Brexit Negotiations and 2017

EU FlagA chorus of commentators are telling us that it’ll be impossible for the UK to negotiate a free trade agreement with the EU in two years (once we’ve triggered Article 50), which means we’ll have to revert to WTO rules, and the subsequent tariffs will plunge us into an immediate, long-term recession. Not just a recession, but an out-right depression.

Are these commentators on to something? Is this likely? Before getting in to that, it might be worth noting that these are often the same people who told us that voting leave on June 23rd would result in an immediate recession. Remember that? Even if you do, they’ve forgotten.

The goalposts have moved. It’s now “economic Armageddon is still coming because of Brexit. But it hasn’t happened yet because Article 50 hasn’t been triggered.” Once Article 50 is triggered? It’ll be: “Okay, well, economic meltdown hasn’t taken place yet because we haven’t left.” Once we leave? Well, there will be more excuses.

At some point, given the ridiculous monetary policy of most western governments right now, there will also certainly be a global financial contraction. Maybe a big one. Maybe bigger than 2008. And when it happens – though Brexit is unlikely to be the culprit – you’ll be sure those same commentators will blame our decision on June 23rd this year.

Because of all of this, when I hear warnings of economic disaster due to us trading with the EU on WTO terms, I get sceptical. It’s the more of those same unqualified pronouncements that for some reason must be respected by virtue of the fact that they’ve been made. That makes no sense to me.

Right now, the chances of us getting a free trade deal sorted between March 31st 2017 and April 1st 2019 is about 50/50. If we had to do a deal from a standing start, I’d say we only have a 5% chance, given the EU’s awful history of this. But our terms are already active and in place. That should make it 99% certain that we’d secure a deal. But, the dead hand of the EU Commission and the other EU high-ups make it much harder than it should be. Though to be honest, don’t their petty hostilities right now justify our decision to leave?

And even if we do revert to WTO rules, will it really result in instant economic collapse? We pay £9.7 billion net into the EU a year. The tariffs (at current trading levels) are likely to be less than £3 billion a year for us. Much higher for the EU (we do have a massive trade deficit with the other 27 member states after all), but that’s just a good incentive for the 27 to strike a free trade deal with us.

But let’s end on a good note. The reason I think we’ve got at least a 50% chance of getting a deal in two years is the disconnect between the directly democratically-elected governments of the nation-states and the high-command in charge of the EU executives.

The EU guys talk tough because they don’t have to face a ballot box. But even the most sycophantically pro-EU governments in the 27 member-states are accountable. And if they push for rulings that make it harder and more expensive for, say, BMWs or French wine to be sold in the UK, their chances of re-election are, at least slightly more difficult.

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Out And Into The World

UK FlagWe actually did it. I was convinced for more than a year that the vote to leave the European Union would end up in a 60/40 result in favour of remaining. Once again, UK politics has confounded my expectations, and produced a result few predicted.

So what happens next? We have a new prime minister (in the form of Theresa May) and she’s stated that “Brexit means Brexit”, and has appointed serious “Brexiteers” to the task of negotiating our way out of the supranational entity.

But what exactly IS Brexit? It’s a negotiation that could have many different forms, so which is best?

I think the result probably helps inform this decision. People voted 52% for leaving the EU, and 48% against. A massive turnout with 17.5 million people voting to leave, in absolute terms that’s more people in the UK voting to leave than have voted on anything ever before.

But is it such an overwhelming majority that gives the government a huge mandate to pursue an aggressive and ambitious (and fast) Brexit? The numbers are large, but 52/48 is still pretty close. There’s a lot of people who bought into “project fear” and are deeply concerned about us leaving the EU. I think it’s important to bring those people on-side.
So Brexit absolutely means Brexit, but the closeness of the result should influence how we transition from being an EU member state to being an independent sovereign nation. It’ll take a little longer than a quick clean break, but it’ll be worth it in the long run.

In the medium-term, there will be a limited series of economic wobbles, but nothing on the scale that “project fear” was threatening. Already their big scary warnings are starting to look a little silly, (I thought they did anyway to be honest). The threatened “emergency budget” never happened, but the drop in the value of sterling and the short-lived dip in markets did shake some people up. They saw it as the beginning of the Brexit warnings coming true. The question is, how can the 52% bring the 48% on-board?

A decent suggestion would be to create a situation where they see what leaving looks like, dipping our toe into the wider world if you will. After that, moving further out would be easier.

An idea I had would be to start talking right away to the EFTA countries (Switzerland, Lichtenstein, Norway and Iceland), and secure our membership. It should be pretty straightforward. After all, it was the UK who created EFTA originally, as an alternative to the EEC.

Once a member of EFTA, we could leave the EU, retaining our membership of the EEA (European Economic Area). You don’t need to be an EU country to be party of the EEA, after all, Lichtenstein, Norway and Iceland are all EEA members (Switzerland has a series of bilateral deals with the EU that don’t require EEA membership).

