Britain needs fighting ‘Plan B’ for trade as EU turns screws on Brexit

By Ambrose Evans-Pritchard. The original first appeared in the Daily Telegraph.

The European Union is hardening its terms on Brexit. There is a new hint of hostility in the language. The tone is peremptory.

Those of us who hoped that Germany would push quietly for an amicable settlement can no longer be so confident. We now learn from Handelsblatt that the German finance ministry insisted on some of the most unfriendly changes to the EU’s latest working documents.

Berlin stipulated that Britain must honour “all obligations” (Verpflichtungen) for divorce payments, a tougher wording than the earlier, gentler talk of legal and budgetary “duties” (Pflichten).

It demanded that Britain desist from tax dumping and financial deregulation that would “jeopardize the stability of the union”. This demand is almost insulting. British regulators have led efforts to recapitalize banks. It is the eurozone and Germany that have dragged their feet on tougher capital rules.

There is no longer any attempt at diplomatic tact. The document states that the European Commission will “determine” when the UK has made “sufficient progress” as it jumps through the hoops, the way it handles accession talks for supplicants hoping to join. It reads like an imperial curia discussing a colony.

The French too have stepped up their demands, insisting that financial services be excluded from the trade deal. The City of London must respect the “regulatory and supervisory standards regime” of the EU in any future arrangement, suggesting that Britain will have to accept the sway of the European Court.

Some argue that France will soften its line under a President Emmanuel Macron. His economic strategist is the anglophile Jean Pisani-Ferry, co-author of a Breugel paper proposing a ‘continental partnership’ between Britain and the EU that preserves very close ties.

Sadly, Mr Pisani-Ferry has made no headway with this idea. I have met Mr Macron enough times – or have seen him at EU venues behind closed doors – to detect a messianic fervour for the European project. He is a crusader by political religion, the EU’s latterday Bernard de Clairvaux.

But it is the hardening mood in Germany that is most ominous. The reason for the sudden change is unquestionably Theresa May’s snap election. While we think that the Prime Minister’s motive is – in part – to build a buffer against Brexit ultras in her own party, that is not the view in Berlin. Germans see her gambit as anti-EU sabre-rattling and a breach of good faith.

“The EU wants to counter Theresa May’s rhetoric and kill the idea that a bigger conservative majority will make any difference to their negotiating position,” said John Springfield from the Centre for European Reform.

The German press has likened Mrs May’s démarche to the defiant posturing of Alexis Tsipras in Greece. They almost take it as a given that her Brexit plan will fail and that she too will be forced to capitulate, grovelling for mercy. One wonders where the briefings are coming from in Berlin.

The parallel with Greece is on one level absurd. Syriza caved after the European Central Bank cut off liquidity and shut down the banking system. Britain is not in the euro or vulnerable to such coercion, and the strategic contours are entirely different.

Yet the Greek saga is instructive. The lesson is that you do not bluff with the EU power structure. If Theresa May still thinks that “no deal is better than a bad deal”, she had better have a credible Plan B, and she must be willing to activate it.

Falling back to the minimalist option of the World Trade Organisation and hoping to craft global trade deals smacks of defeat. It would leave Britain in limbo, pleading with the US, Japan, China, India, and other countries to embark on talks when they have larger matters at hand.

So it is time to think in revolutionary terms.  Parliament’s Exiting the EU Committee called earlier this month for a detailed study of what it would mean if the UK left the EU without a deal. Downing Street should answer this legitimate request, and the menu should include the nuclear option of unilateral free trade.

This is a heady Cobdenite manifesto, a turbo-charged version of the Repeal of the Corn Laws in 1846. No developed country has ever attempted such a thing, though New Zealand comes closest, leaving aside the special cases of Hong Kong and Singapore.

All tariffs would be cut to zero. There would be no restrictions on imports besides obvious safeguards, such as policing child labour or environmental abuses, or for national security reasons.

It needs no reciprocation, working from the premise of Adam Smith that if any other country wishes to impose or maintain barriers that is their own folly. They suffer the welfare loss. The currency would adjust to the new equilibrium, keeping the current account close to balance over time.

Adam Smith’s Wealth of Nations laid out the argument that protectionists hurt themselves most

Adam Posen, head of the Peterson Institute in Washington, said Britain would face a rough time with no EU trade deal but at least such a plan has creative allure. “It is far more credible than other options,” he said.

The current dismal narrative on Brexit would be transformed overnight.  Britain would suddenly be seen by the rest of the world as pioneering nation at the forefront of globalism, reasserting Thatcherite audacity, rather than a crabby islanders in decline. “People’s jaws would drop,” says Professor Patrick Minford from Cardiff University.

