On the EU side, there has been some posturing too

Mrs May and some members of her team have gone on record to say “No deal is better than a bad deal”, but realistically, “no deal” was never an option. The worst scenario would have been an incomplete, partial deal and with neither side wanting a cliff-edge scenario in March 2019, even this would not be anyone’s preferred option. For all the dire warnings of Yanis Varoufakis, Greece’s former Finance Minister, the UK is not Greece.  We would suffer more than EU-27 from a non-deal, but it would not be in the EU’s interests to be obstructive and prevent an agreement being signed.

To prove the point, it is now emerging that some of the tough rhetoric from the EU side which we heard in the immediate post-referendum period has turned out to be little more than posturing. Barely three months ago, it was widely reported that Spain would be given  a right of veto over the final deal with the UK and would have the full support of the other EU member states if it chose to take a tough line over Gibraltar. Recently, however, Alfonso Dastis, Spain’s Foreign Minister,  has stated that his country will not block any Brexit deal and that talks over Gibraltar’s future will be handled on a bilateral basis. “The issue of Gibraltar doesn’t have to be the first, nor the most important point during talks,” he said.

Another example of hot air is the EU’s apparent desire to remove the lucrative €uro clearing business from the City of London to somewhere within the Eurozone.  This would have been a political gesture rather than an economic necessity. After all, most clearing in the Saudi Riyal takes place in London without any heart-searching in Riyadh. Writing in City AM, however, Mark Field, the City of London’s MP claims that “All of the EU politicians and financiers I have spoken to understand that this is a risk not worth taking. They express no desire to prevent euro-denominated trades from being cleared in London and indeed privately rail against the notion that such business might be forcibly moved to Paris.” He also points out that “Most sensible players implicitly understand that if London is undermined, key participants in the financial services industry will move not to Frankfurt, Dublin or Paris but to New York, Singapore or Shanghai.” Absolutely. In or out of the EU, London  will remain Europe’s principal centre for financial services for the foreseeable future.

On the surface, however, it does appear that the EU has turned the corner after its recent problems. Its economy is performing better than at any time since the Great Recession of 2008 and eurosceptic parties in the Netherlands and France failed to make any breakthrough in recent elections. France’s new President, Emmanuel Macron, is a strong supporter of the EU and his triumph is encouraging the Eurozone to consider pressing on with further integration. Even Germany’s ever-cautious Angela Merkel recently indicated that she would “consider a common finance minister, if the circumstances are right,” adding “we could also consider a Eurozone budget if it is clear that we are really strengthening the structure of the economy and doing sensible things”. 

Donald Tusk, the President of the European Council, has also adopted a very upbeat note in his invitation to the EU’s leaders for the next meeting. “It is fair to say that we will meet in a different political context from that of a few months ago, when the anti-EU forces were on the rise. The current developments on the continent seem to indicate that we are slowly turning the corner. In many of our countries, the political parties that have built their strength on anti-EU sentiments are beginning to diminish. We are witnessing the return of the EU rather as a solution, not a problem.”

There is a big “but”, however. A recent survey by Chatham House, a foreign policy think tank, pointed to a wide gap between the opinions of the EU’s “élite” (defined as leading figures from politics, media, business and civil society) and the general public and even the élite is not as optimistic as Mr Tusk’s words would have us believe.  Only 34% of the public feel they have benefitted from the EU, compared with 71% of the élite while a majority of the public (54%) think their country was a better place to live 20 years ago, which in some cases means before their country joined the EU.

The study also finds 48% of the public wants the EU to hand back powers to member states, while only 31% of the élite are keen on this idea. Less than 1 in 4 of the general public support extra powers for the EU and even among the élite, the figure is a mere 37%. What is more, among the élite, almost one in two (46%) thinks that another country will leave the EU within the next decade. The figure for the general public is 58%.

While the groundwork for the survey was undertaken between December 2016 and February 2017 – in other words, before the Dutch and French elections – it still painted a rather fragile picture of the EU, suggesting that Donald Tusk’s comments may be somewhat over-optimistic. To prove the point, less than a week after Macron’s triumph, several members of his cabinet have already quit. If plans for further Eurozone integration do fall foul of public opinion, any revival of enthusiasm for the EU project among the general public may prove short-lived.

