The paradox of the City and the EU

The Daily Telegraph recently featured a report confirming the results of earlier polling that the majority of financial workers in the City of London would vote to remain within the EU.

Ironically, more than 40pc of those surveyed believe that Brussels is actively hostile towards their industry and with good ground. Tim Congdon’s booklet The City of London under Threat was published five years ago and illustrates how the EU’s attack on the City began to undermine its leading position in the financial world several years ago.

Nonetheless, in the latest survey conducted by the Centre for the Study of Financial Innovation (CSFI), only 12pc of those surveyed said they would “definitely” vote to leave, with 73% saying they would “definitely” or “probably” vote to stay.

All is not lost, however. As Andrew Hilton, the director of the CSFI said, “Support for the EU is based on resignation rather than enthusiasm. Yes, the City wants to remain in the EU, but it doesn’t like Brussels, it fears European regulation and it is worried about the political drift of the EU.” The nub of the issue is that “the City is scared of the implications of an out vote and about its vulnerability if the UK chooses to go it alone.”

In other words, if a strategy could be devised and sold to City workers that would ensure an EU exit would preserve their trade while freeing them from damaging regulation originating in Brussels, support for EU membership would likely prove very soft. With organisations such as Global Britain and Business for Britain actively seeking to engage with the Business Community – including workers in the City – winning this important group of people for the withdrawalist cause is by no means an impossibility.

Photo by vic15

Scaremongering and bias

We recently posted a highly critical article by Roger Helmer MEP on the subject of Open Europe’s recent analysis of the prospects for an independent UK.

Roger pointed out that claims that the UK would be poorer by 2.2% of GDP was a “worst case scenario”. To be fair to Open Europe, this is precisely what it said, with more emphasis was on the “worst case scenario” than you would have thought from reports in the media. The blame for this scaremongering, in other words, should be laid at the door of the press rather than Open Europe itself. “UK risks economic blow outside EU – Open Europe study” claimed the BBC. The Financial Times, whose pro-EU bias is nearly as bad as the BBC’s was no better: “Brexit could cost economy £56bn a year, think-tank warns”. Thankfully, City AM struck a more balanced note: “Beware the headline costs of Brexit: We’ll thrive if we’re open to the world”. Open Europe’s daily e-mail, or “daily shakeup” as it is now called, from 24th March was similarly careful to be a bit more objective than some of the daily papers. “A Free trading Britain could prosper outside the EU” said the headline to one article.

If you look more closely at the report, it claims that, “In a best case scenario, under which the UK manages to enter into liberal trade arrangements with the EU and the rest of the world, whilst pursuing large-scale deregulation at home, Britain could be better off by 1.6% of GDP in 2030.” This is a very significant remark. A pro-EU think tank is claiming that, given the right policies, we would be better off out. No wonder that the BBC, which has received further criticism from the House of Commons European Scrutiny Committee for its pro-EU bias, skated over this positive scenario in its reporting of the analysis.

Open Europe’s round-robin e-mail the following day included a report on an event it hosted marking the launch of its new report, ‘What if…? The consequences, challenges and opportunities facing Britain outside the EU.” It included a quote from Lord Wolfson, one of the speakers and a signatory to the “Business for Britain “campaign. He endorsed the positive prospects for the UK outside the EU if the correct policies were adopted. The UK’s economic success outside of the EU would mostly “depend on what Britain chooses to do in the wake of departure,” he said. He argued that “the opportunity of leaving [the EU] shouldn’t be underestimated”, especially since the UK would have more freedom to trade with the rest of the world. Of course, Open Europe would prefer us to stay in a renegotiated relationship within the EU. As Mats Persson, a director of Open Europe put it, “There’s life after Brexit, but it makes sense to test the limits of EU reform before pulling the trigger.”

Fair enough, but it’s all too apparent from the preliminary meetings held by David Cameron that “the limits of EU reform” fall far short of what many people in the UK wish for. An end to free movement of people is not on the cards, nor total repatriation of our criminal justice system. Theresa May foolishly opted back in to 35 Justice and Home Affairs measures included in the Lisbon Treaty, including the European Arrest Warrant. Will a subsequent Conservative Government (in which she may play a prominent role) decide to opt out again a couple of years later? Hardly. Suzanne Evans, a UKIP MEP, was widely criticised when she replied “yes” when asked if she would stay in following a reform she was happy with. This was another case of selective media reporting, for her following words were, “But I don’t think that is going to happen – that is the problem. If we could reform the EU that would be wonderful, but unfortunately this is an organisation that just won’t reform.” She didn’t go on to flesh out what “reforming the EU” meant for her, but how about this? Let’s abolish the European Commission, bin the thousands and thousands of pages of EU laws, scrap the European Parliament, return sovereignty to the member states in toto and turn the EU into nothing more or less than another EFTA. If David Cameron could persuade the other 27 member states to go down this route, I am sure that not just Suzanne Evans but many other ardent supporters of withdrawal would say, “I’m happy with these reforms” but it ain’t going to happen.