Pure free trade cuts through the Gordian Knot, eliminating the need for an army of technocrat negotiators and for yet more of those supra-national tribunals that so proliferate, eviscerating democracies and sapping consent for globalism.

Prof Minford says the hide-bound political class has yet to give such clear blue sky proposals a serious airing. “It is so unfamiliar. It takes a mental somersault to break free of mercantilist thinking,” he said.

Economists for Brexit – now Economists for Free Trade – certainly got off on the wrong foot last year by suggesting that the UK would be positively richer under such a model. This invited a blizzard of criticism.

My own view has always been that there will be a negative shock from Brexit and withdrawal from the single market, with effects on GDP at best neutral by 2030 with the right policies.

Professor John Van Reenen, a trade expert at MIT and a vocal critic of the Minford plan, says retreat to the WTO would cost roughly 2.5pc of GDP compared to remaining in the EU, with losses rising over time to 8.5pc due to productivity effects.

Open Europe’s proposals for a trade deal outside the Customs Union

Open Europe did not win to many friends in the run-up to last June’s referendum vote, its “reformist” position created mistrust among both leavers and remainers, being too supportive of staying in for the former  and too EU-critical for the latter.

Following the vote to leave, Open Europe has continued to contributed to the debate, producing analysis now aimed at securing what is, in its opinion, the best possible Brexit deal.

Its latest offering came out earlier this week. Entitled “Nothing to declare: A plan for UK-EU trade outside the Customs Union“, the full paper can be downloaded from the Open Europe Website.

During the referendum campaign, the customs union hardly featured as an issue, unlike the single market. This is unsurprising as the leave campaign emphasized the importance of being able to strike our own trade deals – something which is impossible as a member of the customs union.

Open Europe’s key points are as follows:-

  1. The UK should leave the EU’s Customs Union (EUCU). The UK Government has stated its intention to leave key parts of EUCU (the Common External Tariff and the Common Commercial Policy). Open Europe’s assessment is that leaving these and EUCU overall is correct. Brexit means the UK must be able to shape its own trade policy. It can only do so outside of EUCU.
  1. The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds. The UK should leave EUCU entirely to maximise opportunities. Prime Minister Theresa May has suggested that she is open to being an “associate member” of EUCU or remaining a signatory to elements of it. Open Europe believes that, while it is sensible to keep an open mind, no ‘half-in’ option is better than being fully out. Nonetheless, the UK should consider retaining membership of some relevant conventions.
  1. It is in both the UK’s and EU’s interest quickly to secure full cooperation on the practicalities and administration of customs as part of a comprehensive Free Trade Agreement (FTA). Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs facilitation agreement. The EU already has agreements on customs facilitation with non-members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the continuation of tariff-free UK-EU trade and minimise customs delays.
  1. There will inevitably be a degree of cost to the UK economy associated with leaving EUCU. Some costs will be one-off adaptation costs (e.g. technology investment which may have benefited the UK anyway); other costs will be on-going frictional costs to UK-EU trade. These costs can be minimised and may be offset by trade liberalisation with non-EU partners.
  1. The UK must take action now to minimise costs and seize new opportunities. Some steps are unilateral, domestic reforms; others are bilateral with specific EU members (above all Ireland); other negotiations need to happen at EU level, or indeed more broadly.
  1. There will also be costs to the EU economy and these costs will be much greater if full customs cooperation with the UK is not secured. The costs to the EU economy will be greatest in those countries and industries which export the most to the UK. If comprehensive customs cooperation and an FTA are secured, these costs will be minimised.
  1. There are challenges and opportunities from leaving EUCU but these vary from sector to sector, and even between companies in the same industry. Individual companies will need to look carefully at their supply chains and consider making adjustments where appropriate.
  1. Free trade does not require a customs union and over half of UK trade happens without it. Most UK trade (51.5% in 2015) is not with the EU. Non-EU trade takes place without a customs union and is growing faster than trade with the EU. In 2015, the US was the largest recipient of UK goods exports (16.6%). There is no EU-US FTA, let alone a customs union.
  1. Companies with complex supply chains can trade without a customs union. For example, automotive supply chains cross the US-Canada border. Both countries are North American Free Trade Agreement (NAFTA) members, but are not in a customs union. Nonetheless, leaving EUCU will challenge companies with complex supply chains. To address challenges, the UK and EU need an FTA to eliminate tariffs, to agree liberal cumulation so more products transformed in either the UK or EU can be considered as originating anywhere else in the UK or EU, and to cooperate and use technology to minimise bureaucratic delays and costs.
  1. The UK should ‘grandfather’ – i.e. replicate – the FTAs that the EU has concluded with third countries. The UK, as an EU member, is currently party to over 30 FTAs with over 60 non-EU countries. The Canada-EU FTA, CETA, is one example. Discussions on how to ‘grandfather’ these agreements should be underway bilaterally between the UK and third countries but also need to engage the EU. Protecting these agreements will secure the freest possible trade, safeguarding existing global supply chains, and supporting growth in global trade.
  1. There is an extremely strong economic case for full UK-EU customs cooperation; the question of whether it is achieved or not is primarily political as much as practical. Reaching a comprehensive UK-EU customs agreement will be technically easier than other trade agreements. As an EU member, the UK’s customs systems are already fully recognised by EU members and the UK already applies EU product standards. Businesses across the EU are used to tariff-free trade – so there will be less pressure to defend specific industries.
  1. The UK and EU should consider a transition period to extend the UK’s EUCU membership for one or even two years. Theresa May has suggested “phased implementation” for new arrangements on customs systems. The two-year Article 50 timetable is a challenging limit for negotiations. A transitional period would increase chances of a favourable deal for both sides, and minimise potential disruption to UK and EU business. It would also give governments and business time to adapt, including by upgrading customs procedures and IT. Agreement on a transition period is most useful early in the Brexit negotiations to reduce the risk of companies making rushed decisions on changes.

