Trade & Finance

Inside or Outside – Economic and Financial Issues

Well, along with immigration, this will be the area that most concerns individuals, and thus is a subject about which the most wildly extreme claims are made.

Listening to the Remain lobby, suggestions are made that:

1. 3 millions jobs that rely on our exports to the EU will be lost (even though this is implied rather than explicitly stated)
2. It could take us up to 10 years to negotiate trade deals with the EU and with the rest of the world
3. Every household will be £4,300 worse off per year 15 years on from Brexit
4. Sterling will fall
5. The stock market will fall
6. Inflation will go up
7. Unemployment will go up
8. Interest rates will go up
9. House prices will go down
10. If we vote for Brexit, George Osborne will slash public spending and introduce huge tax increases
11. Any other possible disaster either already claimed or yet to be dreamt up by the Inners

Brexit supporters claim that:

1. Free from EU restrictions, Britain could quickly expand its trade with the rest of the world, especially throughout the Commonwealth
2. We would no longer have to pay £350 million per week into the EU
3. Trade deals could be initiated much more quickly, and in any case international trade will continue with or without such deals
4. EC countries, especially Germany and France, have much more to lose by some imagined cessation of trade with the UK following Brexit than Britain, given our £66 million trade deficit with them

Comments from the Remain lobby:

1. In David Cameron’s Bloomberg speech, he explicitly stated that: “of course Britain could make her own way in the world outside the EU ”. Only last year, he re-iterated this saying that he want “ to debunk the myth” that the UK could not flourish on its own, and again this February.
2. A few months ago, George Osborne is reported as having expressed doubts that the Remain lobby could not really campaign on the economy, because the argument would be implausible – after all, over the last few years, the UK economy has created more jobs than all the other EC member countries put together.
3. Lord Rose – former CEO of Marks & Spencer and chairman of Britain Stronger in Europe – said that, should the outcome be to leave the EU, nothing much would happen to the economy for at least 5 to 10 years.

Perhaps I may comment on these various claims?

The Remain claims:

1. If ever there was an ad nauseam argument, to plant a belief in people’s minds regardless of any facts, it would be that 3 millions jobs that rely on our exports to the EU will be lost on Brexit. Our ex-Deputy Prime Minister, Nick Clegg (a devout Europhile who worked for some years in Brussels) ran this argument almost every time he spoke. This is simply a canard, deliberately misleading.

This claim is based on research which stated that companies that exported to the EU employed around 3 million people. The argument has always used words that suggest that such a number would find their jobs at risk if we were to leave the EU.

Well, quite frankly this is nonsensical. Almost none of these companies exist only to produce exports to the EU, the vast majority (if not all) having a significant domestic market, and thus the headline casualty headcount is simply misleading.

What is more, this suggestion – always at the forefront of the Remain lobby’s arguments – falsely assumes that Brexit will bring about a cessation of trade with EU states, and specifically ignores the fact that such is most unlikely, given that this would cause far greater job losses in other EU countries that export to the UK.

This argument is as absurd as suggesting that all BMW/Audi/VW jobs in Germany would be at risk on Brexit. It is a theoretical one-sided fantasy, and I believe that it dilutes the credibilty of the Remain camp’s overall campaign.

2. A significant reason behind the claims of how long it takes to negotiate trade deals is the inability of the EU itself to move quickly. It is self-evident that, with 28 (and growing) disparate member states, trying to reach concord in the interests of each member is increasingly nightmarish.

As far as negotiating trade deals with the EU, there is no reason why this cannot be done quickly. After invoking Article 50 of the Lisbon Treaty, we have at least 2 years to agree the exit arrangements. Well, this does not need to be invoked straight away, and so Mr Cameron could leave it until the latest stages of this Government’s tenure, in order to maximise the negotiating time.

In any event, post-Brexit, negotiations between Britain and the EU need not be lengthy, as British exporters are already fully compliant with the EU market rules, and so there really is very little to negotiate. Any reason for protracted negotiations can only be the result of spite, and in any case would be more than negated by the needs of EU member states who export to the UK to reach a quick deal with us.

Britain, on its own, could certainly negotiate bilateral trade deals with Commonwealth and other countries far, far more quickly than the EU with the disparate needs of its ever-growing membership. The EU negotiations to finalise the Australian trade deal have been facing lengthy delays due to an issue over Italian tomatoes. The 2014 EU trade agreement with Canada still cannot be implemented because Romania is refusing to ratify it, due to visa requirements for Romanian nationals. The veritable host of diverse issues, across the 28 EU member states, will only grow as more countries join, and this restricts Britain’s trade opportunities across the rest of the world.

In any case, international trade goes on, regardless of the existence of international trade deals. According to Boris, looking at exports of goods and services to the single market since it began 23 years ago, there are 36 non-EU countries that have done better than the UK at exporting both goods and services to the EU, which have none of the regulatory burden. There are countless non-EU products for sale in the EU, whether from America or Asia, from countries where formal trade deals have not yet been signed.

