Straws in the wind

Apart from signs of possible movement in the stalled negotiations with the EU on trade, events are beginning to push into reality those matters which have previously been merely the subject of rhetoric and speculation.

Whatever plans the government has, it will have to start giving practical information to businesses in the early new year about its intentions. In our extended article The Complexities of Brexit, we pointed out the urgency of the situation for chemical manufacturers, farmers, food producers and other businesses which have long production cycles or investment programmes which reach into the post Brexit era.

Whilst trade associations like to avoid publicity which might upset the government and to conduct their negotiations in private, the urgency of the situation is pushing these matters into the public sphere. Two articles from City AM of 22nd November demonstrate this.

EASYJET PLAN COULD SHAKE UP SHAREHOLDINGS by Rebecca Smith

EASYJET yesterday set out plans which could force UK shareholders to sell their stakes after Brexit, as it prepares to comply with foreign ownership rules.

Under EU law, the airline needs to ensure majority control and ownership by EU nationals after Britain leaves in order for it to keep operating intra-EU. Yesterday it unveiled plans to amend its articles of association which currently give directors the power to limit the ownership of the firm’s shares by by non UK nationals. Easyjet intends to change this so they apply to non EU shareholders, which will exclude UK shareholders once the UK has left the EU – giving it the power to force UK shareholders to divest their shares if need be.

The airline will put the changes to shareholders at its annual general meeting in February, saying the switch-up will ensure that Easyjet is able to remain EU-owned and controlled at all times after the UK has left the EU.

The carrier said it has “no current intention” of using the proposed powers……

BREXIT BREAKTHROUGH NEEDED BY EARLY 2018 TO HELP BUSINESSES.

By Jasper Jolly & Alys Key

THE GOVERNMENT must secure a Brexit transition deal by the end of the first quarter of 2018 before businesses implement “no deal” contingency plans, according to the head of the Institute of Directors (IoD).

Speaking at the lobby group’s annual dinner last night, IoD director general Stephen Martin said businesses “are concerned about what happens if a breakthrough is not made at the next round of talks in December”.

He said “It’s as simple as this – we are now only 16 months away from leaving the EU. We need the discussion to move on to our future trading relationship and critically what happens when the Article 50 timeline runs out in early 2019.

But he praise IoD members for their “determination” in preparing for every Brexit eventuality, saying that businesses have upheld their end of the bargain and now need the politicians to “deliver” for them.

IGNORANCE ABOUNDING IN HIGH PLACES

A colleague, who has been quietly lobbying trade associations for months, decided it was time to speak to his MP. During the course of their discussion, he mentioned EFTA (The European Free Trade Association) and was astonished to find that this shadow minister did not know what it was. He had never heard of it. Over many years of campaigning, we have often been surprised at the lack of knowledge by MPs of all parties concerning the European project. A national referendum and over a year’s intense debate on the result appear to have been insufficient to disperse the fog of ignorance on even such a basic matter as this.

It is not just politicians either. At a private meeting of senior business people, not one participant raised a hand when asked if they had ever downloaded and skim-read an EU Free Trade Agreement. Former civil servants at the meeting said that this was also true of ministers they had served.

Mind you, half an hour of reading the sort of leaden prose which the EU produces is enough to sap the will to live! Considering the very definitive statements made by leading spokesmen and media personalities, it would be interesting to know how many of their very emphatic opinions were based on direct acquaintance with the text. The Devil is always in the detail.

A WIND OF CHANGE

Commenting on a report of this meeting, our good friend John Ashworth of Fishing for Leave wrote “I haven’t been home long from three days in London and I too can’t say what I have been up to, but I can confirm there is a wind of change. I have a lot of work to do now, but I am happy with the three days, never satisfied enough. But movement is at last happening, so to all readers, keep the pressure up.

“The two factors which had the most effect on them were, on the one hand, a most extraordinary level of ignorance and, on the other, an almost complete inability to listen. If anything, the stories that have leaked out on these aspects are somewhat under-stated” – yes, spot on”.

