A revised estimate – the financial settlement with the EU

Since we published Anthony Scholefield’s Futurus Briefing paper on the financial settlement with the EU, the author has undertaken some further research which has resulted in a revision to the original document. The revised version can be downloaded here.

It should be pointed out that the headline figures, suggesting that the EU owes us a refund, have not been revised, but  extra background information, such as our realistic future pension liabilities, has been added.

New research paper by Futurus – The negotiations will fail

The title of this latest publication from Futurus may appear provocative but the prospect of concluding a jointly agreed leaving process and a future relationship so it can come into effect, possibly with a transition period, by March 2019 seems very remote.

There have been faults on both sides and the UK government’s failure to set out what exactly it wants the outcome to be has been a particular problem.

The UK government need not have agreed to the EU’s proposed sequence of events – the settlement of the Irish border issue and the exit fee – before discussing trading arrangements. Under Article 50, it need not have done so.

A mutually-agreed pause in the negotiations looks likely or else failure looks highly probable.

The full paper can be downloaded here. PLEASE NOTE: The paper has been revised since this article  was first published.

How to negotiate Brexit

Now the UK has triggered Article 50 and is entering negotiations with the rest of the EU, it is worth taking a rough look at what the government should do in the negotiating process.

The Position in 1975

The NO Campaign in 1975 stated “If we withdrew from the Market, we could and should remain members of the wider Free Trade area which now exists between the Common Market and the countries of the European Free Trade Association.”

That position was supported by Enoch Powell and Tony Benn and the NO Campaign in 1975 simply because they recognised that this Free Trade area was a trading association without any political implications.

The EEA [European Economic Area], although considerably modified, is essentially the successor to “the wider Free Trade area”.

Clear Aim and Clear Plan

At present it is unclear whether the government has either a clear aim or a clear plan.

While it is true that the Prime Minister has ruled out the UK remaining in the ‘Single Market’, she has not specifically ruled out retaining EEA membership.

Of course, it would be best to stick with the EEA for at least some years in order to reduce the magnitude of the task of leaving the EU.  More important, any losses in trade from leaving the EEA would be sudden and might affect large amounts of exports, especially goods.  The bright picture of extra trade globally is just that – a bright picture which could take years to bring about.  So there is a major temporal dislocation which must be factored in to future calculations.

If the UK becomes a third country vis-à-vis the EU, there is likely to be a trade in goods exports drop off because of customs and regulatory complexity.

Whether the UK opts for an EEA solution or not, the details of the financial divorce, organising trade relations with other countries on succession to EU trade arrangements, setting up greatly expanded and separate UK customs for the UK, etc., would be necessary.  It is just simpler to do this while UK/EU trade is relatively undisturbed.

How much would the ‘hit’ be?

It is worth looking at the quantities and types of goods exported by the UK to the EU.  Excluding agriculture and fish, whose regulating régimes are specific, goods exports to the EU were about £140 billion per annum in the period 2012-14.

It would seem that about 30% of exports would be relatively unaffected (except possibly by tariffs):

  • Basic materials
  • Coal, gas, etc.
  • Gold and precious stones
  • Motor cars via dedicated export points
  • Ships and aircraft
  • Oil – crude and products

So the ‘at risk’ total is about £95 billion.

The ‘hit’ on this could be estimated quite speculatively at 10-20%, so a loss of trade in goods of £10-20 billion.

This ‘lost trade’ would not necessarily be the same as a financial loss.

Most exported goods contain raw materials and components so there is a ‘netting off’ process.

Trade statistics exaggerate the importance of trade in an economy, and globalised supply chains distort trade statistics even more because of double, triple and more percentage counting.

The actual financial loss to the UK might only be the ‘profit margin’ if the displaced labour and capital could find alternative employment or returned to their country of origin but it would be prudent to assume the net ‘hit’ would be in the £5-10 billion range.

More important would be the disturbance to the structure of the exporting firms and the labour market, with considerable shedding of labour – in manufacturing, a most unfavourable outcome.

Trading under WTO rules

It has been conclusively shown by eureferendum.com that few countries trade purely under WTO rules.  There are numerous trade treaties (not free trade agreements) which govern the trade between the EU and third countries.  These have often taken many years to establish.

The government has said it wishes to establish a Free Trade Agreement with the EU but many hard Brexiteers state that, if a favourable FTA cannot be agreed, the UK would fall back on the WTO rules, but this would be a massive disturbance to existing UK exports to the EU.