Of course, much work will be needed to replace the current arrangements. However, whether dealing with the EU or elsewhere, the UK is a net importer, and the balance of things is that, overall, it is in the interests of the outside world to quickly arrive at an arrangement with us.

For these reasons, I believe that this argument is much weaker than is portrayed by the Inners.

3. George Osborne got the Treasury to come up with an alarmist forecast that, by 2030, the average household would be £4,300 worse off per annum if we left the UK.

Well, everyone knows that the Treasury cannot predict what will happen 6 months ahead, let alone 15 years. Furthermore, it has now been admitted that suggesting that this figure applies to the average household, rather than also to the Treasury and corporations, was plainly incorrect. Indeed, the wording of this claim suggested that households would be worse off than now – as it happens, even on the potentially spurious assumptions behind the forecast, the prediction was that households would be worse off than staying by 2030, rather than worse off than they are now. Such long term predictions are not to be believed, especially when one considers the potential impact of inflation, trade deals outside the EU, population growth, politics, collapse of the Eurozone, and whatever else. Indeed, other forecasts, with tweaks to the underlying assumptions, suggest that UK households could be £5,400 better off after Brexit.

After years of producing forecasts in business, I know that their outcomes rarely follow expectations. For these reasons, I consider this claim to be ludicrous.

4. Will the medium to long term value of sterling fall on Brexit? Perhaps so, perhaps not. The underlying workings of the market are pretty sophisticated, and the uncertainty caused by the referendum will already have been factored into the current value. Sure, the short term will see temporary variations, but these things always get evened out before long.

Indeed, the value of the Euro in a post-Brexit EU will certainly fall against the pound. In any case, if sterling does fall, this would be welcomed by UK exporters and would bring some welcome relief to our trade deficit.

5. Again, the stock market has already factored in the risk of Brexit to those companies who will be most affected by it. Any effect will most likely be short-term, and there is no reason why there should be any long-term damage. Indeed, the current weaker value of the FTSE 100 is still 8.3% higher now than 4 months ago, when any expectation that Leave might have a 7 point advantage over Remain would have been derided.

6. I see no particular reason why inflation should go up. However, given that the Eurozone is in a state of deflation, and UK inflation has been way below the target level of 2% for the last couple of years or so, some inflationary pressure should be easily bearable.

7. There have been suggestions that unemployment will increase on Brexit. Again, nothing significant is likely to happen in the short term. Looking forwards, more control over our immigration policy must surely be a positive factor regarding employment levels. Membership of the EU has not exactly resulted in brilliant employment in Spain, Italy, Greece or France, especially in the area of youth unemployment which is disastrous in these countries.

8. Claims that interest rates will go up are plucked from the sky. There may be some short term fluctuations, but there is no reason why rates should go up in the long term. As with everything, there is a balance in these things, and many people with savings would welcome an increase in rates.

9. I believe that George Osborne’s claims that research shows that house prices will reduce by 10% have subsequently been corrected to say that house price increases from their current value will be 10% less after Brexit. Well, even if either was true, whichever the case this should be very welcome news to all of the younger generation, for whom the step to house ownership is prohibitive.

10. The Chancellor’s latest threat to say that post-Brexit he would have to slash public spending and introduce huge tax increases is, to my mind, desperate bullying of the electorate. Firstly, as Lord Rose said when launching the In lobby, nothing much will change for at least 5 years or so, especially as the status quo will continue whilst things are renegotiated. Secondly, both Cameron and Osborne have only started to threaten all of this Armageddon in the last couple of months, with Cameron saying as recently as February that of course Britain could flourish after exit – if they thought this before, then how irresponsible of them to call the referendum? Thirdly, with around 70 Tory MPs declaring that they would not vote for any such budget, there is no prospect of a such cuts getting through Parliament.

11. Any other possible disaster that is predicted in the next week will only be an afterthought, published through desperation to win the argument.

The Brexit claims:

1. I believe that in a position of willing buyer/willing seller, Britain could expand its worldwide trade rapidly, free from some of the restrictive tariffs under the EU. Without a doubt, Commonwealth countries would be excited at the chance to trade more freely with the 5th biggest economy in the world. I see this as a positive outcome for Brexit, rather than simply maintaining the status quo, although I would admit that this view is an aspiration rather than certainty.

Indeed, organisations such as Open Europe believe that trade agreements with emerging markets such as China, India & Brazil could be quickly made by the UK if they initially concentrated on tariff free trade, whilst agreeing to address non-tariff barriers at a later date through more protracted negotiations. Open Europe believes that the realistic early effect of a Leave vote would range from a reduction in GDP of 0.8% to an increase of 0.6%. However, they believe that the resultant short-term boost to GDP from quick trade deals with emerging markets would significantly alleviate any negative impact of Brexit, whilst leaving Britain’s GDP better off in the longer run.

