Tag: EU

What is Theresa Waiting For?

Author
Angus Dent
Date

Whatever my views, we’ve decided to leave the EU and as Mrs May is now famous for saying ‘Brexit means Brexit’, so why doesn’t she get on with it?

Preparation takes time. Before negotiating even the smallest of deals, you need to be well prepared, and we’ve been advised this week of the expected additional cost and recruitment needs. Set next to 43 years of membership and integration and the time the negotiations will likely take, the period of preparation measured in months rather than years is disproportionate.

It seems that hardly a day goes by without either a UK pro-Brexiteer or an EU official suggesting that we should get on with it. There’s a gap between the unelected officials and the elected representatives of the people.

The EU, and particularly the countries of the Euro Zone, are in a mess. There’s a German hegemony that is beggaring southern Europe (under-valued German currency and massively over-valued southern European currency). There’s never been a successful monetary union without a parallel or preceding political and fiscal (read corporation and income tax) union. To state the obvious, there are the beginnings of a political union in the EU and no fiscal union. Without a single fiscal authority within the Euro Zone there can be no common monetary policy for that zone. The political will / union appears to be fracturing; the unelected officials of the EU seem to be further and further ahead of the European electorate when it comes to integration. With political union stagnant at best and possibly fracturing there’s no chance of a fiscal union.

The question becomes then how long will the Southern European countries and France put up with this, probably not much longer. In any case, the situation gets worse by the day, deficits rise, borrowing rises to fund deficits, and the need to devalue to re-balance the economies becomes worse. Or in the jargon austerity continues so that Germany can, in theory, be repaid debts that in practice can never be repaid and which must, therefore, be forgiven. Plus we may have another banking collapse, lead this time by the German banks.

The worse the mess in the EU the better the deal that the UK can negotiate and / or the less impact a so-called hard Brexit will have on the UK. Playing the long game may be playing the smart game. A ‘week is a long time in politics’* six months is a lifetime.

*Harold Wilson, UK PM 1964 to 70 and 1974 to 76.

eu-and-brexit-zip

Are the economic benefits of “Brexit” worth the potential disintegration of political and financial order?

Author
Angus Dent
Date

With a decision on the timing of the “Brexit” vote looming, David Cameron is starting to ramp up the pro-EU rhetoric to convince the public to ignore the Eurosceptics and vote to maintain the status quo. The decision has very much been Cameron’s Sword of Damocles moment, hovering over his current tenure and threatening to create an unwanted Prime Ministerial legacy akin to Eden’s Suez Canal Crisis.

Yet there is an overwhelming feeling that whatever Cameron says will pale into insignificance should a “defining incident” take place that pushes those sitting on the fence to unite against staying in the EU. Marine Le Pen’s initial success in the regional elections in the aftermath of the Paris attacks shows just how quickly people can make a potentially rash decision on the basis of fear and loathing. Le Front National might have mellowed since Le Pen ousted her right-wing firebrand father, but any electoral gains for the party would have represented an alarming move towards the ugly end of right-wing conservatism. Fortunately a wave of sentiment against the Front National and some tactical voting saw the party end up without control of a region, despite support from at least 6.6 million voters.

There is still a feeling that leaving the EU is a proposition that is just too scary for the general public to plump for- the “British” thing to do would be to knuckle down and get on with it in order to avoid such a huge political and social catharsis. Yet a Daily Telegraph poll on Friday last week saw over 80% of the 22,000 voters said Britain should leave the EU. Despite the obvious bias of Telegraph readers, this is still an alarmingly high figure for Cameron to stomach. After all, these are the people that, more likely than not, are the staunchest supporters of his party.

From a financial point of view, the UK’s global financial clout wouldn’t be affected too much by a decision to leave the EU. It is unlikely there would be a banker exodus and freedom from stifling and constantly changing EU regulation will be welcomed by financial institutions. Yet the UK economy would undoubtedly take a beating: world-leading economists unanimously agree on that- have a look at this FT article for more proof: http://on.ft.com/1Q8XeSw.

Cameron needs to emphasize the enormous practical issues that hinder the UK from leaving the EU. The significant upheaval of the EU regulatory framework would be a minefield that would make or break businesses in industries such as the food and drinks sector. As it stands, companies have to abide by EU food regulations if they want to export to the EU but have no say over those regulations. Something as innocuous as a change in the wording of a law can mean the difference between a product being allowed to make a health claim or it failing to meet the requirements. It is worth considering just how crucial altering such stringently inflexible regulation is to UK SME’s who are most the perilously placed.