There are some quite weak safeguard clauses in the WTO rules.  These were not incorporated in the WTO agreement in anticipation of such a massive and sudden change in trading relationships but, rather, refer to sectoral problems.

However, a scenario where UK goods exports to the EU fall drastically, while EU exports to the UK carry on as normal, is so disturbing and unsustainable that invocation of safeguard clauses might be necessary.

The final fallback position for the UK government in this scenario is trading with the EU under some emergency system such as an Exchange Equalisation Fund.

This, of course, would be a breach of WTO rules but would be the only alternative to financial disaster.  It would, of course, be presented as a temporary measure.

As a matter of political realism, EU Treaty rules and WTO rules are servants to national governments who retain responsibility for the prosperity of their peoples.

Breaching of EU rules have been quite common:

  • Breaches of the budget overspending rules of the EU Stability and Growth Pact by France, Germany and others.
  • Breaches of the Maastricht Treaty on no bail-out clauses for EU member states.
  • Breaches of the Dublin Convention on asylum seekers by Germany and others.

Additionally, many NATO-EU governments have breached NATO agreements on defence spending.

EU rules and treaties have been breached by EU member states and condoned by the EU because they believed, correctly or not, that the prosperity of their peoples required such breaches.

Breaches of the WTO rules fall under the same rubric.  If adherence to WTO rules threatens financial stability and prosperity, they must be considered.

The ‘money’

Whether the UK remains in the EEA or whether it does not, there will be a financial divorce on the UK leaving the EU.

The reason is that the EFTA EEA states have little financial relationship with the EU, making only a small contribution to the workings of the EEA agreement.  Additionally, but outside the EU financial structure, are the Norway and EEA grants.

The EFTA EEA states do not pay anything into the EU budget or have any responsibility for the reste a liquider amounts of EU programmes (except for the EU programmes they have voluntarily joined, such as university research).

More importantly, these states have no liability, contingent liability, guarantees or ‘joint and several’ guarantees to any financial activities of the EU or its institutions, such as the ECB [European Central Bank] or EIB [European Investment Bank], the EFSM [European Financial Stabilisation Mechanism], the EU Balance of Payments programmes etc.  So, moving to EFTA/EEA status would still mean that a financial divorce of the UK from the EU would have to be negotiated.  It should be noted that the potential losses of the ECB and the EIB, which includes an unfunded, irresponsible lending programme begun by Juncker, are absolutely enormous.  One advantage for the UK is that the EU is hardly going to acknowledge these potential losses and include them in its demands.

Another background point before considering the financial divorce is defence costs.

At present the UK is increasing its defence and security presence and spending in Eastern Europe, whereas many NATO countries, as President Trump pointed out to Angela Merkel, do not adhere to NATO spending targets.

It is difficult to see how any financial package on the UK leaving the EU can be discussed when other EU-NATO countries are falling down on their obligations and have serious past shortfalls.

By now, the UK government should have to hand a schedule of what amounts are material to be considered by the UK and the EU on divorce:

  • Defence spending
  • Current budget
  • Reste a liquider amounts

Additionally, the UK should be targeting its extrication from all liabilities, contingent liabilities and guarantees, as well as totalling its contributions to EU assets.

The European Parliament

The divorce terms have to be approved by the European Parliament, which can easily sabotage any agreement in the last few weeks of the two-year negotiating period with or without the encouragement of EU leaders.

It seems obvious, therefore, that at the very beginning the two parties must agree that if the European Parliament rejects an agreement between the EU Council and the UK, the two-year time limit on negotiations must be extended indefinitely.  Otherwise the whole negotiation is at the mercy of an irresponsible actor.

A quick look at the Brexit White Paper

The government White Paper this week charts the course the government intends to take to achieve the second leg of Brexit following the referendum result.  This should be to provide a ‘safe and beneficial exit’.

In effect, the government is not attempting to reach a withdrawal and settlement of the new relationship with the EU within two years after triggering Article 50, but is aiming to reach a settlement of the ‘framework’ within two years and thus leaving all the details for many years in the future.

It seems the government is splitting the Brexit job into two parts.

Job One:   Leaving the EU is being interpreted as negotiating a ‘framework’ within which the detailed negotiations will sit.