 

The OECD Is making the same mistake as our negotiating team

According to Angel Gurria (above) of the Organisation for Economic Co-operation and Development, we should hold  a fresh referendum to stay in the EU as this would be ‘positive’ for the UK economy.  The OECD published its report as speculation mounts that Theresa May will shortly pull the plug on the Brexit talks. She is most definitely being encouraged to do so by a number of her MPs.

In response, Philip Hammond, the Chancellor, quickly made it plain that a second referendum was not going to happen and a number of Brexit-supporting Tory MPs expressed their indignation at the OECD’s intervention, pointing out that it had consistently underestimated the UK’s economic performance since last June’s vote.  Leaving the EU without a deal, however, is a different kettle of fish. There are sharply differing opinions among Brexit supporters about the probable consequences, ranging from predictions of a decade-long recession to a conviction that leaving under so-called WTO rules would bring economic benefit.

We will find out who is right in less than 18 months, but even if the OECD’s gloom proves correct, in urging us to halt Brexit, it is guilty of making the same mistake as our negotiating team – viewing the EU as an economic project whereas it is predominantly a political project.

What swung it for the leave campaign was not money but sovereignty. The message on the red battlebus about funding the NHS was a red herring. We wanted to regain control of our country from a foreign power and to escape from a political project for which few of those who understood its true nature had any enthusiasm. This is why we voted to leave and the EU’s subsequent push towards closer union, as evidenced by Jean-Claude Juncker’s recent “State of the Union” speech, has been a vindication of that decision.

Elsewhere on this blog, I have compared Brexit to a cancer operation. It will be painful at the time and a period of convalescence  may be required afterwards, but leaving the condition untreated would be far worse – it will inevitably lead to death.

Therefore, even if we are less well off in the immediate post-Brexit period, than we might have otherwise been, it is a price worth paying. It seems that the majority of Brexit voters agree. We could draw parallels with 1939. We would have been much better off to declare our neutrality alongside Sweden and Switzerland if our relationship with Hitler’s régime had been judged in purely economic terms at that time.  That was not the course we chose to take and after all these years, most people still feel that we made the right decision to address the evil of German expansionism.

In the long term, I have little doubt that if Brexit is managed successfully, there will be economic benefit. It will be far easier from outside the EU to reorientate the focus of our trade from the sclerotic economies of Europe to more rapidly growing countries in Asia. Our fishing industry will revive and we can do more to nudge global trade away from protectionism when we regain our seat on bodies like the WTO rather than have someone from the EU speak on our behalf.

The short term is another matter, however. A short blip for which we can prepare (and from which we should recover within a year or so) – which is the most likely outcome of a smooth Brexit allowing us a reasonable degree of access to the EU’s single market – shouldn’t cause a recession nor generate any serious political ripples. A badly botched Brexit would be another matter. Substantial job losses, food shortages and a sharp spike in inflation cannot be ruled out.

To return to the cancer operation analogy, yes, we have to go through with it. The sheer complexity of the issues already discussed in the Brexit talks highlights the amount of sovereignty which has already been eaten away by the EU.  Given that this is such pioneering surgery, however, it would be good to be assured that the best possible team of surgeons are in charge. As the halfway point between the vote to leave and Brexit day looms on 9th November, some of us have yet to be convinced that this is the case.

 

 

Photo by Chatham House, London

Cough, cough, but no new insights on Brexit

There were at least two statements about Brexit during the Tory conference which show that some at least within the party appreciate the seismic change that Brexit involves. Firstly, Philip Hammond, the Chancellor, said that Brexit was “one of the most challenging tasks ever faced by a peacetime government in Britain.”  He is quite right there. Secondly, Jacob Rees-Mogg  challenged Theresa May’s assertion that her government would not be “defined by Brexit.” It “is the defining political issue of our time and and to pretend otherwise…is absurd”, he continued, comparing the changes Brexit would bring to the Great Reform Bill or the Glorious Revolution of 1688.

Again, all well and good, but we were expecting something more from the Prime Minister in her keynote speech, particularly more detail on what the route to Brexit was going to look like. Sadly, we were to be disappointed.