Moreover, Britain would need to renegotiate its trade rules with the EU in order to preserve its favourable status. Under World Trade Organisation rules, the UK would have no more access to the single market than would China. Any negotiation would come at huge financial and political loss: just look at the amount of financial support Norway gives to the EU each year to curry favour. Britain would then need to renegotiate its trading relationships with the rest of the world; EU partakes in 35% of all world trade so “Brexit” would deny the UK to an extraordinary range of privileges afforded to EU competitors.

The cost of leaving, combined with the converse cost of “staying in”, would be felt for years to come. Yet it looks unlikely to get to that point; the Lisbon Treaty only allows for two years of negotiations for a country to leave the EU, unless all 27 nations unanimously vote to extend the period. Negotiation is done with whole EU rather than country by country, presenting major obstacles. It seems hard to fathom that Britain wouldn’t have the option to cordially extend the negotiations, yet all of the individual nations will certainly seek to negotiate the best deal for themselves, particularly concerning immigration, given the tensions regarding economic migrants and asylum seekers from the Middle East. The rancorous callers for tighter immigration need to recognise how difficult it is for Britain to tighten its control on non-Brits arriving to live in` the country, when the negotiations could force Britain to accept an even greater migratory burden. The British public should also take into account the effect it will have on Britons currently living abroad (c. 2 million) in other EU countries who would lose their EU citizenship. The same notion extends to those with businesses or business interests abroad. It hardly seems aspirational to any business owners to reject the ease at which the EU allows business expansion across borders. Likewise, it is no wonder that Cameron wants to extend the vote to 16 year olds, for whom the Schengen Area presents a chance to escape the clutches of their parents if anything else.

Yet despite the dense complexities of Britain leaving the EU the decision makers will have to take into account, we are still faced with a referendum that will only ask us “‘should the United Kingdom remain a member of the European Union or leave the European Union?”. In age where, for better or worse, the public needs politics to be made more understandable and politicians more approachable, this is a vote that should not be put to the public in such stark wording that belies the delicate, yet far-reaching, intricacies of the result.

Why We Should All Vote Against Brexit

Author
Angus Dent
Date

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This post is made largely in response to an article written by Nicolas Stone for Economics21 and reproduced in CapX, see http://www.capx.co/external/americans-should-urge-brits-to-vote-for-brexit/.

I would summarise the argument put as:

  1. The EU is an undemocratic mess that restricts trade and therefore prosperity.
  2. The UK’s trade with the EU is in terminal decline, whereas its trade with the rest of the world is increasing.
  3. The UK should therefore get out before the EU drags it down in to the mire of economic stagnation that currently afflicts the remainder of the member nations.

I agree that the EU is an undemocratic mess that over-regulates and thereby probably restricts trade. The UK joined the then European Economic Community on 1st January 1973. That’s more than 42 (yes, forty two) years ago. The problems occurred on our watch! This was not something that was forced upon the UK last week. This is something that the UK allowed to happen to itself while it was disengaged.

I do not agree, however, that the EU’s economy is in terminal decline… and maybe the stats don’t really say that either. There’s always a risk of fighting the last war when using statistics, which focus retrospectively. While the 2Q15 GDP growth figures for German and France are lacklustre, those for Spain appear to be better. Even as I write now from South-West France I see signs of a recovery, with homeowners beginning to work on their properties once more.

Source: http://www.cer.org.uk/sites/default/files/imagecache/spotlight_pages/images/spotlight/in_the_press/2014/commission_smarket_sm_sl-1402405845.jpg
Source: http://bit.ly/1HVvcCD

Our nation’s attitude to the EU has always been to reap the benefits of free trade and avoid the harder stuff, leaving that to the Brussels-based bureaucrats and in the process turning those bureaucrats into bogeyman figures. This is a ridiculous attitude to take. These are our neighbours who have organised a club that we voted in favour of joining. We should have spent the last 42 years helping them, putting our energies into a better EU for all members rather than some form of super membership for the UK. Increased democracy within the EU would strengthen members’ economies by homogenizing trade rules for all.

The notion that the UK can easily replace EU trade partners with members of the Commonwealth is fanciful. That Britain’s international trade has increased in recent years is good news. Britain should therefore, as a member of the EU, push to lower the EU’s trade barriers with the rest of the world. Free trade across the globe is the bedrock of economic prosperity, not free trade for the (British) Commonwealth (Empire). I thought that lesson had been learnt many years ago.

The alternative of negotiating a Swiss type deal with the EU, thereby keeping the vast majority of British EU trade, simply doesn’t ring true with me. I doubt if we take our ball home that former partners would feel goodwill towards us and agree a treaty that is principally for the UK’s benefit. One must also consider that “Brexit” would be a costly, drawn out affair full of legal quagmire and political gridlock. Indeed we can be certain there would be no rush from the EU side, after 42 years of wasting time as a disingenuous member of their club.