 

Wishing us to fail?

If you have read the Bruges Group’s latest Brexit paper What will it look like?, you will be aware of the scale of the challenge Mrs May’s team will face in negotiating a seamless exit from the EU within the tight timescale imposed by Article 50 of the Lisbon Treaty. It will be intense – a very hectic time with the potential to go wrong – but the stakes are high on both sides. It’s neither in our interest nor that of the EU to reach Independence Day – possibly the end of March 2019 – without some agreement in place enabling trade to flow smoothly.

It is now over eight months since June’s memorable vote and since then, the UK economy has defied the gloomy predictions. Anyone signed up to the daily news briefs from Global Britain will be well aware of how well the business sector is doing.  Only yesterday, for example, the news brief carried reports of Boeing’s decision to establish its first European base in the UK, factories in Plymouth thriving and 500 new jobs being created at the University of St Andrews, including an enterprise centre.

It’s a far cry from the doomsday scenario painted by George Osborne. Thankfully, some remain voters who decided leaving the EU carried too great a risk have graciously admitted that they got it wrong. For instance, Andy Haldane, the chief economist at the Bank of England, said that the worst predictions may turn out to be “just scare stories” and that criticism of economists was a “fair cop” after they failed to predict the financial crisis and were wrong about the impact of the Brexit vote.

True, there has been some negative fallout from the Brexit vote. The fall in the value of sterling, while a bonus for exporters, has caused a rise in inflation, which is not welcome for consumers. This still needs to be put into context, however. At 3%, Spain has annual Consumer Price inflation running at a much higher level than in the UK  – indeed, the UK’s current inflation rate, 1.8%, is still below the Bank of England’s target of 2%. For most people in the UK, in spite of the inconvenience of rising prices, the Brexit vote has come and gone and it’s time just to get on with life.

There are the exceptions, however, the most prominent of which are politicians. Following on from Tony Blair’s intervention, Sir John Major’s speech at Chatham House rightly infuriated Mrs May’s ministers. Major did mention that negotiations were going to be a tough, which is a reasonable enough comment to make. However, the tone of his remarks were very different from the Bruges Group’s paper. He called the Brexit vote “an historic mistake” and sought to dampen down the optimism of Government ministers. “The hopes of those who favoured leaving the European Union are sky-high. We are told that countries ”are queuing up to do trade deals with us”. That ”our best days lie ahead”. It all sounds very enticing. And – for the sake of our country – I hope the optimists are proved right. But I’m not sure they will be… If events go badly, their expectations will not be met, and whole communities will be worse off.”

It is one thing to say that some Brexit supporters, including even members of Mrs May’s team, may have underestimated the challenges of the negotiations, but is there almost a wish for Brexit to fail? Are there some people who would positively like to see us slip into a calamitous recession if it means we bottle out and end up stuck in the EU?  Take the Guardian’s Polly Toynbee. Last November, she wrote, “Sooner or later, {Philip} Hammond will have to stop pretending the economy is OK.” What was the truth? The economy was doing much better than expected at the time and three months later, the picture hasn’t changed. One comment on the article said “significant inflation is already building up due to this mad plan to leave the EU.” As we mentioned above, the UK inflation rate is well below Spain’s or Belgium’s for that matter, but never mind the facts. It’s as if the unspoken message is “oh good – the more it hurts economically, the more chance there is of people reconsidering their decision.”