Mrs May reiterated that we would leave the EU in March 2019. No back-pedalling here or she is toast – and she knows it. She then continued “I know some find the negotiations frustrating, but if we approach them in the right spirit – in a spirit of cooperation and friendship, with our sights set firmly on the future – I am confident we will find a deal that works for Britain and Europe too. And let’s be clear about the agreement we seek.”

Oh no! Next came that awful phrase again “deep and special” – twice, in fact.  Please bury this one, Mrs May. It’s just as bad as “strong and stable” which the voters found so unconvincing in June.  It doesn’t reflect reality and sounds rather soppy. Mind you, what came next as she fleshed out this overworked cliché sounded rather familiar too:- “A partnership that allows us to continue to trade and cooperate with each other, because we see shared challenges and opportunities ahead. But a partnership that ensures the United Kingdom is a sovereign nation once again. A country in which the British people are firmly in control.” Once again, her statement begs the obvious question, “yes, but how are we going to get there?”

What is more, Mrs May ignored the unfortunate reality that negotiations on this partnership are not even going to be started any time soon. Yesterday, the European Parliament passed a resolution which stated that the “absence of any clear proposals has seriously impeded the negotiations”. The Parliament is “of the opinion that in the fourth round of negotiations sufficient progress has not yet been made” in the three key areas. Of course, the resolution is significant but merely a non-binding expression of opinion, not having been introduced by the EU Commission.

Maybe a speech at a party conference is  not the best occasion for announcing a new initiative on Brexit to unblock the talks, but when exactly will the moment come? Her words on Brexit today could have been cut and pasted from the Florence speech, which was received politely by the EU’s leading lights who then pointed out that it gave little idea about the sort of deal Mrs May is seeking, both for the interim and longer term.

To be fair to the Prime Minister, she wasn’t at her best, having to deal with a persistent cough and – as if that was not enough – a moronic intruder who somehow gatecrashed the meeting, handed her a P45 saying “Boris made me do it.” However, the issue goes deeper – and affects not only the Prime Minister but, it seems, a considerable number of Members of Parliament – they still fail to understand what the EU project is all about.

During the German General Election, one politician, when asked about Brexit, said he regretted that the UK always viewed the EU as an economic rather than a political project, this failing to see its value – at least in his eyes. This man, whether by accident or not, has hit the nail on the head. It explains why we are  getting two different pictures from the UK and the EU side whenever they report on the current negotiations.

To put it simply, the UK negotiators (and, I would suspect, Mrs May), are viewing  these negotiations through this same historic mindset. The EU must want a trade deal with us because surely it would be foolish not to. Look at how their businesses would suffer without one. Therefore, if we complete the repatriation of the acquis by Brexit day, there should be no reason why should we not trade as before – well, more or less – as there will still be regulatory convergence.

The EU’s reply, reiterated ad nauseam by Michel Barnier, is that we will be a third country on 29th March 2019. We will be outside the EU’s political bloc, whose ongoing integrity matters far more than trade deals. If the EU was prepared to reduce Greece to poverty – and Greece wasn’t even talking about leaving the EU – why should it put trade before politics in the Brexit negotiations? To repeat, for us, it’s all about trade whereas for the EU, it’s all about politics. Even discussion of any interim arrangement needs to be viewed in that light.  The EU simply will not let us enjoy two years as an honorary member of the club while outside the jurisdiction of the ECJ  and refusing to continue to abide by the EU’s free movement rules. It is another terrible and overused cliché, but only when our politicians can learn to see how the EU project is understood by the likes not just of Barnier, Juncker and Verhofstadt, but also of national leaders such as Merkel, Macron and even Varadkar – and realise that they are all more or less of the same opinion – will we be able to escape the “having cake but eating it” mindset which has so bedevilled the negotiations from the very start.

There are grounds for hope that at least some MPs are belatedly beginning to understand the nature of the EU, so I have been told, but they need to spread the word among their colleagues pretty quickly if we are to have any hope at all of leaving the EU in March 2019 with any sort of deal worthy of the name.