None of this reduces the challenges facing the UK government in the Brexit negotiations. Indeed some have argued that a strong EU may be more willing to grant a favourable deal to the UK than one which believes itself to be on the back foot. What we can say is that it is far from certain that the UK’s negotiators will necessarily spend all the next 21 months facing representatives of an organisation which is self-confident or even united.

Photo by D-Stanley

Macron’s victory may create more problems than it solves

Emmanuel Macron campaigned for – and indeed, won – the French Presidential election on an unashamedly pro-EU platform. His victory was greeted with huge sighs of relief across the Continent. Rather ironically, however, his enthusiasm for the Single Currency and indeed the European project as a whole may have the opposite effect, as John Stepek pointed out in a recent edition of Moneyweek magazine.

At the heart of the problem is that when it comes to further integration within the EU and in particular, the single currency area, it is far easier to talk the talk than walk the walk.

A broad range of economists acknowledge that so many economically divergent nations pushing ahead with a single currency in the 1990s was far from ideal. If a monetary union is to work, fiscal and political union, while not prerequisites, certainly reduce the risk of a catastrophic failure. As it currently stands, the Eurozone is far from being an optimal currency area.

This is exactly the line Macron has been taking. In other words, as Stepek puts it, “He’s one of the rare pro-eurozone politicians who’s actually quite honest about the euro and the eurozone. He is calling openly for a much closer Europe. He reckons that Europe needs a common budget, a common banking system – effectively, a full-blown United States of Europe.”

Any French politician who has made such a proposal in the past has been fobbed off by Berlin with the curt instructions to put their own house in order first. Reforms to France’s generous pension arrangements, bloated public sector and short working week have been often proposed by a number of newly-elected Presidents only to be scuppered by tyre-burning, stone-throwing protesters backed by France’s powerful trade unions.

But just suppose Macron succeeds where his predecessors have come to grief. Even a streamlined French economy will take years to converge with Germany’s and then, what about Italy or Greece? Following Macron’s victory, the headline in the Bild newspaper, which Stepek describes as the rough German equivalent of the Sun, was “How expensive will Macron be for us?”

This is not just the heart of the Eurozone’s problem – it highlights a major stumbling block with the whole European project. Germany has been happy to be a net contributor to the EU’s funds via the EU budget. In some ways, it would be very churlish of the Germans to moan about this. Labour market reforms in the first decade of the 21st Century made German businesses more competitive and the single currency also made German goods relatively cheap in other Eurozone countries. Italy and Spain, habitual devaluers before adopting the Euro, have lost this option. Unable to weaken their currency and thus boost their export markets, businesses in these countries have failed to compete with the Germans.

The unemployment figures bear this out. Only 3.9% of working age Germans are out of work and youth unemployment was a mere 6.7% in March. The corresponding figures for Italy are 11.7% and 34.1%. Spain and Greece are even worse, with overall unemployment at 18.8% and 23.2% respectively and more than two out of every five young people out of work in both countries.

Closer fiscal union means that not only would German taxpayers be paying into the EU budget to rebuild the infrastructure of the former Soviet bloc countries, but they would be liable for the social security and pension benefits of unemployed and retired Greeks, Italians and Spaniards. At the same time, a banking union would increase German liabilities if an Italian bank went bust. In short, it would be all pain for the average German (who is doing very nicely out of the Euro) with very little gain.

But surely the gain would be the big step towards full political integration which has always been the goal of the EU project? We are now getting to the heart of a fundamental flaw in the whole federalist vision. The idea of an United States of Europe may have been appealing in the late 1940s when everyone was keen to find a format which would prevent another world war. The problem is that while certain intellectuals, particularly on the political left, have long had an internationalist outlook, ordinary men and women are far more attached to the concept of nationhood and ethnicity, even though they may not even be aware of how deep that attachment runs.

But the subject of fiscal transfers, along with the related issues of benefits and welfare, can be guaranteed to bring such sentiments out into the open. Even in the United States of America, there is considerable resistance in some states to a European-style welfare state – and significantly, the states in question are the most ethnically diverse. It seems to be hard-wired into our nature that we are more willing to make sacrifices for people who are “one of us” than for people we perceive to be different.