But it’s not just columnists and people who haunt the comment sections of on-line newspapers who seem to be willing a recession. In his recent speech Blair admitted that there was “no widespread appetite” for the referendum result to be reversed, but added that he wanted to “build support for finding a way out from the present rush over the cliff’s edge.” Oh wouldn’t it be lovely to have a catastrophe!

Assuming Mrs May manages a successful Brexit, that would be the end of any talk of staying in or rejoining this failing project, which is why, reading between the lines, Blair not only expects but seemingly hopes she will fail. If the secret wish of the hard core remainiacs is that thousands of people should be put out of work, lose their homes and endure poverty because it is the only way so we might be stopped from taking a step forward to freedom and self-determination, all we can say is that these people are merely acting true to form.  Perhaps the best comment on Blair’s intervention in tbe Brexit debate came from his former sports minister, Kate Hoey. “Why doesn’t he just now go and find himself a job?”

Why not indeed? It’s time that Blair recognises that his dream of becoming Europe’s Emperor Tony the First died a long time ago. The rest of the EU just wants us gone, Blair and all. There are few in Brussels who want a U-turn now. “This bus has left,” said one senior EU diplomat. “No one is happy about it. But we have moved on and the last thing anyone wants now is to reopen the whole issue.”

Photo by Eoin O’Mahony

When you don’t understand the question

In the run up to Christmas I went to quite a few parties and social events. I do not mention this to boast about my social life, but because I ran into quite a few Remainers – some were old acquaintances I had not seen for a while, others were new to me. It was an illuminating experience.

Most of them were friendly – one was not, but then I never liked her very much anyway – and the majority accepted that they had lost. Quite a few had voted Remain only because they had been influenced by the speeches by the great and the good, others because they liked going on holiday to Europe, some because they backed the status quo. They had moved on and accepted that Brexit would happen. A few had voted Remain simply because most of the people they knew were voting Remain.

But the ones I found most interesting to talk to were those who had been vociferous Remainers and still believed that Britain should remain in the EU. And especially entertaining were those who did not know that I had spent the campaign working as Campaigns Manager for Better Off Out.

The conversations often revolved around the fact that Leave voters “believed lies”, or rather less politely “were ignorant” or “stupid”. We’ve all heard these unpleasant slanders, but I took the opportunity to probe further. What seemed to be behind these comments were that the Remainers I was talking to felt that the Leave voters had not understood the question posed in the Referendum.

These folks were keen to talk to me about the “real issues” at stake. Each person had their own take on these, but they tended to be variations on the economic issue. They were concerned with trade with the EU. A few of them actually worked for companies that did business in the EU, but most did not. They seem to have bought the line that you need to be in the EU to trade with the EU. They were worried about the economy or jobs. Despite the lack of any economic downturn since 23 June, they were convinced that disaster would strike soon. They felt that leaving the EU was economic suicide. People who voted to leave had, apparently, not understood the economic issues at stake.

They were keen to tell me that the Brexiteers had not understood the question.

But actually, it was my party-going friends who had not understood. The ballot paper asked us if we wanted Britain to be a member of the European Union. It did not ask us if we want to buy cars from Germany, nor if we wanted to sell pizza to Italy (I jest not, I know one company that does).

Of course, trade with the EU will be affected by the terms of whatever trade deal emerges from talks with the EU. But for me at least such issues were unimportant.

Essentially the question on the ballot paper was a constitutional one. Should the UK be an independent sovereign country or a member state of the European Union?

When a Remainer says that Leavers were “ignorant” or “stupid” or “did not understand”, what they really mean is that the leavers did not agree that economics were of prime concern. They are concerned about the money, the cash, the lucre. Not that they would ever admit to anything so vulgar, of course. They talk about the economy, the jobs, the exports, but their concerns always boil down to money.

And money was not on the ballot paper. Freedom and independence was.

Next time a Remainer tells you that Leavers were “stupid”, you know who is really showing their ignorance.

A budget to “punish the people for voting to Brexit”

THE PRESS OFFICE OF                                                           

The Lord Stoddart of Swindon (Independent Labour)                                                                                          

News Release

24th  November 2016

A budget to “punish the people for voting to Brexit”

The independent Labour Peer, Lord Stoddart of Swindon has strongly criticised the Chancellor’s Autumn Statement, characterising it as a “budget to punish the people for voting to Brexit.”