 

Photo by EU2017EE

Michel Barnier’s recent speech – some salient points

Either Michel Barnier, the chief EU negotiator for Brexit, is off his head or there are fundamental misconceptions being held by our government’s Brexiteer Big Beasts.  The following is a summary of the most salient points apparently made by Mr Barnier speaking ‘frankly and sincerely’ about Brexit recently in Brussels to the European Economic and Social Committee.  A more detailed analysis is provided on EUreferendum.com, Brexit: Barnier – “that is not possible”.

Point 1 – on being outside the Single Market and Customs Union

“There will be no business as usual. The UK will become a third country at the end of March 2019”.

Point 2  – on the UK cherry-picking (through negotiations)

“There can be no sector by sector participation in the single market: you cannot leave the single market and then opt-in to those sectors. You cannot be half-in and half-out of the single market”

Point 3  – on being able to ‘influence’ the EU from the outside

“The EU must maintain full sovereignty for deciding regulations: the EU is not only a big marketplace. It is also an economic and social community where we adopt common standards. All third countries must respect our autonomy to set rules and standards. And I say this at the moment when the UK has decided to leave this community and become a third country.”

Point 4  – on the British Side being out of touch with the reality of the EU

“I am not sure whether they have been fully understood across the Channel”. “I have heard some people in the UK argue that one can leave the single market and build a custom union to achieve ‘frictionless trade’, ……that is not possible”.

Point 5  – on the status of UK having left the EU – comprehensive free trade agreement (even if agreed before then doesn’t change this status)

“Whatever the outcome of the negotiations, at midnight on 29 March 2019, the United Kingdom will at the present stage be a third State, which will therefore not have the same facilities and rights as a State Member of the European Union. It’s its choice. Not ours”.

Point 6  – on trading from the outside being more difficult (e.g. customs duties and non-tariff barriers exist)

“A trade relationship with a country that does not belong to the European Union obviously involves frictions”.

Point 7  –  on no deal (trading under World Trade Organisation Rules) being a practical non-starter

“I therefore want to be very clear …to my mind there is no reasonable justification for the ‘no deal’ scenario. There is no sense in making the consequences of Brexit even worse”.

Point 8  – on cutting losses arising from the new relationship between the UK and EU

“Business should assess, with lucidity, the negative consequences of the UK’s choice on trade and investment. And prepare to manage them”.

To conclude

Mr Barnier has a conception of Brexit negotiations that is not shared (publically at least) by our government. The main takeway from M. Barnier’s speech (and assessment) is that he feels the UK is unprepared for Brexit or even to negotiate realistically based on the reality of dealing with the EU. A comprehensive free trade agreement finalised within two years isn’t going to happen, he claims, and would not solve all problems of seamless access to the Single Market. And it will not be all right in the end unless the UK’s Brexit negotiators understand what is actually involved.

Photo by EPP Group in the CoR

Drifting in Brexit Limbo

It is still government policy to seek a comprehensive partnership agreement with the EU as a third country. Already we are seeing lobbying for pharmaceuticals to continue participating in the single market. The government will concede on this if it does not want to lose our pharmaceuticals industry. No doubt our aviation sector will want to continue participating on more or less the same terms. We will be seeking to ensure manufactured goods and foodstuffs travel unhindered into the EU. The automotive sector will push for whatever it can get to avoid tariffs and rules of origin. And so on and so forth.

By the time this government gets as far as negotiating our future relationship, it will have a long list of things it wants to keep the same. We will also find that the practicalities of intricate policies mean that change is barely possible and largely undesirable. This sets the stage for a long and drawn out negotiation as to our future relationship.

But this time it will dawn on even the thickest of MPs that an interim agreement is necessary. That in itself would be a serious and lengthy undertaking. That is precisely why it is not going to happen. Why should the EU commit ever more of its runtime to negotiating two comprehensive and complex packages – one of which being time limited? The ultimatum will that be that we either drop out with no deal or stay in the EU on more or less the same terms until a future agreement can be concluded.

That is, of course, unless we move into the EEA/Efta position in order to expedite our exit. We will probably find this in itself is a major diplomatic and legal undertaking and once that is done we will find there is actually no point in reinventing the wheel, nor is there any particular obligation for the EU to bother. Moreover, Efta states have little to gain from the disruption for what is only a temporary arrangement. Their view will likely be that we’re either in or out.

