The Demise of Great Britain and the Emergence of its National Dependencies

The Times
August 4, 2009
Time is up for once-great Britain

by Stryker McGuire

Even in the decades after it lost its empire, Britain strode the world like a pocket superpower. Its economic strength and cultural heft, its nuclear-backed military might, its extraordinary relationship with America — all these things helped this small island nation to punch well above its weight class. Now all that is changing as the bills become due on Britain’s role in last year’s financial meltdown, the rescue of the banks and the ensuing recession. Suddenly the country is having to rethink its role in the world — perhaps as Little Britain, certainly as a lesser Britain.
This is a watershed moment for the UK. The country’s public debt is soaring, possibly doubling to a record 100 per cent of GDP over the next five years, according to the International Monetary Fund. The National Institute of Economic and Social Research forecasts that it will take six years for per capita income to reach early 2008 levels again.

The effects will cascade across government. Budgets will be slashed at the Ministry of Defence and the Foreign Office, affecting Britain’s ability to project power, hard and soft. And there’s little that can be done to reverse the trend, either by Gordon Brown or by David Cameron. As William Hague, the Shadow Foreign Secretary, said in a recent speech: “It will become more difficult over time for Britain to exert on world affairs the influence which we are used to.”

History has been closing in on Britain for some time. The rise of China and India always meant that Britain would have a smaller seat at the increasingly crowded top table of nations. It also meant that the US would recalibrate the so-called special relationship as it sought new partners and alliances, inevitably shrinking the disproportionate role Britain has long played in world affairs.

Tony Blair made a final stab at greatness with what amounted to a 51st-state strategy: by locking Britain into America’s wars — on terror, in Afghanistan, and in Iraq — London achieved an importance it hadn’t had since Churchill. But whatever advantage Britain gained in the short term was wiped out by the political damage Mr Blair’s strategy caused at home. Ordinary Britons and even members of the Establishment grew critical of what they saw as London’s subservient relationship with Washington. Mr Blair’s authority was diminished, his political agenda at home suffered and it became clear that Britain’s geopolitical default setting would no longer be to follow America’s lead automatically. Mr Blair may merely have postponed the inevitable: a lesser Britain is a consequence of world events.

The global recession has hit virtually every country, but Britain more than most. The great engine room of British prosperity, the financial sector, now feels like an anchor. The IMF believes that Britain’s slump will be deeper and longer than that of any other advanced economy. The number of Britons claiming unemployment benefits has jumped from 1.3 million (4.6 per cent of the workforce) in 1999 to more than two million and is on track to top three million.

The OECD says Britain’s recovery may begin this year, but will lag behind those of other rich countries. At the moment, Britain is arguably saddled with the worst public finances of any leading nation, thanks to voracious spending in recent years and to borrowing that is growing faster than in other developed nations. Britain is so heavily indebted that one political commentator dubbed it Iceland-on-Thames, suggesting that Britain could follow that nation into bankruptcy.

What makes the British case stand out even more is that it is the only country of its size in recent history that has sought such a disproportionately large role on the world stage. During the Cold War, Margaret Thatcher saw herself as second only to Ronald Reagan as a leader who helped to bring down the Soviet Union. During Mr Blair’s decade in office, Britain fought three wars — in Kosovo, Afghanistan and Iraq — in which its military participation was right behind that of the US. Now that’s changing.

The UK still maintains one of the largest defence budgets in the world, but probably not for much longer. As the number of British deaths in Afghanistan has risen dramatically, both Labour and the Conservatives have felt obliged to say they would not reduce defence spending, so as not to put troops at greater risk. But in the longer term experts say big cuts are inevitable.

A Royal United Services Institute paper estimates that the MoD budget will be cut by 11 per cent in real terms over the next six years. Other estimates are much higher. Paddy Ashdown, a former Royal Marine, has said the annual £35 billion MoD budget might have to be cut by almost a quarter, which would put Britain more in line with traditionally lower-spending continental powers. Britain’s role in the world will shrink with its budget.

The future of Britain’s nuclear force, the ultimate symbol of a great power, is also uncertain. Britain’s submarine-based Trident missile system is due to be replaced over the next decade at a cost of some £20 billion. But according to a recent poll 54 per cent of the British people say that Britain should give up its nuclear deterrent altogether. That’s unlikely, but it may force the next government to find a cheap way to extend Trident’s lifespan. Traditionally, being a nuclear power was one way of securing permanent membership of the UN Security Council, and any downgrading of Britain’s deterrent could strengthen the demands of big emerging powers that they should have more seats on the council, possibly at the UK’s expense.

The glory days of the City of London are now grinding to a halt, too. London stole the march on Wall Street by seizing the highest growth areas, such as hedge funds, exotic derivatives and the like. Unluckily for London, these areas were also the hardest hit by the financial crisis. But now London, like New York, awaits a slew of new national, regional and global regulation that appears likely to diminish its role in the world for years to come. The EU has already endorsed the creation of a systemic risk board with oversight powers that will include the City. Britain has sidestepped such intervention in the past, but this time is different. Germany and France appear intent on restraining the excesses of Anglo-Saxon capitalism and may seek to engineer reforms that steer a greater share of global capital flows into more cautious continental hands.

London, as the glitzier icon of laissez faire, will pay a steeper price than Wall Street in the financial new world order. Ever since the Big Bang of the 1980s, London has regulated the banking industry with a light touch. If European regulations are harmonised to include London and if London’s light touch gets a little heavier, the City could suddenly become “more antagonistic to the institutions that are being regulated”, as Andrew Hilton, of the Centre for the Study of Financial Innovation, puts it. In that event, financial centres such as Singapore and Hong Kong could draw business away from the City.

Britain’s bout of reflection on its last gasps of empire comes at a natural point in its history. The Great Recession came as a surprise and has accelerated the trend, but the rise of China, India and Brazil, and the changing ties to a declining America, have been visible for many years. As America turns to building new ties with the advancing powers of Asia and Latin America, Britain can only feel less special. The nation is in the totally predictable grip of the ennui and grumpiness that accompany the end of a political era.

Eleven years ago, the year after Mr Blair swept to victory, he spoke in Dublin of a Britain that was “emerging from its post-empire malaise”. Phrases such as “new Labour” and “new dawn” and “new Britain” were not yet curdling on the tongue. Today, Mr Blair is two years out of office and Mr Brown suffers from a grey, been-there-too-long aura. Long gone is the cultural ferment of Cool Britannia that made London the capital of cool in the early Blair years.

Pity the prime minister who takes over from Mr Brown. A Conservative victory at the next election would have little of the game-changing feeling that accompanied Mr Blair’s triumph 12 years ago. Then, Britain bought into Mr Blair’s mantra because it was real enough: the economy had already begun a period of unprecedented growth, immigration was enriching the country, an entrepreneurial fervour crackled across even the old industrial heartland. Today that has evaporated. The great test of the next prime minister will be not only to redefine Britain’s place among great nations but also to renew the kind of spirit that has ruled Britannia in the past.

Stryker McGuire is contributing editor of Newsweek magazine.