A German, whose public sector employees have to work well into their 60s, is therefore unlikely to take kindly to subsidising the pensions of Greek public sector workers, many of whom used to retire in their 50s. But Greek austerity is biting impossibly hard. At our Annual CIB rally, Ambassador Chrysanthopoulos told us that his own pension had been cut from 3,400 euros per month to 1,200. If the recently announced cut of a further eighteen per cent applies to him, he will be down to under 1,000 euros a month – and he reckons himself lucky! So real hatred for Germany is building up in Greece, as is impatience with Greece in Germany. The German people may yet find the price of European empire too high while poorer Greek households on the most basic social security are currently receiving around 8 euros per household (not per person) per day. So starvation stalks the land – all in the name of building a European superstate.

An extreme example? Perhaps, but it illustrates graphically the challenges which Macron’s election has brought to the surface. How deeply does the average German, Greek, Frenchman, Swede, Pole, etc  – as opposed to an intellectual or a politician – really love the EU? If the depth of love of the rank and file isn’t strong enough to transcend ethnic and cultural divisions or to be willing to endure financial deprivation and extreme hunger, the only question which Macron, Merkel or their successors will need to consider is how the whole EU project can be put peacefully to sleep without a total political and economic catastrophe.

Photo by Lorie Shaull

What if we had lost?

It’s now over 10 months since the referendum. After the initial euphoria at the result, we enjoyed a brief and well-deserved break before plunging in to the next campaign – ensuring that we end up with the best Brexit deal possible. With Article 50 now triggered, however, the negotiations about to begin in earnest and memories of the referendum itself beginning to fade, it’s easy to forget how hard we had to work to achieve last June’s result.

Suppose, however, that it we had lost.

David Cameron had spelt out in no uncertain terms that this referendum, like Scotland’s vote in 2014, was a “once in a generation” decision. Admittedly, Nicola Sturgeon is straining every nerve to try to engineer a second vote on Scottish independence, but given that it was 41 years since our previous referendum on EU membership, we all knew that if our countrymen had voted to remain in the EU last June, we would have faced many more years of campaigning before a third vote would ever become even a remote possibility.

But just suppose a further vote had eventually been held in, say, 2025, what sort of state would our country – or indeed, the EU – be in by then?

We know that there was a great deal of unease on the Continent following the Conservatives’ 2015 General Election victory, which meant Cameron was going to have to make good his promise to hold the referendum. Laurent Fabius, France’s Foreign Minister, called his pledge “dangerous”. Until last June, Cameron had been described as a “lucky” Prime Minister, winning the 2015 General Election when many pollsters were predicting a hung parliament and securing the results he wanted in both the AV and Scottish independence referendums. Perhaps his track record helped calm nerves in Brussels and Berlin. After all, if remain had won, the implications for the EU would have been enormous.

A vote by the most consistently eurosceptic member state to remain in the EU would have been a green light for a further push towards federalism. Such a move may have initially been focussed on the Eurozone, especially given the victory of the enthusiastic federalist Emmanuel Macron in last Sunday’s French Presidential Election, but we would have inevitably found ourselves swept along in the federalist slipstream. Furthermore, even if voters in other EU member states voted the “wrong” way in any subsequent plebiscites, the EU could have pressed on confident that opposition could be muzzled. If even the truculent UK ultimately had decided to submit to the yoke of Brussels, the EU would have felt emboldened in the pursuit of its objective of creating a superstate. To put it another way, all 28 member states would have themselves been locked into an EU where the Jean-Claude Juncker mindset would have reigned unchallenged. “’If it’s a Yes we will say “on we go”, and if it’s a No we will say “we continue””, he famously said.

Now, however, there will be much nail-biting whenever a new treaty is put to a popular vote. The Brexit vote has shown that electorates are happy to defy a powerful combination of their own political leaders, businessmen and senior figures from both Europe and the wider world. The results of the Dutch general and French presidential elections may have been greeted with huge sighs of relief in Brussels, but it is worth remembering that in the first round of the French elections, 46% of voters opted for an EU-critical candidate. Macron’s victory does not imply a renewed love for the EU in France.