Job Two:   Detailed negotiations after the UK formally leaves the EU with a ‘framework’ settled.

So the question is this – can the government negotiate the details after formally leaving the EU with a framework agreement but in which framework the details are that each ‘chapter’ of the interface comes up for negotiation maybe years later?

In a way, the government is agreeing with the basic plan offered by the Leave Alliance during the referendum campaign – that the job is too big and complicated to do in two years.  The Leave Alliance solution was to remain in the EEA for some years, thus parking trade and other issues.  The government’s solution is to agree a ‘framework’ within two years and carry out the detailed negotiations later.  In this way it can argue that the UK has left the EU within two years.

Of course the first problem is then that the EU may well reject the splitting of the negotiations into ‘framework’ and ‘details’ because this is a new concept and because the ‘details’ are to some extent the ‘framework’.

Will the electorate and the Conservative Party accept that the UK will for most purposes still be in the EU after two years and the full withdrawal will take many years?

Also, by proposing to leave the EEA single market the government has added to its negotiating burden as it will have to secure trade agreements with the EFTA countries.

What happens if this course is pursued?  It depends on how the EU reacts.  It may go along with this in order to get the UK out of the formal political structure.  It might also say that the idea of separating the ‘framework’ and the ‘details’ is not realistic and put forward a more radical programme of detachment.

The Leave Alliance proposal would have been more certain, quicker, more attractive to the EU and would have more electoral support in the UK.  It would rest on off-the-shelf proven solutions.  The government’s proposals are the opposite of all these sensible proposals, are far more risky and uncertain and will involve the UK in many EU activities for years to come.

No, we are not behind the Mishcon de Reya legal bid

You may have read that Mishcon de Reya, a prominent firm of solicitors, is launching a legal bid to determine who (and how) decides the removal of the United Kingdom from the European Union.

Just before the referendum, and following David Cameron’s statements about intending to trigger Article 50 shortly after the referendum, I examined this matter and I reproduce two emails which give the essence of the arguments. (They are emails and not polished political or legal statements.)

(June 2016)

Crown prerogative and its exercise are an opaque area of the British constitution. Generally legal treaties have been regarded as only one factor in the British government (and here I mean a majority of the Cabinet), taking any foreign action. The most prominent occasion was the declaration of war in August 1914. It is true that Edward Grey made a speech to parliament on August 3rd 1914 which is often quoted. This speech did not define the trigger required for war, nor was there a vote in the House of Commons. What did happen was a massive ‘spin’ operation in Parliament and the media to define the Asquith government’s confusion as ‘statesman-like’. The Asquith government was saved by the Germans openly invading Belgium. As Asquith wrote to Venetia Stanley on August 4th 1914, “We got the news that the Germans had entered Belgium … This simplifies matters, so we sent the Germans an ultimatum.”

This ultimatum was never put to Parliament for pre-approval.

It is pretty clear that the new Prime Minister will need some ‘simplification’ shortly after taking office.

The bottom line is this:

The new Prime Minister must ensure that the UK Parliament did not reject his (her) notification as not being within the constitutional requirements. Quite evidently the defeated Remain groupers in Parliament could hide behind this. At first sight, it would therefore seem a new Prime Minister should carry a short bill or possibly a resolution that ‘Parliament should take note of the result of the referendum that Parliament called and that the government should implement the result and that it should notify the EU of its intention’.

Any opponents of democracy would be flushed out.

Emails dated 21-22 June 2016:
“Can Cameron decide to make an Article 50 notice to withdraw while sitting in his bath?

1) “Any member may decide to withdraw from the Union in accordance with its constitutional requirements”. The “withdrawal” is clearly the repeal (or modification) of the ECA Act of 1972 but what is, and who takes, the decision to withdraw? As the decision to withdraw is effectively the same as the withdrawal under Article 50, this seems to require an Act of Parliament.

2) We know the Treaties will cease to apply two years after notification (unless otherwise agreed) so who gives the notification, and when?

It seems to me that “notification of its intention to withdraw” means also the decision to withdraw has been taken constitutionally and that is the same as withdrawal, although the decision to withdraw and the withdrawal would take place at different times. Therefore, the notification cannot be given until the decision to withdraw has been taken. Only an Act of Parliament can withdraw and, therefore, only an Act of Parliament can decide to withdraw, with an effective later date, or no date, determined.
Therefore, no notification can be given until an Act of Parliament takes place.”
– – – – –
‘If I were the post-Brexit PM, I’d trigger Article 50 straight away’

Well, the point of the note was to explore whether a post-Brexit PM could do that -in his bath! or by a media leak or a PR statement.