As a non-EU EEA country, we retain tariff-free access to the single market on goods, services and capital. We could unilaterally invoke Article 112 of the EEA agreement to apply a handbrake on free movement (as it was an area of such concern for many who voted to leave). In return for an agreement of free-movement of people in the financial services sector, it might be easier to secure the so-called passporting rights to ply our lucrative financial services to the EU member states. And that means in return that Germany can make money selling us their cars, and France their cheese and wine. All tariff-free.

A couple of years of that arrangement, and I think two things would become clear to lots of the 48%: firstly, the free-trade deals forged with the rest of the world (that we can’t do while shackled to the EU) will become striking and valuable, with a strong possibility that we’ll get our self-confidence back. We may also end up thinking that these free trade deals are so good, that we couldn’t possibly entertain the idea of rejoining the EU and giving them up. There’s a whole world out there, and the possibilities surrounding rejoining it once out of the EU are too exciting to ignore.

Secondly, they will see, simply, that the sky did NOT fall in. Free trade continues with the EU states, and life goes on quite happily.

It’s from a position like that, that we can start to unpick the EEA agreements, and replace them with a series of bilateral agreements, Swiss-style. Plus, our current laws and regulations will remain on the books, each only being rejected and altered as and when we want to. That’s not so scary.

The future outside the EU is bright and full of promise. My sincere hope is that in time, even great swathes of the 48% get to see it too, once we’re out and into the world.

Our Future in Europe

EU FlagSo it begins. And continues. And continues. And on. And on. Over a hundred days of debates and rows have already started, with many more to come in the coming weeks and months. I would imagine that already, a lot of the public are already sick to death of the EU debate. But it’s easily one of the most important votes we have ever had, and time should be taken to think about what the implications are for all of us moving forward.

The BBC’s show Question Time has shown already the public demanding two contradictory things: they wish the fear-mongering (on both sides) would end, so they could just get “the facts”. But on the other hand, the “facts” are too dry and boring, and they want to be talked to in plain English.

I personally think you can only chose one of those things. You either want the facts – as best as they can be presented – or you want to be told opinions on general terms.

But either way, (and I’m putting this here for my reference as much as anything), here’s how things look as I see it right now:

  1. 3 million UK jobs depend on our trade with the EU. But that’s trade with the EU that those jobs depend on, not membership. There’s probably tens of thousands of jobs in the UK that depend on our trade with Hong Kong. No one is suggesting we form a union with them. Besides which, the other 27 member-states have some 6.5 million jobs between them that depend on trade with the U.K.  Will they put that at risk? Which leads me to…

  2. For every £3 worth of goods and services we trade to the EU, we buy £5 worth of goods and services from the other 27 member-states. If talk of a trade deficit is too “wonkish” for you, how about thinking about it like this: we’re basically the customer. Will the EU want a tariff-free trade deal with one of its biggest customers upon us leaving the current arrangement? Will it help Angela Merkel politically if she makes it harder for BMW and Mercedes to sell cars to us? Will Francois Hollande look good to the French people of he ignited a trade war stopping French cheese and wine making its way to British supermarkets?

  3. We aren’t voting on whether or not we leave Europe. Come June 24th, the tectonic plates won’t suddenly shift and push the UK out into the mid Atlantic somewhere. We’re voting on whether or not to leave the political union known as the EU. Including places like the Channel Islands, there’s 47 countries that can be described in some way as being in “Europe”. Two of them (Russia and Belarus) have no free trade agreement with the EU, choosing instead to form a pan-Asian trade block. The other 45, are part of the free trade area in some form or another (EFTA, the EEA, or members of the EU). There’s three layers to the European cake: 45 countries, of which 28 are members of the EU, or which 19 are members of the Eurozone. So 17 countries/states are in the outer layer (free trade and not part of the political union), 9 are in the middle layer (free trade AND political union) and the remaining 19 are in the inner-layer (free trade, political union and a single currency). The choice is not so much “leave” or “remain”, as it is “move to the outer layer” or “stay in the middle layer”. By and large, the inner layer does worse per capita than the middle layer, and the middle layer does generally worse per capita than the outer layer. Whether in the outer layer you think we’d also be strong enough like, say, Switzerland (as we have the 5th largest economy- set to take over Germany as the 4th in 2030 and Japan as the 3rd in 2045, with currently the 4th largest army, a head figure at NATO, the UN, WTO, whose language is the most widely spoken in the world, whose trading maritime and philosophical links exported around the world are one of the fundamental reasons for the decline in world poverty), is up to you.

  4. There is no vote on offer for the status quo.  Voting leave will mean we walk away from the union we’ve been part of since the early 1970s. But voting remain will be a vote to be part of a changing EU, which contains both David Cameron’s new reforms, but also changes that confirm the middle layer can’t impede the changes of the inner layer, which means that one way or another change is coming. The question is, what change do you want?