It therefore seems obvious that the EEA should be our first port of call with a view to being a long term part of the single market, using the systems within the EEA agreement to tailor it to our needs. The alternative is to stay in the EU in a Brexit limbo, slowly bleeding from uncertainty only for us to pass some years later into an inferior relationship that we will have to rebuild over many years.

It would appear, however, that this realisation eludes the powers that be, and thanks to the power vacuum at the heart of government, we can expect this to drag on, feeding the uncertainty and eroding our choices. With all of our political capital spent, with our minuscule leverage squandered, we will be forced to take whatever we are given. That may even be a conversion of the interim EU membership into the permanent status of being a non-voting member. Precisely where we didn’t want to be.

It was always The Leave Alliance view that the EEA was suboptimal but it does have the chief merit of getting us out of the EU. We also took the view that the EEA, preserving most of the trade integration, would save us from the damage caused by uncertainty and the economic impact of leaving would be manageable. It seems, though, that this message, having met fierce resistance, will not get through.

Though the ultra Brexiteers share some considerable blame, it is as much the fault of the media who have been unable to grasp the mechanics of Brexit, along with a government which is impervious to messages from the outside. Ultimately this is the result of two factors.

The hard right of the Tory party are wedded to some woefully simplistic ideas as to how trade is done, taking their advice from Legatum Institute who will tell them pretty much whatever they want to hear if it means they get their feet under the table. Collectively they are fixated with tariffs and are unable to see the larger picture, treating non tariff barriers and regulatory systems as a mere afterthought.

In normal circumstances we would have a sufficiently competent media who could rip through this self-delusion, but having pruned their experience journalists, the closest the media gets to expertise is the Financial Times, itself incapable of bringing any clarity to the debate and largely tainted by a metropolitan bias. It has not earned the right to be heeded.

The second factor is that having deleted the discipline of trade from our political horizons by way of being in the EU we simply don’t have an institutional memory of it and our politicians haven’t in any way been connected with the real business of international trade negotiations. This is why we should never have joined.

Further still our post Brexit trade policy will be inept largely because it is viewed as a separate undertaking from politics, foreign policy and international development aid. It stands as an abstract pursuit, largely geared toward the maximisation of trade volumes, divorced from cultural and political objectives. It is an entirely technocratic domain.

Ultimately, Brexit is a mess of difficult choices and trade-offs between commerce and sovereignty. The EU is an elaborate and complex web of rules, many of them protectionist where moving to the other side of those defensive measures harms us considerably. As much as it is difficult to prove that new trade deals will compensate for lost EU trade, the EU has ways of making sure that they won’t. Rules of Origin being one of them. These are the realities we must face up to.

And herein lies the problem. For Conservative leavers who believe in “free trade”, Brexit is an economic venture and a chance to snub the EU. They fail to take account of the fact that the EU is a regulatory and economic superpower and the UK is not. They are working from a faulty definition of free trade and are failing to look at the bigger picture. This is why Brexit will hurt far more than it was ever meant to.

For us realists Brexit was never an economic silver bullet. The Leave Alliance was keen to point out that Brexit would be a process and that there would be an economic cost. The point though, was to end political union with the EU and to put the brakes on “ever closer union”. That is our first objective and the most important one. To end the supremacy of the EU in British affairs and to repatriate decision making. If we can make a good go of trade then that is a happy outcome, but that is more a long term concern. Our first priority is to get out of the EU with our hide intact and to ensure that we do not burn our bridges.

The chances of that now seem ever more remote. The appointment of Steve Baker as junior Brexit secretary, a man who calls for the EU to be “wholly torn down” is entirely the wrong message to send. Not least since he is a devotee of Legatum’s panglossian nonsense. Thanks to the obstinacy and ignorance of the ultra-Brexiteers, Brexit is going to hurt a lot more than it ever should have – if we manage to get out at all.

 

Photo by Smabs Sputzer

We must not allow Remainers’ predictions of economic doom to become self-fulfilling

This article by Ewen Stewart of Global Britain first appeared on the Brexit Central website and is used with permission.