Surely any such action would immediately invite the enquiry as to whether this ‘notification’ complied with the UK’s constitutional requirements. Alternatively the EU could say, well we assume that the British PM knows the UK’s constitutional requirements better than us so that’s it- the notification is a commitment and UK leaves the EU in 24 months, that is done and dusted, now we are off to Mykonos for 2 months and let the British PM deal with the fallout from his actions e.g. that the UK Parliament would reject his notification as not being within the constitutional requirements since the British PM cannot withdraw Parliament’s assent to the ECA while sitting in his bath or indeed in any posture.

‘No point in enacting post 24th June legislation’. As you know the Leave Alliance does not think we should abandon regulatory convergence for several years as it restricts the possibilities for the UK. Also a feature is that we would repatriate or enact as UK law all EU relevant legislation since 1973 exactly the same as Ireland and India did specifically and the American states did by implication after independence. I mean all pending cases in the North Carolina courts in 1783 under the Theft Act did not cease because the UK recognized North Carolina as independent, they simply carried on while there were some immediate changes at the constitutional level, that is what I expect to see in the UK.

It is then worth looking at each area of law and policy because some such as Foreign Policy would have hardly any legislative problems while in others such as the CAP this could carry on as it is for some time while the direction was transferred from Brussels to London-however a lot of the UK’s trade is food products so that would have to be worked in.

So to maintain regulatory convergence the UK would enact post-24th June EU laws

Update: November 4th 2016

It appears that the judges have arrived at the same conclusion, albeit using different arguments against the use of Crown Prerogative and citing the removal of rights from British citizens. This seems to me a rather weak line of argument when one considers that the declarations of war by Prerogative in 1914 and 1939 certainly removed the rights of British citizens.

However, Asquith was never pressed by Parliament for a vote of approval for war to take place because of the ‘simplification’ caused by the German invasion of Belgium.

Up to now, the new government has had ample warning of this problem and could have taken the opportunity in July of passing a short bill or a motion as laid out above.

It will now have to scramble to catch up but then it is clearly not yet ready to enter a negotiation so perhaps a further few months’ delay will be beneficial

(Please note that Futurus has published a new briefing, Should the uk stay in the EEA? It can also be accessed from  the publications page of the website.) 

It’s just obvious!

A series of post-referendum briefings.

Milton Friedman is quoted as saying that “It’s just obvious but you can’t have free immigration and a welfare state”.

Indeed.  Much of the conventional political thinking of the last twenty five years has suffered from ignoring “it’s just obvious”.

Here at Futurus, we have tried to explain why “it’s just obvious” about many political and economic matters for over fifteen years.

“It’s just obvious” that the UK’s participation in the Exchange Rate Mechanism of the EMS in 1990 would disintegrate.

“It’s just obvious” that the UK would never join the euro.

[Why Britain will not join the single currency, Futurus publication, 2002]

“It’s just obvious” that Scotland will never become independent on the basis of SNP proposals.

[The Scotland Referendum and the Lessons for 2017, Futurus position paper, 2016]

“It’s just obvious” that immigration, without superior capital or superior skills, must impoverish the receiving country.

[Warning: Immigration Can Seriously Damage Your Wealth, Social Affairs Unit publication, 2008]

“It’s just obvious” that the UK would vote to leave the EU.

[Nostradamus, Futurus Briefing, July 2016]

“It’s just obvious” that most professional economists and central bankers have lost touch with the accounting framework on which all economics is based.  Contemporary economics group-think is based on single entry bookkeeping – the road to disaster.

[Thinking in Decades and Centuries, Civitas Review, 2012]

So we are now faced with another “just obvious” situation.

“It’s just obvious” that the UK government’s Brexit plan should be to have a controlled exit process.  This should be initially based on retaining EEA membership with the provisions of the EEA used to control EU migration.  Legislation, deemed EEA relevant by the EU and by the EFTA-EEA states, comprises the Single Market (called internal market in the EU Treaties) and is about 25% of the entire EU acquis.

[Leaving the EU:  It’s not just about future trading arrangements, Futurus Briefing, September 2016]