point before we disappeared into the crisis in general of saying that you don't think that the economic consequences of leaving the European Union are, A: Particularly foreseeable
Bernard: Are material.
Merryn: Or, B: Exactly, material. Could go one way, could go the other way. But it's marginal. Now the UK's large
Bernard: They're not going to be immaterial for everyone. There will be certain people who lose out in one of the two scenarios. There's no doubt about that.
Merryn: Yes. But looking at the types of companies in the UK who are coming out warning us about all the dreadful things that will happen. These are, in the main, the larger companies.
Merryn: So the ones who are obviously doing more business in Europe and the ones who benefit from regulation. The ones who have the money to lobby to effectively make themselves into oligopolies by blocking the entrance of smaller companies. Is that unfair?
Bernard: No, I don't think it is. It's part of the process of creating a nomenklatura state rather than a democratic state. It's part of the process through which Davos man feathers his own nest. And it's part of a process which deforms capitalism. Let me go back to the little maxim I used before: Build a better mousetrap and the world will beat a path to your door. Unless the maker of the existing mark one mousetrap has enough political clout to stop you doing it. And that, I think, is what the lobbying, the political influence, not least influence of the big Wall Street banks is doing.
There's a kind of crony capitalism developing, right? There have been many periods in the past in all sorts of countries where capitalism has descended into cronyism. There have been waves of reform and sliding back again. We're very much at the moment on the downslope towards more cronyism and a crowding out of new entrants. Let's go back to the productivity point that I have a number of friends who tell me, you know, you go to these tech conferences and you are absolutely blown away by the marvellous things that are happening. There's a golden age of scientific and technological advance. Why don't we see it in the numbers?
Merryn: In the growth numbers? In the productivity numbers?
Bernard: In the growth and productivity numbers. I think the answer is: Well, there's a stage between the idea and the fruition, and that stage involves entrepreneurship, initiative and investment. And if the investment process, or the capital allocation process is completely to cock because of what's gone First of all what's gone wrong in the macro-economic way that we were talking about a few minutes ago, and secondly in the ability of existing entrants to block off new competition. You're just not going to get the translation of those ideas fully. Of course to some extent it will happen. But you won't get the full translation of those ideas into improved productivity and output.
And again I think I mentioned the civil war a little while ago, but if one thinks back to the reasons for the civil war, and historians, you know, sort of argue about this incessantly and there's a new conventional view every ten years, but one of the things that's quite clear is that the first half of the 17th century was an era in which there were lots of new ideas. There was a lot of innovative thinking. There was a lot of frustration with the way things were run, both in terms of politics and economics, and of course the religious aspect was hugely important and we mustn't forget that.
The way the early Stuarts ran things was, because they didn't trust Parliament, they and particularly Charles I, even more than James I wanted to institute personal rule. Rule by decree in effect, which was what they did, they had a problem, if you didn't have a parliament how are you going to raise the money? And a major element of the financial arrangements of the early Stuarts was the sale of monopolies. To manufacture anything you could think of. And that was a period when manufacturing was actually becoming important for the first time. And it was stymied, stalled by the institution of monopolies. And I think that the European Union You know, the early Stuarts are actually a very good analogy for the European Union
Merryn: So the European Union is doing, in that sense, something rather similar. It's not so much creating monopolies as oligopolies, because groups of very powerful companies operating in each sector
Merryn: And we see this in big companies getting bigger and bigger and bigger and bigger.
Bernard: Yes they are. They're two different Two variants if you like for crony capitalism. The early Stuart one was more explicit. You know, you paid to get your monopoly granted to you.
Merryn: Well, there's a lot of paying in lobbying.
Bernard: There's a lot of paying but, you know, you don't say: Here is £1,000, give me a piece of paper with a stamp on it that says I'm the only person who's allowed to manufacture whatever it is. Kitchen tables.
Merryn: It's a bit more subtle.
Bernard: But the effect is very similar.
Merryn: So in that sense, the impact on our economy were we to come out would be that some of our larger companies Well I daresay they'd find other ways to operate. But our smaller companies may find it an exciting time
Bernard: Well I think the smaller companies would For two reasons. First of all, there'd be fewer obstacles to their challenging the existing entrants. I mean, contestability is the most important aspect of competition. And contestability is blocked off by the EU. But I think the other way in which they'd find it advantageous is that, what, Britain exports a bit less than 30% of its GDP. Around 40% of that goes to the EU. That's 12% of GDP is affected by the single market for better or for worse. And 88% of the economy isn't. But 100% of the economy has to abide by EU regulations and rule. And so there'd be a significant freeing of the major part of the economy.
Now what about that other 12%? That's where the potential for perhaps a 1% fall in GDP comes from. There are indications that our European partners, forgive me for smiling when I use that word, might adopt a vindictive approach to Britain. Well I think there are two ways of looking at that. One is, yes, if they do, how are they going to do it? They're going to use whatever rules there are in the EU to do it. Well, aren't we much more at risk of that vindictive behaviour if we're actually in the EU than if we're out? I think we are.
