HOLD YOUR NERVE


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The UKs most insightful economist and Chairman of Capital Economics, Roger Bootle argues that no Brexit deal is better than a bad deal. His latest brilliant book, “Making a Success of Brexit and Reforming the EU”, has just been published by Nicholas Brealey

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At the time of this magazine going to print, Teresa May took an urgent call from Arlene Foster (DUP) interrupting her lunch with Jean-Claude Juncker – she is seen here speaking at Lancaster House and outlining a 12-point plan for Brexit, 17th January 2017

In January, Prime Minister Theresa May, speaking at Lancaster House in London, stated clearly and robustly that the UK would like to have a “deep and special partnership” with the EU, one that that would include a Free Trade Agreement (FTA), allowing tariff-free and interference-free trade between the UK and the EU to continue after Brexit.

But that was before Mrs May’s calamitous decision to call a snap election in June of this year and by the time of her speech in Florence in September, the British position appeared to have softened. The UK was now prepared to agree to a transition period of about two years during which it would remain a member of both the Customs Union and the Single Market, while making a payment to the EU – the so-called divorce settlement – of some €20 billion. In short, the chances have increased that the UK will leave the EU without a deal.

When people talk of a “deal”, there are two issues at stake. The first is the conclusion of an FTA. The second involves a ragbag of detailed and specific issues on which there needs to be agreement – even if there is no FTA – on matters concerning customs clearance, the rights of individual citizens, the position facing the aviation industry and a host of other such things.
In practice, given mutual goodwill, it should be perfectly feasible to sort all this out before March 2019, when the UK is due to leave the EU. So the most important question concerns tariffs and access to the Single Market. It is widely believed that unless we secure the “deal” with the EU, the UK’s European trade would be devastated. In fact, this view is well wide of the mark. The average rate of tariff on manufactured goods entering the EU is about 4%. This is easily absorbable by British manufacturers, particularly after the sharp fall of the pound.

It is also widely believed that being a member of the Single Market brings some sort of magic benefit to its members. Without “access” to the market, British exporters will supposedly struggle. This word “access” is highly misleading. It is as though the Single Market is envisaged as some sort of closed space to which entry can only be secured by a door. At the door stands Jean-Claude Juncker, checking your membership card. If you are not a member then you can’t get i

In reality the Single Market is a single regulatory area. If you are not a member, all you have to do in order to sell to it is simply to comply with its various rules and regulations with regard to the things that you wish to sell. That is why all countries around the world that are not members of the Single Market manage to export into it successfully.

There has been concern that leaving the EU will cause immense damage to the City of London, whose success over recent decades is one of the UK’s greatest economic achievements.

This concern centres around the issue of EU “passports”, which allow banks and other financial services companies to operate throughout the EU by having a corporate base in only one EU member country. It is feared that when the UK leaves, unless some special arrangement is made to replicate the passport system, large numbers of jobs and types of economic activity – and perhaps even a number of banks – will leave the City.

These concerns are seriously exaggerated. Some jobs and activities will leave London. Indeed some already have. But the impact of the loss is pretty much confined to investment and corporate banking. Asset management and insurance will be hardly affected.

Even for banks, the advantages of London are so enormous that the dominant approach will be to transfer as little activity as possible. Moreover, the UK leaving the EU is not all bad even for banks because it allows them to escape the EU’s onerous regulatory regime, including the imposition of restrictions on bankers’ bonuses. If the EU ever gets to impose the much discussed Financial Transactions Tax (FTT) then the traffic would be decidedly in the opposite direction as banks and others sought to (re)locate business activity in London.

The threat to London would be greater if there were a single city that was going to try to replace it. But in reality there are umpteen. Although many businesses have announced plans to beef up their operations in Frankfurt, many have chosen Paris as their EU centre and there are many others that have chosen, or are contemplating Dublin, Luxembourg, Amsterdam, Madrid and Milan.

In reality, there are three economic arguments for leaving the EU. The first is the saving of our budget contribution. Much controversy has surrounded the specification of this sum. In net terms, our contributions have tended to be just under £10 billion per annum, or about 0.5% of one year’s GDP. This is a significant sum and well worth saving but it is not a game changer. Second and much more important is the escape from the EU’s protectionist trade policies. As a result of our membership, we have to impose the EU’s tariffs on imports from the rest of the world and to subscribe to its Common Agricultural Policy (CAP). Moreover, we are unable to conclude FTAs with other countries. This consistently raises the UK price level, especially for food. The third economic argument for leaving is to escape the excessive burden of EU laws and regulations and to fashion a regulatory regime more suited to British circumstances. We will only benefit from all three once we leave the EU, even without a deal.

The EU’s negotiators clearly believe that time is on their side. If they are intransigent, they believe that the UK will be forced, in the end, to do a deal on onerous terms. If the UK does not accept such terms and leaves without a deal they believe it will suffer hugely. I have more than a suspicion that they do not want a deal. They are adamant that the UK must be left worse off after it has left the EU.

That is precisely why we should prepare to leave immediately with no deal. This would put immense pressure on EU member governments. First, there is the money. A net contribution of about £10 billion a year is not, in the grand scheme of things, a very large sum of money. But in the context of the EU needing to extract extra contributions from reluctant member countries, it is a very large sum indeed. If we leave in March 2019 without a deal, then our contributions will cease immediately. There will be no divorce settlement and no continuing maintenance payments.

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The House of Lords has made it clear that this would be perfectly in accordance with the law. And, for once, the law is perfectly in accordance with common sense. Once we have ceased to be a member of the EU, why should we continue to bear its costs?

Second, continental and Irish exporters to the UK would be extremely worried about what would happen to their sales if the UK imposed tariffs on their exports. They would be particularly worried if they believed that the UK would also be successful in securing FTAs with other countries around the world. This would result in a marked fall in the UK prices of imports from the rest of the world, thereby making it even more difficult for European producers to sell into the UK market. The result would be a huge drop in EU sales to the UK, ranging across everything from wine to cars.

Just as the EU is the UK’s single biggest export market, so the UK is the EU’s biggest single export market, larger even than the US. Our market is really very important to them. So walking away without a deal would present Britain with an eminently feasible path to future prosperity. As it happens, it would also make it more likely that the EU would come to heel, with the result that it felt more inclined to agree an FTA. Indeed, the worst negotiating tactic that we could adopt is to let it be known that we believe that we absolutely must have a deal at almost any cost. That would ensure that the cost would indeed be very high.

Meanwhile, in his recent State of the Union address, the President of the EU Commission made it abundantly clear that the EU must pursue further integration, indeed complete integration to the point of becoming a United States of Europe, accompanied by fiscal and political union. In particular, he emphasised that opt-outs from the euro would not be accepted. The euro is the currency of the EU and all members must use it.

If, by some ghastly quirk of fate, the UK does not manage to leave the European Union, then before too long we would find ourselves forced into accepting the whole caboodle – including membership of the euro and Schengen and heaven knows what further integrationist nonsense lies ahead.

 

 


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