The UK is not the only state within the EU that has tried to use the system for its own benefit, to the detriment of others. The two largest economies within the Eurozone are also guilty of this. Germany has imposed on Greece a bailout that is punitive, unworkable and against the diplomatic bonhomie that was intended from its inception, whilst its manufacturers continue to ram under-priced goods down the throats of poorer EU members. France, meanwhile, has always pandered to its farmers and supported the unworkable and unaffordable Common Agricultural Policy.

Yet the opportunity to make the EU more democratic, dramatically lower the hidden trade barriers and form a global hub of economic prosperity still exists. Unfortunately I am not sure that the political will remains. And Britain has wasted its political capital for the last 42 years. However, I would argue that there is still time and that the potential benefits far outweigh the risks.

 

Grexit or Gerxit?

Author
Angus Dent
Date

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Greece is saddled with debts on a scale that, when compared with its GDP, no nation has ever repaid. There seem to be only two possible outcomes: default and become the new Albania (a country locked in isolation and spiralling into decline for the next 50+ years) or devalue.

 

When the Euro Zone was formed, the economies of the joining countries should have fitted within certain economic parameters; the failure to enforce stringent “convergence criteria” has come to haunt the Euro area, worsened by the economic calamities of 2007 / 08. Today, while the Greek economy is a basket case, it is perhaps most closely aligned with the economies of Italy, Spain, Portugal the Balkan members of the EU and maybe even France. The countries that are most clearly out of step with the economies of Greece and its neighbours are those of Germany, Holland, the smaller countries such as Luxembourg. Germany has been able to use the Euro’s weakness to export goods to the weaker European nations at cheap prices, but without much foresight into how they would recover the IOUs.

 

The European Coal and Steel Community agreement of 1952 is the cornerstone of the EU and the Euro Zone. It was ostensibly an agreement to prevent any further wars between France and West Germany. It achieved its primary objective, but it was far from flawless. The community had little effect economically; coal and steel production was influenced more by global trends. The crisis in Greece may yet prove that the European Union is inherently flawed from an economic standpoint; it remains to be seen whether its political advantages can help rescue the Euro Zone or prove so strong that it wrecks the whole European Project. Could the radical option of a German exit from the EU be the most sensible alternative solution? The theory is certainly not as stupid as the inevitable copy-cat portmanteau.

 

Grexit gerxit

 

“Gerxit” might not only address Greece’s problems but also help many other countries begin to address their trade imbalances. As a soaring Deutsche Mark would make imports from Germany more expensive, other countries would be able to export at competitive prices. The cheap currency would make importing goods from the PIIGS (Portugal, Italy, Ireland, Greece, Spain) an attractive proposition, and prevent the need to cut high labour costs by reducing the minimum wage – particularly an issue in Italy. The PIIGS would grow at the same pace until it would be economically viable for Germany to re-join a balanced single currency. Germany, in the interim, would benefit from a strong and stable economy.

 

If Gerxit is the answer, it would require a huge expenditure of political will and a readiness, on the part of the Germans, to take the pain of a contracting economy. Merkel is not going to give up on the Eurozone just yet. And, aside from the political stumbling blocks, Gerxit has its fair share of economic barriers as well. In 2012 a Bertelsmann Foundation study found that leaving the European Union would cost Germany around 0.5 basis points of GDP percentage growth over a period of 13 years, or €1.2 trillion. An estimated 200,000 people would have to be made redundant. There would be trade slowdown as a result of currency conversion and exchange rate fluctuations.

 

But pondering the effects of Gerxit remains an academic exercise. For following considerable and far from unanimous debate, the Bundestag have decided to allow negotiations on a €86 billion Greek bailout deal, kicking the can down the road and probably the wrong road at that. At best, Judgement Day has been adjourned; Europe’s political and economic future again hangs in the balance and the UK remains disengaged. Even though the UK is outside the Eurozone, complete disengagement from next door’s crisis seems incredibly foolish. As the UK has little exposure to Greece it would be in a good position to broker a deal to resolve the crisis. Leadership, rather than intimidation and self-serving diplomacy, is called for.

 

I was recently reminded of a joke that alludes to the Germans’ handling of Greece’s fate as similar to the doctor who gave a patient six months to live. When the patient failed to pay up the doctor gave him six more months. Merkel has recognised that “death”, in this case, is the “chaos” of Grexit, a move that has next to no winners and millions of losers. Perhaps a more relevant cry would be “Physician heal thy self”.