Going back to Open Europe, its report insisted that an independent UK would only prosper if it remained outward-looking. To turn this into some sort of scare story, as some media articles attempted to do, is to be guilty of very selective reporting. Open Europe’s actual words are, “In a best case scenario, where the UK strikes a Free Trade Agreement (FTA) with the EU, pursues very ambitious deregulation of its economy and opens up almost fully to trade with the rest of the world, UK GDP would be 1.6% higher than if it had stayed within the EU.” What is scary about this? Pick up any book or article written by a supporter of withdrawal from the EU, be it Ian Milne, Ruth Lea, Tim Congdon, Robert Oulds or whoever, and you will find the author in question propisng precisely this course of action – cutting red tape and embracing free trade with the rest of the world. There are unquestionably a few protectionists who support withdrawal, but they are minor figures with little or no influence.

A more contentious point concerns immigration. The Open Europe report says that “In order to be competitive outside the EU, Britain would need to keep a liberal policy for labour migration. However, of those voters who want to leave the EU, a majority rank limiting free movement and immigration as their main motivation, meaning the UK may move in the opposite direction.” On the immigration issue, the withdrawalist community is very divided. On the one extreme, Lord Wolfson, a man who is clearly comfortable with withdrawal, is known for supporting free movement of labour. On the other hand, whether or not UKIP’s Victoria Ayling really did say “I just want to send the lot back” when she was still a member of the Conservative Party, there are plenty of other people who will quite unashamedly admit that this is what they would like to do.

There are two comments to be made here. Firstly, even a fairly open immigration policy need not go as far as allowing free movement of people. Surely reclaiming the right to deport foreign criminals and no longer being required to pay child benefit to workers with families still living in Poland is better than the current situation. Secondly, there are a number of reports which question the supposed economic benefits of large-scale immigration, such as the Civitas paper by Anthony Browne Do we need mass immigration? Data from the International Monetary Fund shows that in the UK, per capita GDP adjusted for the effects of inflation (“constant prices” or “real GDP” in economists’ jargon) increased by £2,212 in 2000-2004, the four-year period leading up to the accession of the former Soviet bloc states.

However, in the nine years from 2004-2013 when large number of migrants arrived in the UK from Central and Eastern Europe, the latest estimate of the increase is £286, little more than one eighth of the growth from 2000-2004, yet over a timespan of nine years as opposed to four. This poses the question as to whether Open Europe is being a bit disingenuous. Of course, more people means a higher GDP, but it is GDP per capita which is the real measure of wealth. Haiti has a higher GDP than Liechtenstein, but you don’t encounter slums, high infant mortality and food shortages in Liechtenstein.

There are plenty of other holes that can be picked in Open Europe’s report, as Richard North points out, but notwithstanding any potential flaws in its methodology, the very fact that it has conceded that withdrawal may be a benefit to the UK economy is an indication of the weakness of the pro-EU argument. Sadly, this is still not resonating with the electorate, with the latest poll from YouGov showing supporters of withdrawal in a minority, with 46% wanting to stay in and only 36% wanting to withdraw if a referendum were to be held today. The figures are even worse when the choices are between withdrawal and a renegotiated membership. We clearly still have much work to do. It would be a tragedy if, having won a key concession from one of our most influential opponents, we were then to lose the battle that really counts.

Photo by TechnicalFault (formerly Coffee Lover)

Open Europe’s latest research on the 100 most costly EU regulations

On 16th March, the Open Europe think tank published a new list of the 100 EU-derived regulations which were the costliest to the UK economy. Open Europe estimates that these EU laws cost the UK economy £33.3bn a year. This is more than the £27bn the UK Treasury expects to raise in revenue from Council Tax in the current (2014-15) financial year.

In at least a quarter of cases, the UK Government signed off on the regulation, despite the accompanying Impact Assessment explicitly concluding that the estimated costs outweigh the estimated benefits.

However, the study also claimed that leaving the EU and ‘becoming like Norway’ would mean that 93 out of these 100 costliest EU-derived regulations to the UK economy would remain in place at a cost of £31.4bn (94% of the current total cost),under the so-called EEA agreement.

