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

Can it really be done?

In just over 21 months time, we will hopefully be leaving the EU. With the exception of military matters and the European Arrest Warrant, Mrs May’s objective appears to be for the UK to enjoy a looser relationship with the EU than that of any other European country which is not a member state, apart from countries like Belorus and Russia.

After all, all four EFTA countries (Switzerland, Norway, Iceland and Liechtenstein) are part of the Schengen area while several micro-states including Monaco, San Marino and the Vatican City use the Euro. Turkey is part of the EU’s Customs Union while Norway, Iceland and Liechtenstein are, of course, part of the European Economic Area.

Can we realistically expect to reach a greater degree of detachment than these countries by March 2019? The Government has not gone into any detail about how it proposes to achieve such a radical divorce in a very short space of time, but the Bruges Group published a booklet earlier this year, entitled  What will it look like? How leaving the single market can be made to work for Britain. Two of the authors, Robert Oulds and Dr Lee Rotherham, are CIB Committee members.

The problem with staying in the European Economic Area by rejoining EFTA is that it would not resolve the customs clearance issue. We do need a customs agreement with the EU, as a lack of a deal in this area is the biggest problem which our trade with the EU would face. (Just to reiterate, a customs agreement is totally different from remaining in the customs union which, as we have pointed out, is irrelevant as far as Brexit is concerned.)

By contrast, standards compliance rarely causes delays. Another red herring is the issue of access to the EU’s financial services market. It can be accessed from outside the EEA, as the authors explain.

The key to a successful trade deal lies in identifying the potential problems early on, which the authors seek to do in this publication.

With the terms “Hard” and “Soft” Brexit bandied about without everyone being agreed on what this means, the authors claim that there is no such thing as a truly “Hard” Brexit. but  there are significant obstacles to be overcome. Nonetheless, a trade agreement between the EU and the UK, focused on tariff reduction and clearing customs, could take just 18 months to complete.

The authors explain why UK’s bargaining position is stronger than many commentators believe. Given that David Davis has already had to concede to his EU counterpart’s demands that talks on a trade deal cannot begin until other exit arrangements have been agreed, any strong cards in his hand will, I am sure, be most appreciated.

 

 

Our EU exit fee – realism and extortion

How much – if anything – should we pay on leaving the EU?

This will be one of the first issues to be addressed by the new government once Brexit discussions begin. A number of sources within the EU have said that until a figure is agreed, there  can be no discussion on a trade deal.  A figure as high as €100 billion has been quoted in some sources. Meanwhile, a number of more ardent Brexiteers have urged that, on the contrary, we should not pay a penny and just leave.

In between these extreme positions, The Institute of Chartered Accountants of England and Wales (ICAEW) has produced a report suggesting that the likely cost should end up somewhere between £5 billion and £30 billion. The most likely figure, £15 billion, would equate to be £225 for every person living in the UK in 2019.  This is roughly on a par with our net annual contribution to the EU budget – in other words, how much we pay after the rebate and agricultural subsidies are deducted.

The full report can be downloaded here. Some of the costs have been widely discussed. such as the outstanding contributions to the current EU budget, which covers a seven-year period ending in 2020. Having signed up to the budget in 2014, some argue that we should pay what we agreed, even though for the final 21 months of the term, we will no longer be a member of the EU if the Brexit schedule does not slip.

Any spending which has been authorised but not yet incurred will be hard to avoid. ICAEW’s study puts this figure at £28 billion.

On the other hand, there are assets which we can cash in. We have a 16% stake in the European Investment Bank, estimated to amount to some £10 billion by 2019. With ownership restricted to EU members, our shareholding will need to be sold.

The authors also indicate that some additional expenditure will be needed to complete the Brexit process. After all,  for one thing, extra staff will need to be employed for what will be complex but one-off negotiations.

Would we also be expected to foot the bill for the relocation of those EU agencies currently based in London, such as the European Medicines Agency and the European Banking Authority? Time alone will tell as far as this is concerned.

The most contentious part of the deal, claim the report’s authors, is likely to be the level of our commitment to the former Soviet bloc countries which currently are in receipt of massive amounts of development funding.

There are numerous examples of development funding being squandered in the poorer nations of Western Europe. Spain, for instance, has been blessed with an unfinished motorway network and a surfeit of airports, some of which have since closed – and all at the EU taxpayers’ expense.

Of course, the EU was quite open in admitting that infrastructure projects in Spain and Portugal were to be a dry run for the much bigger challenge of putting Central and Eastern European countries on a par with the west. Given the absurd waste of these projects, however, it is hard to have any confidence that money spent in Poland or Romania will be used any more wisely.

This, of course, is one of the many issues which will need to be hammered out when the talks get under way. The ICAEW report has avoided being prescriptive, but on one point it is quite unambiguous – the €100 billion figure is totally unjustified.

 

 

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.