Revealed: What history teaches us about Brexit

The constitutional historian Professor David Starkey has compared the invocation of Article 50 of the Lisbon Treaty on 29 March with King Henry VIII’s break with Rome in the 1530s[i]. As Professor Starkey describes in his numerous books, that event had momentous historical consequences for Britain. Politics in those days moved more slowly – and were much more violent – but it pays informed investors to examine the parallels with today. 

A short history lesson: We’ve been here before

The reverberations from Henry’s divorce from Queen Catherine of Aragon and its aftermath played out throughout the reigns of his three children – Edward VI (1547-53), Mary I (1553-58) and Elizabeth I (1558-1603). It was only during the reign of a king of a different dynasty – the Stuart James VI of Scotland (James I of Great Britain) that relations with Europe were in any way “normalised”.

Remember that Henry died a Catholic – despite having repudiated the Pope and dissolving the monasteries, his attachment to Catholic doctrine did not waver. His obsequies were carried out according to Catholic rites. It was only in the reign of his young son, Edward that the Anglican Church was institutionalised with the Act of Uniformity and the Book of Common Prayer (both 1549).

Mary – Bloody Mary as Anglicans call her – was, in current parlance, a religious Remainiac. After assuming the throne on her young brother’s death she sought to re-impose the supremacy of Rome and burnt her opponents at the stake. Her marriage (and thus alliance) to Philip II of Spain was hugely unpopular and also aroused the animosity of the French who took Calais (the Tudor Gibraltar) in 1558 – England’s last possession in France. In the event, Mary’s attempt to re-Catholicize England was thwarted by her death and the accession of her Protestant sister.

Elizabeth – Good Queen Bess – was finally excommunicated by the Pope in 1570. A theological iron curtain was thus erected by mainland Europe around England which had huge consequences for trade. Although the Pope wielded great spiritual authority, the major temporal power of the day was Spain under its overweening Hapsburg monarch, Philip II. In 1588, Philip tried to invade and conquer England with the Spanish Armada but was seen off by strong winds in the Channel and the skills of Sir Francis Drake.

Philip’s dominions included not only Spain and Portugal but the Low Countries – modern Belgium and the Netherlands. He was also King of Naples and Duke of Milan. He even presumed to the thrones of England and Ireland on account of his ill-fated marriage to Henry’s catholic daughter, Mary. Imagine Angela Merkel, Jean-Claude-Juncker, Guy Verhofstadt, Mario Draghi and Christine Lagarde all rolled into one…

The search for new trading partners

Philip controlled the critical trading entrepôt of Antwerp through which most of England’s exports (mostly wool, cloth, tin, lead and weaponry) reached the European market. Antwerp was increasingly closed to English merchants in the 1570s, forcing them to look for alternative markets. Elizabeth’s principal Secretary, Sir Francis Walsingham, advised the Queen that England should look South and East towards trade with the Muslim world – on which Catholic Europe had turned its back for religious (i.e. ideological) reasons.

By 1578 a delegation was despatched to Constantinople (modern Istanbul) to establish diplomatic relations with the Ottoman Empire and shortly thereafter a commercial treaty (what we would call a trade agreement) was signed. Within ten years English merchants were present across the Ottoman Muslim world from Fez in Morocco to Raqqa in modern Syria (now, of course, the capital of the so-called Islamic State).

Morocco, whose king commanded a formidable fleet which may even have reached North America, became an important trading partner. The Moroccan ambassador to Elizabethan London may have been the model for Shakespeare’s noble Moor (Moroccan) of Venice, Othello[ii]. William Harborne, a Norfolk merchant, became the first English ambassador to the Ottoman court in 1582; and the adventurer Sir Anthony Sherley spent much of 1600 at the court of Shah Abbas the Great. England’s complex love affair with the Orient was conceived, and it has never really abated.

Peace and trade resume

Finally, after the death of Philip II (1598) and the accession of the Scottish King, James I in 1603 a climate of compromise arose. By August 1604 the Treaty of London was signed with Spain concluding a nineteen year war. The main architect of this accord was Robert Cecil, first Earl of Salisbury, who had served Elizabeth.

Trade between Great Britain and Europe surged in the last two decades of Shakespeare’s life. Who blinked first? The religious stroke ideological war had only just begun – Germany would become the centre of protracted religious discord in what we now call the Thirty Years’ War (1618-48 in which an estimated eight million people were killed). Yet Catholic Europe and Anglican England at last found a modus vivendi.

In the subsequent two centuries Britain became a great power, pulling well ahead of her European neighbours, as a result of successive agricultural and then industrial revolutions. It was her superiority in technology and her more dynamic and open economy that enabled her to seek favourable trade deals in the then declining empires of the East, not least the Mughal Empire of what is now northern India. With huge geopolitical consequences.

Napoleon’s Continental System

Another historical analogy to Brexit can be found in the course of the war against Napoleonic France from the late 1790s to Napoleon’s ultimate defeat at Waterloo (1815).

Flushed with victory against Prussia at the Battle of Jena, in November 1806, Napoleon issued the Berlin Decree, which brought into effect a blanket embargo against all British exports to Europe. It only finally ended on 11 April 1814 with Napoleon’s first abdication. In the years after 1806 British exports to the continent lost about half of their previous value.

All connections were cut between Britain and the continent, even mail. Any ships which were found to be trading with Great Britain were liable to French maritime attacks and seizures. Napoleon’s main goal was to control the trade of all European countries, circumventing their governments. His secondary goal was to weaken the British economy by closing off the French Empire, its vassals and allies from British trade.