The top five costliest EU-derived regulations are:-

1) The UK Renewable Energy Strategy – Recurring cost: £4.7bn a year
2) The CRD IV package – Recurring cost: £4.6bn a year
3) The Working Time Directive – Recurring cost: £4.2bn a year
4) The EU Climate and Energy Package – Recurring cost: £3.4bn a year
5) The Temporary Agency Workers Directive – Recurring cost: £2.1bn a year

The full ‘Top 100’ list can be accessed here .

Below are some thought from Robert Oulds, of the Bruges Group, on the Open Europe report.

Open Europe is as anti-EEA as they are pro-EU. They support the reform agenda, and saying in the EU. They consistently misrepresent the EEA as a transitional alternative.

Regarding these regulations, most would apply even if we were not part of the EEA. The Working Ttime Directive originates from the International Labour Organisation, not the EU. The vast majority of financial services legislation would also apply if we were outside of the EU. Indeed a recent analysis showed that if we were to honour international agreements and the decisions of bodies that the UK sits on then 41 of 42 financial services rules ‘forced’ on us by the EU would apply anyway, although not the potentially destructive “Tobin Tax” and the numerous EU agencies which do not apply to the EEA. .

Many of these regulations come from UN standard setting agencies designed to eliminate technical barriers to trade apart from the environmental regulation.

As for the EEA, while it is true that Iceland, Liechtenstein and Norway are obliged to implement some EU rules, these countries adopt 70 per cent fewer regulations than those imposed on EU member states. While neither Norwegian ministers nor parliamentarians can attend or vote in the meetings of the Council of Ministers, or in the European Parliament, they have the right not only to be consulted about EU rules but can also shape EU decisions at the start. Indeed, EEA representatives take part in more than 500 EU committees and expert groups. The management of the EEA agreement is also not top down from the European Union. The EFTA Surveillance Authority monitors whether or not free competition is being followed and that markets are open to business from EU members. Any contravention of the rules by a member state or company can be reported to the Court of Justice of the European Free Trade Association States, which has jurisdiction to interpret the EEA agreement. Unlike the EU’s ECJ, which can overrule and strike down national law, the EFTA Court can only state that a national law is incompatible with the EEA agreement. Resolution can only come from national institutions – not through the EEA and EFTA institutions. What is more, disputes are resolved at a political intergovernmental level, not by judges or bureaucrats in the Commission exercising their power in a supranational institution. Ultimately, for the EFTA/EEA states, it is for the national government to decide how a breach of the EEA agreement can best be remedied. In some cases Norway just chooses to rewrite its rules to make them appear to conform but in reality, nothing changes.

When EFTA countries choose to adopt EU rules, they do not do so as countries that have transferred the making of legislation to the EU, as Britain has. Nations such as Norway establish EEA-relevant rules at the national level. The legislation is not directly imposed from above by the EU. Furthermore, the EFTA states that have agreed to be part of the EEA can opt out of areas of EEA where they feel that legislation does not serve their national interest. Inside the EU, the UK does not have this right.

Implementation of those acts that are not vetoed or ignored are often delayed by Norway. The custom of the EFTA states being responsible for drafting the decision of the EEA Joint Committee often allows them to delay their implementation. The delaying of the translation of EEA-relevant decisions into Norwegian dialects is also regularly used to postpone implementation. Those EEA-relevant acts that are not delayed are often altered. The EFTA/EEA states demand that more than a third of the acts, and as many of 40 per cent of those which deal with services, are changed. This is not just an opportunity to tailor EEA rules to the EFTA states’ advantage; it is also in itself yet another source of delay: negotiations then ensue.

What is more, Norway has a rather nonchalant attitude to aligning its legislation with that of the EU. According to a draft report from the European Commission from 12th December 2012 found that Norway had refused to incorporate into their own law 427 EU legislative acts. In particular the Norwegian government publicly stated its refusal to incorporate the Third Postal Directive and will also not comply with the EU’s financial services agencies. This is certainly not fax democracy.

Norway could make even more use of the flexibility in the EEA agreement. IT does not do so because Norwegian politicians are thoroughly pro-EU and want to keep as close as is politically possible. They are still trying to persuade their population to join, although most Norwegians support EEA membership and are happy to be outside of the EU.

Whereas over 100,000 EU instructions apply to Britain, as of December 2010, only 4,179 EEA relevant acts have been incorporated and are still in force. These 4,179 EEA regulations should be retained, yet they can be modified by the UK. The vast majority of other EU rules can be reviewed when it is practical to do so. In excess of 80 per cent of EEA relevant policy areas fall within the remit of the international standard-setting agencies. Much of the EEA relevant law will be applied after Brexit, regardless of whether the UK retains its membership of the EEA. They are a vital part in the process of not only providing standards but also removing technical barriers to trade.