As I see it, those are the facts as they stand, stated as simply as possible. There’s benefits and costs to either decision. The real question we each have to consider, is which solution provides the best future for us?

Greece and Us

Temple of AthenaAs I write, millions of Greeks are heading to the voting booths to have their say in a crucial referendum on whether to accept the terms of an international bailout.

This is a significant vote. The government have urged a “No” vote, but there are those who say a “no” means ejection from the eurozone.

EU leaders – and eurozone ones more specifically – are backtracking on that somewhat in recent days, and say a “no” vote, while unfortunate, does not mean instant expulsion from the euro.

Sadly, the Greek government don’t strike me as being particularly competent, and the Greek people are, according to polls, very divided on what to do. A Greek colleague of mine has told me of the ugly scenes there at the moment, with friends turning on each other as credit halts and money gets harder to come by.

There’s no good options left for the Greek people now. No magic wand can be waved to fix this crisis. However, there is always a “least worse” route, and for the Greeks, I think it would be to find themselves on an “outer-tier” of the EU, and finally out of the euro altogether.

If they default, decouple, and go through the (painful) process of returning to a currency (the drachma?) that they can inflate at will, goods and services (and holidays) would be much cheaper again, and the Greeks could finally start exporting their way back to growth.

Colour me sceptical, but I think the reason why the eurozone leaders are so keen to keep Greece in the euro – even if they vote “no” today – is because they would hate to see Greece slowly recover under their own steam.

That could have a particularly strong resonance here in the UK. If we were to witness a more independent Greece get back on its feet in the months ahead after walking away from the eurozone, will it influence British people’s vote on the EU referendum?

Right now I think the popularly-held (but inaccurate) narrative that “it would be worse for Greece right now if it were not in the EU” could crumble very quickly if a “free” Greece were to get back on her feet again.

Eurozone leaders know this, which is why I think they are keen to see Greece remain with them, come what may.

It’s set to be a fascinating 30 days. I just hope either way, thinks start getting better.

EU vs Commonwealth – Where Should Britain’s Future Lie?

This is from Daniel Hannan’s superb blog on the Daily Telegraph website, just look at these graphs:

 

And this one too:

Any way you choose to look at it, the Commonwealth’s growth is about to exceed that of the European Union/Eurozone. Again, I’m all for open free trade with our European neighbours, but by cutting ourselves off from free trade elsewhere, haven’t we shackled ourselves to a corpse? And how is having a trade agreement with one group of countries at the explicit expense of others free trade? That’s just protectionism…

 

The “Anglo-Saxon” Approach was not to Blame for this Mess

My local MP John Redwood has, in four basic points, eviscerated the myth that laissez-faire light touch regulation (or the so-called “Anglo-Saxon Approach”) was responsible for the banking crisis:

1. The European banking system is in a worse mess than the UK or US systems today. There is no evidence that the EU, Spaniards, Italians, Greeks and Germans suddenly fell in love with “light touch Anglos Saxon regulation” and made the same mistake, yet they ended up with more weak banks.

2. The volume of regulations expanded substantialy during the build up of the boom. The EU came into the game and added many pages of new financial regulation at their level, on top of all the extra regulations the UK and US authorities were issuing. The UK was governed by a left of centre administration which believed in the efficacy of more regulation. The FSA reviewed all past banking regulation and added to it.

3. The authorities themselves were enthusiastic proponents of the easier credit they allowed under their myriad of new detailed regulations. In the US a Democrat President promoted more mortgages to people on low incomes as a social policy, which led directly to the junk loans which jeopardised the system later. They called the crisis the “sub prime” crisis in honour of the loans advanced by mortgage banks and by a couple of state financing arms that were fully nationalised in the crisis. The UK government ran up big bills paid for by off balance sheet transactions called PFI and PPP in the spirit of the lend more age.

4. The UK administration was particularly keen on promoting the growth of Northern Rock, a North Eastern company, and RBS,a Scottish company, as they grew very quickly. They took pride in the huge expansions of their balance sheets, and in the way they used off balance sheet vehicles to speed their growth. In the good days these were northern and Scottish companies showing London and the south how to run modern banking and financial services.

I wonder if we’ll ever be able to put this myth that laissez-faire is to blame to bed for good? Sadly, I doubt it…

You Call This Austerity?

Sorry for banging on about this all the time at the moment, but I think it’s really important that we understand what’s really going on right now.

This narrative that the UK and Europe are embracing ‘austerity’ i.e. shrinking government spending (which is causing the problems over here), and the US is embracing ‘growth’ (which is solving problems in the US) is nonsense. It’s totally the other way around.

Here’s a really great overview of the austerity myth presented to us by the insightful, thoughtful and intelligent Veronique de Rugy for Reason TV (with the ‘man in black’ Nick Gillespie asking the right questions):