Saturday, March 31, 2018

RIP: Mother of the Modern EU Her Party Wants to Leave

by Roy C. Smith


Margaret Thatcher died five years ago this week. She would have hated the debacle of the Brexit vote and the shambles that have followed, because she did more than anyone to shape the modern European economy in which she wanted Britain to play a leading role.

When she became prime minister, the EU was the European Economic Community, a stodgy assemblage of 12 countries hoping for benefits of integration but badly in need of reform and rejuvenation. She was a true believer in free markets, deregulation and competition and on reforming and rejuvenating Britain after decades of weak economic performance and currency depreciation. Right away she repealed foreign exchange controls that had been in place since 1914, cut income taxes and battled unions. But she had a larger vision – to “privatize” hundreds of state-owned-enterprises (many of them nationalized by previous Labour governments) that then represented 10% of the UK GDP. Doing so would return billions of pounds to the Treasury, enable collection of taxes on profits, and return the companies themselves to being competitive in world markets. And, ordinary Britons could become capitalists by buying shares in great British companies. A long stream of British privatizations in coal, iron and steel, automobiles, gas, electricity, water supply, railways, trucking, airlines, airports and telecommunications began in 1981.

But for privatization to occur on a large scale, multi-billion £ stock issues would have to be sold. The financial infrastructure of the City of London, however, was antiquated and not up to handling such large issues. The City also needed to be reformed along free market lines, with the chips falling where they may. So “Big Bang,” announced in 1983 to be implemented in 1986, came into being and did the job. Simply by forcing the London Stock Exchange to negotiate commissions, allow “dual capacity” (of trading and sales, etc.), and open membership to all qualified comers, the system was transformed into Europe’s most competitive and efficient financial marketplace. Not long afterward, all of the countries in the EEC, fearing that the securities business in their countries would migrate to London, copied the Big Bang example and modernized their systems too. They followed her example, not some decree published in Brussels. Today, integrated European capital markets are the largest segment of the global capital market. In 2017, they generated over $4 trillion of new debt and equity issues, more than in the US market.

By the end of Thatcher’s term in office, more than 50 British companies worth more than £50 billion were privatized, restructured and made competitive. Soon it was clear to other EEC governments that privatizations worked, were popular with citizens, and generated returns of capital and tax revenues that eased governmental finances considerably. By the late 1980s, all of the other EEC countries were actively engaging in large privatization issues of their own. They in turn were followed by IPOs and other equity market transactions that transformed the closely-held private sector of Germany, France, Italy, Spain and other countries.

But Thatcher was not content to limit her reform ideas to Britain. In 1984 she appointed euro-skeptic Arthur Cockfield to be a member of a European commission studying economic reforms. Like Thatcher, Cockfield was a strong advocate of free markets; he arrived with a lot of data and a lot to say about integrating and liberating European trade and industry. He was the driving force behind the Single Market Act of 1986, the EECs most import reform effort. It incorporated the “Four Pillars” of the EU (freedom of movement across EU borders of goods, services, labor and capital) that was formed a few years later. After implementation of the Single Market, every company in Europe had to reconsider its business model and strategy. They were now part of a much larger, integrated marketplace and nationally protected local market dominance became a thing of the past. This strategic rethink, together with revitalized securities markets, lead to the first-ever European M&A boom that began around 1985 and has continued since, making it a vital part of a global M&A market that periodically does more transactions in Europe than are done in the US M&A market.

Finally, after forcing through financial reform, privatization and the Single Market act with its ensuing merger boom, Thatcher appeared in Bruges, Belgium in September 1988 for her now-famous address to the College of Europe on Britain’s future role in the EEC. She began her remarks by saying that “if you believe some of the things said and written about my views on Europe, it must seem rather like inviting Genghis Khan to speak on the virtues of peaceful coexistence!”  But she explained, “Britain does not dream of some cozy, isolated existence on the fringes of the European Community. Our destiny is in Europe, as part of the Community.”

She also acknowledged that Britain under her leadership had fought back over regulation and other issues that she thought were unnecessarily constraining to the UK. Then she added her nest remembered line: “We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance from Brussels.” But, this did not mean she wanted to leave Europe, only to use the UK’s powerful influence and example, as she had successfully been doing, to persuade Europe to maximize the utility of the private sector and minimize the notion of a super-state.

She was never a believer in go-it-alone, nor did she ever deviate from the basic idea that a great country like Britain had to be part of the global scrum to influence it. She would never have agreed to the Faustian bargain that David Cameron made with his backbenchers to offer a dangerous referendum on EU membership in exchange for their support as party leader, and she certainly would have hated the result.  

Britain’s post-Brexit future is certainly unclear. But what is not unclear is the enormous transition of financial markets, the vitality of the private sector and operational effectiveness of the EU’s integrated private sector that is now the world’s second largest GDP (at purchasing power parity), just behind China and ahead of the US, serving more than 500 million people. No one was more influential in bringing this to be than Mrs. Thatcher.

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