The European Commission itself acknowledges that, if the European Economic Area agreement is updated membership of it ‘would offer EEA EFTA countries a convenient “alternative EU Membership-status on an à la carte basis”.’

Lord Kalms speaks out

Lord Kalms

Not all businessmen support the UK’s membership of the EU.

CIB has produced a video of an interview with one senior figure who doesn’t. Lord Kalms,  the life president and former chairman of Dixons Retail  spoke to CIB’s chairman Petrina Holdsworth.

You can hear his comments by accessing this link






Migration, the deficit and the recovery

Anthony ScholefieldOne of the matters I raised at a meeting in the House of Commons on Tuesday 16th December was:

The effects of mass immigration are now so large
that they are impacting on the economy as a whole and, specifically,
on the deficit, the debt and the ‘recovery’

The ‘Recovery’ and the Deficit are linked

– The import of a large migrant workforce has inevitably added to total GDP so nearly one per cent of growth of total GDP p.a. can be put down to simply having more workers and consumers. Those enthusing over the ‘recovery’ should be aware of this.

It is standard economic theory that immigration transfers income from newly plentiful factors to newly scarce factors, that is, from labour to capital. What is not noticed, however, is that much capital in the UK is now foreign owned so the transfer also is in part from British workers to foreign capitalists. Foreign capitalists get dividends and capital gains tax free. Moreover, due to the tax regimes in Ireland and Juncker’s Luxembourg, a great deal of foreign corporations’ profits in the UK are, effectively, lost to the British tax system under ‘freedom of capital’.

– The way the tax system for workers is now set up means that low earners (and migrants are overwhelming so) pay little tax and actually get tax refunds. Additionally, of course, they place demand on the existing ‘public services’ such as schools, hospitals, etc.

– Further out there are plans and projects for more public capital spending on transport, housing, schools, etc., as well as, unseen, capital diversion to provide the private sector tools and assets that migrants require: factories, office blocks, shops, houses, etc.

It should be noted that there is a great difference between employing existing natives who already have their ‘social capital; in the form of housing, roads, dams, etc., and migrant workers who require equipping with appropriate capital items from the ground up. The capital both extra native and migrant workers need (and this need is common) is for ‘the tools of production’: factories, equipment, office buildings, etc.

– The electorate are aware, even if the political class is not, that migrants send much of their savings abroad. There is no proper counting of this; it all relies on Office of National Statistics (ONS) speculation and guesstimates as is admitted, but it is several billion pounds a year.

In any case annual savings by migrant workers or their employers are far too small to provide the capital they require to operate and live in the British economy (less than 1% p.a.). This phenomenon means that the capital to equip migrants has to be found mainly by natives either by taxation or by capital diversion.

– All of this means, therefore, there must be appropriation from the taxpayer to fund extra current expenditure and the extra capital requirements of the public sector. These expenditures count as GDP growth but, of course, do nothing for the incomes and wealth of native workers. Actually they reduce both.

– Therefore, the ‘recovery’ with high inward migration may mean a statistical increase in aggregate GDP but produces little tax revenue either from workers or capitalists and places extra demand on public sector investment and current spending on the public services. Migration also diverts capital investment from natives to equipping migrants by the process of capitalists re-ranking the profitability of investments as the economy changes shape. In this way capital intensification is reduced for native workers; therefore reducing their income. It is not just the political catchphrase, ‘pressure on the public services’, it is pressure on the private sector and on capital formation. Instead of capital intensification for natives, there is capital diversion to equip and supply migrants.

– By not taking strong steps to rein in migration, the government is making its task of reducing the deficit much harder to achieve and makes the ‘recovery’ a statistical mirage with little effect on native income. It also is deceiving itself, as much ‘capital investment’ adding to GDP statistics is simply a means of equipping more workers in the economy.

When considering the ‘recovery’, it is also worth noting that the GDP deflator has been rebased and effectively reduced since 2008. A reduction in the GDP deflator means that ‘real GDP’ is statistically increased. Thus a further part of the ‘recovery’ is also a statistical mirage.

Another point on the GDP deflator is that the fall in crude oil prices will, for about a year, mean a higher GDP deflator as price falls in imports add to the GDP deflator and, therefore, increase the statistical overall ‘growth’ or real GDP and the ‘recovery’.

The Debt

– In addition to the massive increase in government debt, the off balance sheet liabilities for state pensions and healthcare are mushrooming all the time and have not been recalculated since 2010. To enthuse over GDP growth, but not calculate off balance sheet liabilities, is living in a fool’s world.