The French Empire under Napoleon was characterised to a high degree by the imposition of the Code Napoléon – the Napoleonic legal system – and by a uniform system of administration, taxation, finance and justice – including a currency union. In many ways this was progress – the feudal system was abolished in the Netherlands and Germany, which was popular. The Church was emasculated; the guild system (especially pernicious in Italy) was abolished and internal tariff barriers were removed. Many European states, including Germany, retained the Code Napoléon even after the collapse of Napoleon’s empire.

In fact, we can regard Napoleon’s empire as the forerunner of the European Union – except that it was an attempt to unify Europe by force. The territories of the original six states which signed the Treaty of Rome in 1957 corresponded almost precisely to the boundaries of the Grand Empire of 1810.

When Napoleon realized that extensive British trade was still being conducted with Spain and Russia, he invaded both countries – Spain in 1808 and Russia in 1812. His forces were tied up in Spain where the Spanish War of Independence was already underway. And the invasion of Russia after the retreat from Moscow so tellingly described by Tolstoy in War and Peace, concluded in disaster for la Grande Armée.

The Continental System was undermined by smuggling and by a counter blockade by the British navy. It caused high prices and shortages. The first state to change sides in protest was Sweden. But ultimately, the great powers – especially Austria and Russia gained an incentive to ignore the Continental System, and this led to the weakening of Napoleon’s coalition. The Peninsular War in Spain, pursued largely by the British in alliance with the Spanish crown, fatally undermined the French Empire’s military ascendancy. By April 1814 Napoleon and the Continental System were undone.

True, Britain does not command the relative superiority to Europe in manufacturing today that it held in 1810 when Germany was yet to industrialise. But if the EU were to impose a regime of punishment against the UK post-Brexit – a new Continental System – we can be sure that both sides would suffer – and some EU states more than others. The intrinsic problems of European integration and of the currency union would not go away. There might even soon be calls for a Northern European free trade area encompassing Britain, the Scandinavian countries and possibly Ireland. No blockade lasts forever.

Protestantism and capitalism

Max Weber, the German sociologist in his The Protestant Ethic and the Spirit of Capitalism (1905, but not translated into English until 1930) associated Protestantism with capitalism, based on deep cultural notions around hard work and just reward. It is tempting to think today that the EU is the ultimate Catholic power (recently blessed, and lectured, by the Pope); while Trump-Brexit are dissident Protestants. Catholic majority cultures have a predisposition to state socialism; Protestants love profit.

It is dangerous to stereotype but this cultural difference is still important. Catholics (South Europeans, including Bavarians but not Greeks) have a higher tolerance for ambiguity (which can be a strength). This makes for looser accounting standards. (And, as Professor Starkey says, corruption – but that harsh).

Brexit trade negotiations: What happens next?

Currently, about 45 percent of UK exports go to the EU, though if you include the five EFTA countries and those countries with which the EU has signed trade agreements that figure rises to about 60 percent. That means any necessary re-configuration of Britain’s existing trading relations could be painful.

That said, Britain is probably better placed to make such a transition than any other EU country. This is thanks to historical ties with the Commonwealth, its remarkable soft power (from TV formats to the global pull of its universities), its world language and the far-flung British diaspora (not least in the USA).

Lord Price, a UK government trade minister has talked of a second Elizabethan age. Once we leave there will be 15 percent of the world economy inside the EU and 85 percent outside. A slew of great nations, principally in the Anglosphere, including India, have expressed interest in dynamic trade relations with the UK. Russia – which was an important trading partner for the half century before WWI – would welcome a closer relationship, if the current UK government could attenuate its hostility towards Moscow. (Much complicated by the Syrian issue, I admit)

The downside is that the three huge economies with which we shall have to curry favour – China, India and the USA – have increasingly protectionist instincts, especially when it comes to basic industries like agriculture.

There will always be those who argue that trade is essentially determined by geography. Nations will trade most with other nations with which they are immediate neighbours. That was certainly what Ted Heath believed when he led Britain into the Common Market in 1972. And then there are those who argue that cultural affiliation is the key driver to trade – which leads us in the direction of closer cooperation with other English-speaking nations.

But given that 80 percent of our economy is driven by services – many of those IT related – the argument for geographical proximity breaks down. It is the same transaction for Sage PLC (LON:SGE) to provide a software upgrade for a customer in Calais as for one in Christ Church, New Zealand, some 12,000 miles further away from Gateshead. In an information economy, geographical contiguity counts for much less than cultural affinity. How many Harry Potter books were sold in France, as compared to the USA? How many Game of Thrones fans are there in Germany, as opposed to Australia?

Fintech, about which I have written extensively in these pages, is a case in point. London and Mumbai are Fintech hubs. The challenge ahead for the UK is to shape trade agreements which stimulate the export of value added services in developing economies – India at the fore.

Lessons for investors

The first lesson for investors is that Britain was never likely to settle down into a cosy ever-closer-union with its Catholic, Socialist European neighbours. The more Napoleonic Europe became, the more likely that the British would opt out.

The second lesson is that the European powers have been trying on and off to stymie English and then British trade for the last 500 years. And yet, despite our separateness, our economic and cultural importance always forces them to close a deal in the end.

The Rubicon has been crossed, however. Brexit will not be a single event but rather a chain reaction lasting many years – just like the break with Rome.

[i] See: https://en.wikipedia.org/wiki/David_Starkey

[ii] See: https://www.theguardian.com/culture/2016/mar/19/moroccan-ambassador-london-1600-real-othello-shakespeare Also: https://bookshop.theguardian.com/catalog/product/view/id/366383/