A remain vote would have bolstered the EU’s credibility in the wider world. It is doubtful whether it would have altered the course of events in Turkey, where accession to the EU now looks highly improbable following President Erdogan’s revisions to his country’s Constitution. It would, however, have strengthened the pro-European forces in Norway and Iceland. Maybe even the Swiss would have felt that sooner or later, they would have to join up. Instead, our vote to leave essentially buries the prospect of membership for Western Europe’s non-EU members and also makes the EU a harder sell in the Balkans and the former Soviet republics.

After all, although many of us are aware that one country, Greenland, had earlier left the EEC (as it then was), how many of us can actually remember it happening? It was a pretty minor piece of news at the time whereas the Brexit vote was splashed over front pages across the world, complete with pictures of either Donald Tusk or Angela Merkel looking distinctly gloomy.

The EU was never going to be the same after our referendum, however we voted. Its credibility would either have been boosted or dented.

As for how our country would have been affected by a remain vote, as Rupert Matthews pointed out, defeated leavers would have accepted the result with far more grace than the appalling behaviour we have witnessed from remainiacs like Gina Miller, Richard Branson and Tony Blair. We would have vowed to continue the fight but would not have accused voters in the opposite camp of being stupid. Nor would we have been cry-babies saying that the people didn’t know what they were voting for.

However, within a matter of only a few years, we would have seen much of our remaining distinctiveness gradually eroded. How long would we have been able to remain outside the single currency? How long before our armed services would have been absorbed into an EU army? What of the safeguards of our common law-based criminal justice system, so superior to the Napoleonic inquisitorial system of continental Europe, which the EU eventually would have replaced with a single criminal justice code? Would metrication have been pushed with renewed vigour?

Thankfully, instead of this nightmare scenario, we voted to leave and in so doing, besides the eventual benefits to our own country, we may well have put a big spanner in the works to the whole federalist project, for the good of the whole continent. As William Pitt the younger famously said 200 years ago, “England has saved herself by her exertions and will, as I trust, save Europe by her example.”

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.

France gives the EU a breather

The nightmare scenario in Brussels would have been a le Pen/Mélenchon run off in the second and final round of the French Presidential election. Both candidates, for different reasons, were strongly EU-critical and the far left Jean-Luc Mélenchon put in a strong showing in the final days of campaigning.

Not strong enough, however, to beat Emmanuel Macron, the most pro-EU candidate of the four front runners. He will go forward to the second round where he is widely expected to win comfortably against Marine le Pen, although probably not by anything like the same margin as the 82%-18% victory of Jacques Chirac over her father Jean-Marie le Pen in  2002

One reason why a Macron victory is unlikely to be that decisive is that he has come out openly in support not only of the EU but of multiculturalism and diversity. France today contains a substantial number of voters who are distinctly unenthusiastic about both. Indeed, a total of 46% of all votes were cast for either le Pen, Mélenchon or “Frexit” candidate Nicolas Dupont-Aignan. Abstention is likely to be high in the second round and some supporters of the defeated candidates may well switch to Marine le Pen. Even so, it would be a brave man who would bet any money on her becoming president this time round.

So huge sighs of relief are the order of the day in Brussels and Berlin. What about in London? A run-off between two EU-critical candidates with one of them eventually becoming president would have perhaps given us a Brexit-friendly voice in the Elysée Palace but at the expense of the remaining EU-26 wanting to take a tougher line on Brexit to minimise the risk of contagion. A probable Macron victory relieves the fear of any other country voting to leave. As with the failure of Geert Wilders’ PVV Party to top the polls in the Netherlands’ election earlier this year, Brexit now looks more and more like a one-off as far as the EU is concerned.

But those disaffected 46% will be heading back to the polls in June to vote in elections of the National Assembly, the lower house of the French Parliament. Even if France ends up with a pro-EU president, that president is likely to deal with a considerable number of députés who do not share his enthusiasm. As in other European countries, support for the mainstream socialist party is in freefall and the centre-right Les Républicains are unlikely to perform well. This doesn’t mean that the EU’s day of reckoning has only been postponed by a further two months. Its final collapse could be several years away, but as one Old Testament prophet put it, “The vision is yet for an appointed time… thought it tarry, wait for it, because it will surely come.