Even the hoariest of all false factoids, that immigrants are needed to pay for British pensions, keeps returning. For example, in the New Statesman on 5th December 2014:

“There is a truth that no politician will utter: if Britain is to maintain a welfare state … its current economic model demands more immigration.”

Yet every study by the UN, OECD or the Home Office, has always come to the conclusion of Chris Shaw, the government actuary, writing in 2001:

The single reason why even large constant net migration flows would not prevent support rates from falling in the long term is that migrants grow old as well.”

The UN calculates that, to maintain the UK worker/dependant ratio, the UK would have to support 60 million immigrants by 2050 and, by then, migration would be running at 2.2 million per annum, and increasing.

This is a dead-end in thinking.

– The accumulated, to date, off balance sheet liabilities for state old age pensions (not including public sector retirement pensions) were last calculated in 2010. They had then increased from £1.3 trillion in 2005 to £3.5 trillion in 2010 according to the Department of Work and Pensions. With the guaranteed 2.5% increase in pensions per annum, even in times of low inflation, the off balance sheet liabilities since then are increasing alarmingly. The fall in interest rates may also have a massive effect as the ONS states, “For example, reducing the discount rate to 4 per cent leads to a 31% increase in total pension entitlements (by £1,174 billion)”.

In 2010 the ONS used, in alignment with Eurostat, a rate of 5 per cent (nominal) for its discount. The rate is based on high quality corporate bonds yield. Rough calculations are that discount rates for corporate bonds are now in the region of 3.5 per cent. This means that the off balance sheet liabilities for state pensions at 2010 have risen to the area of £5.3 trillion – and this does not make any provision for the rises since 2010 or those built into the Coalitions’ pension promises.

Quite evidently, pension promises are quite out of control. Adding more lower paid migrants is adding to the liabilities with little contribution to the costs.

The Future

One can therefore forecast that:

  •  Capital employed per head will be static or reduce
  • Native incomes will remain static at best.
  • The ‘recovery’ will only partially reduce the deficit.
  • Taxes on capital and labour will fall short of projections.
  • The deficit will persist.
  • Debt and off balance sheet liabilities will continue to mushroom.

Eurozone QE:- Economic necessity triumphs over political idealism

This is not an economics website, so not the place for a debate on the rights and wrongs of Quantitative Easing. However, the political implications of Thursday’s announcement by the European Central Bank are worthy of comment.

The announcement of a €1.1 trillion asset purchase programme was made by Mario Draghi, the governor of the European Central Bank, but the process will not be as straightforward as when the UK or the USA launched their QE programmes because only a single nation and a single central bank was involved in those asset purchase schemes.

Under the ECB scheme, only 20% of the asset purchases would be subject to risk-sharing, meaning potential losses could fall on central banks of the Eurozone member states. This is a significant development for the next big step in the evolution of the Eurozone has long been expected to be Eurobonds, where debt was mutualised. There would no longer be any Bunds (German government bonds) or Greek Government bonds for sale, just bonds for the Eurozone as a whole. If the aim of the Euro is to help create a single country – a United Sttes of Eurozone, a  common fiscal policy was the next logical step.

It is very apparent that behind the scenes, some serious wrangling has been going on between Draghi and the German government prior to Draghi’s announcement. Germany, which has two members on the ECB’s governing council has been dragging its feet every inch of the way. Any easing of austerity, it was argued, would let the profligate Southern European countries off the hook. Whenever a country has asked for a bailout, Berlin has insisted on cuts in government spending including drastic reforms to the public sector as one condition of money being loaned. Given that Greek public sector workers have often been able to retire on a good pension in their 50s whereas their German counterparts have to stay on into their 60s, the Germans did have a case, but their intransigence has not gone down well and has resulted in the rise of far-left parties like Syriza in Greece and Podemos in Spain. However, Germany continued to hold the line even as youth unemployment topped over 50% in these countries and deflation took hold. It has taken a fall in the annual German inflation rate to 0.2% for the Germans to come round to a more conciliatory position.

But today’s measures prove that the willingness to share risk across the single currency area necessary for Eurobonds just isn’t there. Given that Alternative für Deutschland would benefit immensely if it was shown that German taxpayers were going to have to shoulder even part of the risk of debt defaults by the “Club Med” governments. Merkel could not afford to give any ground on debt mutualisation.

It is likely that the struggling Eurozone economies will breathe a little more easily after today’s announcement, but the price the EU has had to pay for QE is to kick any sort of fiscal union into the long grass. European integration has taken a step backwards.

And how long with the markets’ euphoria last? Well, let’s see what happens in Greece on Sunday.