Lord Stoddart said:  “There is no doubt in my mind that this is going to be a justification budget.  The Government advised the people not to vote to leave the EU and they were ignored.  Therefore, the next budget will be a punishment for their disobedience and a justification for the Government’s original advice.  The evidence is there for all to see.  The Treasury has re-run the gloomy economic predictions it made before 23rd June, despite the fact that many of them are being proven wrong with each passing day.

“It is time to ignore the bleating of these doom-mongers whose predictions have so often proved to be misplaced, inaccurate and self-serving and to proceed with all speed to leaving the EU.”

 

Euro ‘house of cards’ to collapse

By Ambrose Evans-Pritchard. This article originally appeared in the Daily Telegraph.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

“One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.

The comments are a reminder that the eurozone has not overcome its structural incoherence. A beguiling combination of cheap oil, a cheap euro, quantitative easing and less fiscal austerity have disguised this, but the short-term effects are already fading.

The regime is almost certain to be tested again in the next global downturn, this time starting with higher levels of debt and unemployment, and greater political fatigue.

Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said.

The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties.

“The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.

“The no bailout clause is violated every day,” he said, dismissing the European Court’s approval for bailout measures as simple-minded and ideological.

The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.

The central bank already holds over €1 trillion of bonds bought at “artificially low” or negative yields, implying huge paper losses once interest rates rise again. “An exit from the QE policy is more and more difficult, as the consequences potentially could be disastrous,” he said.

“The decline in the quality of eligible collateral is a grave problem. The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade. The reputational risk of such actions by a central bank would have been unthinkable in the past,” he said.

Cloaking it all is obfuscation, political mendacity and endemic denial.  Leaders of the heavily indebted states have misled their voters with soothing bromides, falsely suggesting that some form of fiscal union or debt mutualisation is just around the corner.

Yet there is no chance of political union or the creation of an EU treasury in the forseeable future, which would in any case require a sweeping change to the German constitution – an impossible proposition in the current political climate. The European project must therefore function as a union of sovereign states, or fail.

Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all. The Greeks should have been offered generous support, but only after it had restored exchange rate viability by returning to the drachma.

His critique will exasperate those at the ECB and the International Monetary Fund who inherited the crisis, and had to deal with a fast-moving and terrifying situation.

The fear was a chain-reaction reaching Spain and Italy, detonating an uncontrollable financial collapse. This nearly happened on two occasions, and remained a risk until Berlin switched tack and agreed to let the ECB shore up the Spanish and Italian debt markets in 2012.

Many would say the crisis mushroomed precisely because the ECB was unable to act as a lender-of-last resort. Prof Issing and others from the Bundesbank were chiefly responsible for this design flaw.

Jacques Delors, the euro’s “political” founding father, issued his own candid post-mortem last month on the failings of EMU but disagrees starkly with Prof Issing about the nature of the problem.

His foundation calls for a supranational economic government with debt pooling and an EU treasury, as well as expansionary policies to break out of the “vicious circle” and prevent a second Lost Decade.

“It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months or six years. But in its current set-up the euro is unlikely to survive that coming crisis,” said the Delors report.

Prof Issing is not a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism “by the back door“.

He decries the latest EU plan for a “fiscal entity” in the Five Presidents’ Report, fearing that such move would lead to a rogue plenipotentiary with unbridled powers over sensitive issues of national life, beyond democratic accountability.

Such a system would erode the budgetary sovereignty of the member states and violate the principle of no taxation without representation, forgetting the lessons of the English Civil War and the American Revolution.

Prof Issing said the venture began to go off the rails immediately, though the structural damage was disguised by the financial boom. “There was no speed-up of convergence after 1999 – rather, the opposite. From day one, quite a number of countries started working in the wrong direction.”

A string of states let rip with wage rises, brushing aside warnings that this would prove fatal in an irrevocable currency union. “During the first eight years, unit labour costs in Portugal rose by 30pc versus Germany. In the past, the escudo would have devalued by 30pc, and things more or less would be back to where they were.”

“Quite a few countries – including Ireland, Italy and Greece – behaved as though they could still devalue their currencies,” he said.

The elemental problem is that once a high-debt state has lost 30pc in competitiveness within a fixed exchange system, it is almost impossible to claw back the ground in the sort of deflationary world we face today.

It has become a trap. The whole eurozone structure has acquired a contractionary bias. The deflation is now self-fulling. Prof Issing’s purist German ideology has no compelling answer to this.