2. Claims by VoteLeave that we would no longer have to pay £350 million per week into the EU are shouted down by the Britain Stronger in Europe lobby. They claim that this takes no account of the amount received back by way of rebate, and all of the contributions and subsidies made by the EU to Britain.

Well, if I am asked what the rate of tax is in the UK, the answer is 45/40/20% according to your income. One simply does not try to deduct a value relating to what one get’s back in terms of public services, of course one talks of the headline figure, and so I find this argument spurious. As far as the rebate goes, Remainers have a better case, but the rebate is certainly not cast in stone, and has been reduced at several points since Margaret Thatcher’s original negotiations. As the Eurozone flounders, and as more and more poorer countries join the EU, the pressure to minimise any such rebate will become relentless. I do not trust any Remain politician to have the guts to resist such pressure.

Much is said of the amounts that various sectors of our economy and society receive from the EU. Indeed, the Remain lobby has marshalled as many of the recipients of such ‘benefice’ as possible to underwrite its propaganda. Whatever the actual amount, the fact is that there is no reason why all of these beneficiaries cannot receive the same funding from an independent UK government, leaving a very considerable amount of money to pay down our national debt, or to increase spending on the NHS or farm subsidies, or whatever.

3. One of the reasons EU trade deals take so long to negotiate is that the EU has to get the agreement of 28 member states, and insist on an all-or-nothing approach, rather than the graduated approach suggested in 1. above. There is no reason at all why trade deals between the UK and, say Australia, would take anything like this time. I find it a bit rich that the EU’s own inefficiency is being used as an argument to keep Britain in its midst, when their negotiations are so elongated by Romanian visas and Italian tomatoes.

Much is made of the time that would be needed to negotiate deals with the EU itself. Well, this can only be the case if remaining EU countries want to be spiteful to a Great Britain beyond its clutches. Given the huge balance of trade in favour of EU exports to the UK, this simply would not be in the interests of the EU.

In any case, much of the time spent on negotiating trade deals is with regard to harmonising working/welfare/environmental practices between the EU and other countries around the world. The UK is already harmonised, and indeed is amongst the leaders in Europe on some these issues, especially on such things as animal welfare.

There is simply no need for lengthy negotiations to bridge the gap, as there is no gap.

4. The Brexit lobby claim that EC countries, especially Germany and France, have much more to lose by some imagined cessation of trade with the UK following Brexit than Britain, given our £68 billion trade deficit with them. Well, this is true. The Remainers try to use a statistical presentation to confound this truism, by using percentages of trade rather than actual values.

Speaking as an accountant, I well understand how one can try to present the picture that one would prefer by such tactics, but the fact is – EU countries will lose much more in real terms by trying to be awkward on trade with Britain than we will. A £68 billion (and growing) deficit is the proof!

Where does this all leave us?

Well, of all the various claims made on both sides, I am very much in agreement with the leader of Britain Stronger in Europe. As Lord Rose suggests, I think it improbable that anything is going to change to any material extent. If nothing much will change over the next 5 to 10 years, any resultant effect will have been addressed in the markets, and forgotten. Regarding such things as exchange rates, stock markets, house prices and any other market activity, the markets will certainly have already discounted the risks of the EU outcome. Indeed, even if there is a temporary blip following an unexpected result, markets always recover, and all of these dire warnings can surely only apply to the short term picture, and are irrelevant to the longer term. Indeed, this is born out by forecasts from by Open Europe and others, which show GDP growth deterioration on Brexit in the short term which is more than matched by subsequent increases by 2020 over and above the expectations of remaining in.

Nothing will change very quickly. Huge amounts of UK international trade are tied into long-term contractual arrangements which simply will not be unravelled by Brexit – indeed, if I was an importer/exporter on either side of the channel, I would have already been negotiating arrangements to ensure the ongoing continuity of trade in the face of either outcome of the EU. As with everything about all of this, one cannot just look at a one-sided argument of the downsides of the other position – everything has a balance on the other side.

Moment to reflect

What a ghastly argument this has all been over the last couple of months, and set to get worse over the last few days. It seems that more and more independent commentators are taking the view that the outcome will be somewhere in the middle, rather than nearer some of the outlandish claims we are hearing. So, rather than feeling riled by the iniquity of some of the claims, why not pause for a moment, and calm down, whilst looking at the inner workings of the establishment? Maximise your screen, cancel any advertisement and enjoy it. Whilst rather dated, this nevertheless contains interesting suggestions whatever your view....

Next to come

Time is running out, as I have been away for 2 or 3 weeks. I am aiming to do a posting on defence and security in the next day or so, then one on immigration, and then a final wrap-up… I wonder if anyone is still reading….!!!