The general election has excited the dwindling army of hard core Remainers. A ‘done deal’ is now being challenged with usual suspects claiming that a hung Parliament re-opens the debate about the nature of the UK exiting the EU.

What is clear is that this election was fought largely on domestic issues and not Brexit. While there were differences in the Conservative and Labour approach, both were clear in their manifestos that the UK would leave the EU and the jurisdiction of the ECJ, regain control of domestic borders and withdraw from the Single Market and Customs Unions.

The areas of difference, in terms of policy towards the EU, were largely over employment law and environmental regulations. Thus, those politicians claiming the election result re-opens the debate are trying to subvert an agreed democratic process.

However, while there is no justification for watering down the terms of the exit from the EU, it is clear that Project Fear is rearing its head again. But even if there is a complete breakdown of discussions with the EU, the UK will perform perfectly well so long as confidence holds. Global Britain’s estimate is that even under ‘no deal’ the GDP effect would be negligible.

Why can we be so confident of this?

Those who thought the UK economy would collapse after the referendum were very wrong. They misjudged what the key drivers of the UK economy were and the importance of EU membership in that mix – and indeed the very nature of why trade takes place.

The die-hard Remainers are trying the same trick again with talk of a ‘cliff edge’ and despair. But they misunderstand what makes an economy tick. The primary drivers of the UK economy are monetary policy, consumer spending and public spending. All these factors are largely domestically driven and not materially affected by EU membership.

The impact of slightly higher trade barriers, to the EU, would not be meaningful in the context of the UK economy. Trade is about willing buyers and willing sellers, competitive advantage and innovation, and much less about regulatory framework. Most countries trade with the EU under WTO rules – US, China, Japan and Australia for example – and do so very successfully. Why should the UK be any different?

Moreover, claims that Foreign Direct Investment (FDI) into the UK would collapse have proven unfounded. After the referendum, investment increased, despite investors being well aware that the UK was going to leave the EU. According to UNCTAD, FDI into the UK surged to USD$179bn, the second highest in the world after the US – a marked increase on 2015. The combination of continuing strong consumer growth and substantial business investment has been a primary factor behind the UK’s strong economic performance and record employment levels.

But here is the rub: the constant talking down of the economy, for political reasons, by those trying to unpick the referendum by creating fear, risks becoming self-fulfilling if we are not careful. We must confidently point out that the EU is a fairly low-level factor in the UK’s economic prosperity and the Remainers’ constant doom has been confounded.

We need a rational debate about the nature of the UK economy and not one constantly undermining confidence for political ends. Let us remember that 60% of the UK economy is consumer-orientated. Furthermore, like it or not, government spending accounts for 43% of spending and remains a key driver. It seems likely the Government’s response to the election will be to encourage a modest fiscal expansion. However, perhaps the greatest single influence on the UK economy is neither the Government nor the EU, but the Bank of England, which can choose to stimulate (or not) through monetary policy and possible quantitative easing.

Exports are clearly important but even if talks completely break down and the UK relies on WTO rules (with average tariffs at 1.4%), the reality is that the impact would be fairly minimal. It is simply scaremongering to argue that leaving the EU would have a material impact on growth, unless confidence cracked.

Moreover, the EU has hardly been a success. While the EU’s tail may be up now after President Macron’s election and with slightly improving growth figures, we should remember it has been the slowest-growing region on the planet for over a generation.

Further, its record in signing trade deals is lamentable. It has failed to reach agreements with the US, China, Japan, Brazil and Australia, to name but a few. While the single currency will probably survive, it can only do so by federalising and centralising yet further. The interests of the Eurozone members and the rest will continue to diverge. The UK leaving the EU should be a win-win for both parties: we can follow our global mission encouraging free trade and co-operation and they can focus on their constitutional agreements.

However, we need to challenge those who mislead, constantly blaming everything on Brexit, no matter how tenuous. Ultimately, if we are not careful this could hit confidence. That is why the language of George Osborne and Co is so potentially dangerous, for their deliberate over-emphasis on fear and frankly misleading analysis which may start to worry the bedrock of the UK economy, the consumer. We must point to the facts of the UK economy and why the Remainers were wrong post-referendum and why they are wrong again now. All we have to fear is fear itself