Second, is it in their interest to do it? Is it in their interest to restrict trade with Britain, given that they have a very, very large they, the rest of the EU as a whole have a very large trade surplus with Britain. Well, it depends again on what one means by they. If there were such a thing as a rest of the EU economy, and a rest of the EU demos, or community, or whatever, the interests of the people of that entity as a whole would be very ill served by adopting a vindictive attitude towards Britain.
Now one might say: Well, it doesn't matter, because it's not democratic. And there are certain people who have their own agenda which they want to advance and they think that being vindictive towards Britain is advancing that agenda, and they might do it. To be honest, that sounds a little bit implausible to me. So I'd be surprised in the end if there was a great deal of vindictiveness. But again, if there were, it would tell you two things. First of all you're better off out of their clutches than in them. Secondly, the other system is not a democratic one. Which I think just reinforces the points I've been trying to make.
Merryn: Now, can Sorry.
Bernard: I noticed today that Christian Noyer, the former governor of the Banque de France and hence a member of the ECB, and also at one time the vice president of the ECB said, and I think it was in an interview that if Britain were to leave the EU, the EU would not allow euro/dollar trading to be concentrated in London, which it is at the moment. Why not? Well, because if there are financial crises, the British authorities would look to their national interest rather than to the interests of the euro area. Now think about that euro/dollar. First of all there are two currencies involved. Is Britain part of the United States of America? Of course it isn't. Do the Americans say: Oh my goodness, you can't trade euro/dollar in London because you're not subject to our rules? Well, to a little bit they do
Merryn: To a degree. They're beginning to.
Bernard: But not to the extent they've said: We can't allow euro/dollar to be traded outside of the United States. And the logic of what Noyer says eventually is that there is no currency trading at all.
Merryn: Outside Europe.
Bernard: Well anywhere. I mean, if you extended that logic to the whole world there'd be no currency trading anywhere. There's no currency trading everywhere. You have an autarchic system again in the world. But he's also saying if there were a financial crisis, if Britain were outside the EU it would be free to prioritise its national interests rather than those of the euro area. Well, the clear implication of that is that he expects, if there is a financial crisis and Britain is in the EU I think there will be a financial crisis that Britain will not be allowed to pursue its own national interest and will not be allowed to pursue the interests of the country which has the largest international financial sector in the world. It would be required to do whatever is required, whatever is needed to advance again Une certaine ide de l'Europe. And that is not our idea I think, as Britain, of how the world ought to be organised.
Merryn: No. Now, let me ask you one last thing. Which is: Can the EU survive anyway? Whether we're in it or out of it? There's lots of talk about how Brexit might prompt the end of the EU. But I know that you're not a great believer anyway You're certainly not a believer that the euro can last, but can the EU survive?
Bernard: Well it can survive as the kind of thing that its progenitors want it to be, which is an anti-democratic, illegitimate empire. But that's the only way in which it can survive. And I think the strains which one has seen as a result of the euro and the strains which one is seeing as a result of the migration crisis are putting it in very sharp relief. The reality that you cannot have a halfway house between national legitimacy and national independence and a polity which covers the whole of Europe.
Now my fear is that the more crises there are the more we are being pushed towards there being a political entity. But that political entity will inevitably be, as I call it, an anarcho-imperial entity. Which will go even further than it already has done in eliminating sovereignty by construction, but also I think legitimacy, democracy and, let me say it again, the rule of law. So, yes I think the EU will survive but in a form which no-one in their right mind would want to be part of.
Merryn: And the euro will survive within that?
Bernard: The euro will survive within that as long as two things and I think there are two conditions first is that Marine Le Pen does not become French president or does not acquire such a big share of the vote in the French presidential election that the Germans get scared of France and France's future. And the second is that the migrant crisis within Germany doesn't leave Merkel in the position of fighting a war on two fronts. Now to an extent she has been doing, and we've heard much less from her about monetary matters over the past few months when she's been preoccupied with the immigrant crisis than we might have done previously. She cannot, I think, successfully wage a war on two fronts.
It's rebounded somewhat over the past few weeks according to the polls, as we know, but if her position is weakened again when the weather improves in the eastern Mediterranean, the so-called deal with Turkey is seen to have collapsed and so on, it's going to be much harder for her or her successor to take the steps which would be necessary in the long run to keep the euro together, and those steps are basically that Germany transfers 10% of its GDP every year in perpetuity to the others.
Merryn: To everybody else. Yes. The others will know but the Germans don't need to know that, do they?
Bernard: The Germans will be told very firmly that this is all nonsense.
Merryn: Not happening.
Bernard: It's not going to happen. Just as Kohl said at the time of German reunification: This will not cost West German taxpayers one pfennig.
Merryn: How much did it cost in the end?
Bernard: About 4% to 5% of GDP for 20 years.
Merryn: Yes. OK. Bernard, I think we'd better leave it there, but that has been really interesting. Thank you very much, and I think we have one final message for our readers which is to expect crisis, buy gold and go shopping.
Bernard: And go shopping. You can buy bonds too, I think.
Merryn: OK, and bonds. Thank you, Bernard.
Bernard: OK. Thanks again, Merryn.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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