No Deal is the safest option, given the UK’s increasingly unsustainable trade relationship with the EU 

The fateful decision about whether the UK should leave the EU with or without a withdrawal agreement has to be informed by evidence comparing the UK’s past experience of trading within the EU Customs Union and Single Market, with its trade under World Trade Organisation (WTO) rules. 

The data released by the ONS in March 2019 provides the best available comparative evidence of this kind since it distinguishes UK trade in goods and services with the EU over the twenty years 1999-2018 from that with ‘non-EU’ markets. The latter are not, of course, identical with those trading under WTO rules. Just over 25% of their total value arises from trade with European Free Trade Association (EFTA) members and countries that have trade agreements with the EU, which might inflate their overall value. However, comparative analyses of Switzerland, Norway and Turkey with the UK’s WTO-rules trade partners show they do not do so. On the contrary, they fractionally lower the growth rates of the UK’s non-EU goods exports. The ONS data therefore enable us to make a fair comparison between the UK’s trade performance within the EU and with partners under WTO rules from 1999 to 2018. No better data is available.       

It provides a grim warning about the costs of continuing to trade with EU under any form of agreement that continues the existing trade relationship.

  • Despite the benefits of the Customs Union and Single Market, UK goods exports to EU markets have grown by just 0.3% per annum in real terms over the past 20 years. They cannot therefore have contributed significantly to the growth of employment in the UK. The number of EU members increased over these years of course, so the 0.3% per annum might fractionally overstate or mis-state real growth. The Compound Annual Growth Rate (CAGR) of the EU15 alone was still lower at 0.08% per annum. 
  • UK goods exports to non-EU countries, by contrast, have grown over ten times faster – by 3.2% per annum. Worth just 64% of EU exports in 1999, they overtook exports to the EU in value in 2015, and have plainly therefore contributed far more than the EU trade to the growth of employment in the UK over the past two decades.
  • Imports from the EU meanwhile have surged. Consequently, the UK’s goods trade deficit with the EU has grown from just £7.9bn in 1999 to £93.5bn in 2018. If that rate of growth were to continue for the next 20 years, its exponential trend line indicates that it would reach £246bn by 2030. By contrast, the higher value UK exports to non-EU countries produced a deficit in 2018 of £44.6bn. This is less than half the size of deficit with the EU, and almost half of that (£21 billion) is due to trade in crude oil and natural gas, not manufacturing.

This combination of virtually static exports to the EU, and surging imports from it, seems to be peculiar to the UK. Earlier analyses have shown that the growth of goods exports to the EU of almost all developed economies – including the US, Canada, Singapore, Hong Kong, Brazil, Korea, and South Africa – out-performed the UK from 1993 to 2015. Trading without an agreement, the US decisively overtook the UK as a goods exporter to the EU in 2008. Rising 1.9% faster per year, they are now worth 37% more than those of the UK. 

One may delve further into the distinctive trade relationship that the UK has established with the EU by analysing its ten most-valuable manufacturing export sectors in 2018, manufacturing being 88% of all UK goods exports. In every single sector, from motor vehicles and parts with its 14.4% share of the total, to beverages with a 2.7% share, exports to non-EU countries have outpaced exports to EU countries – by an overall average of 2.9% per annum. In only two major sectors have UK exports to EU countries grown moderately well since 1999 – aerospace and pharmaceuticals – and they happen to be the two sectors where, with zero or near-zero global tariffs, the UK gains little or no market advantage from membership of the Customs Union.

In nine sectors out of the ten there was a trade deficit in 2018 with the EU, ‘aerospace & transport’ vehicles being the sole exception, while in trade with the non-EU countries there is a deficit in only four sectors, with motor vehicles earning the largest surplus of the other six, at £16bn and pharmaceuticals the second largest at £8.3bn.

Goods deficits are offset, of course, by surpluses of services exports. In 2018 services exports to the EU totalled £117bn, and over the previous 20 years have grown at a healthy 5.1% per year. Currently, the surplus in the UK’s EU trade in services, worth £29bn, covers about a third of the UK’s EU goods deficit, but by 2030, if rates of growth of goods and services remained the same till then, it wouldn’t even cover a quarter. The UK’s EU deficit in goods would swallow the UK’s entire projected surplus in services – that of the EU plus the far more valuable non-EU surplus – and still leave the UK with an overall net deficit of £136bn. 

Her Majesty’s Treasury (HMT) and the Bank of England have warned about the costs of leaving the EU, but they have overlooked the risk of an unsustainable trade deficit – and the mother of all balance of payments crises – and its extremely unpleasant consequences for the public finances if the UK were to agree to continue its existing trade relationship with the EU for a transition period and an indeterminate period beyond. This oversight is especially surprising in the case of HMT, since Denis Healey, the Chancellor at the time of the unsustainable balance of payments crisis in 1976 which lead to a massive IMF bailout, later discovered that it was due in large part to figures provided by the Treasury being ‘grossly overstated.’ One would therefore expect them to be super-cautious on this score.

Why have these risks been overlooked, and the failure of the Single Market from the point of view of British exports or productivity remained unanalysed? Every UK government since 1973 has fondly hoped, of course, that the EEC and the EU would generate economic benefits for the UK. However, they have all preferred to assume that the UK was enjoying the economic benefits they had hoped for, and resolutely declined to measure and monitor them, apart from a small classified one-off HMT study in 2005, which only became public in 2010 because of a Freedom of Information request. 

When preparing the case for Remain prior to the 2016 referendum, HMT ‘forgot’ its own 2005 analysis, which showed UK goods exports to the EU rising by just 16% over the 30 years from 1973 to 2004. Instead, its long-term predictions, were based on the idea that ‘EU membership boosts intra-EU trade by 115% relative to a position of WTO membership’, (p.163, para A47), so that if the UK decided to Remain, the trade losses would necessarily be catastrophic, the symmetric equivalent of a 115% increase in trade ‘is a fall in trade of 53% from leaving the EU.’ 

Many of those who oppose No Deal today still rely on the dire predictions based on such assumptions. A later analysis using the same model and evidence, but focusing exclusively on UK experience rather than making inferences from the experiences of the EU as a whole, estimated the likely increase in UK goods exports by 2030 ‘in the range 20-25%’. Back in the real world, the ONS data we now have shows that UK goods exports to the EU over the past 20 years actually grew by just 5.4%. 

As a result of the reluctance of the government, and of the CBI and other trade associations, to regularly collect, analyse and report data about UK trade with the EEC/EU over the 46 years of membership, they have both been unable to recognise the distinctive characteristics – and distinctive problems – of the trading relationship that has evolved over these years. Neither governments nor trade associations have therefore ever asked critical policy questions.

Why has membership done nothing to raise UK GDP, or productivity, or exports and employment? Why has this failure remained unexamined and unnoticed for so long? Why has the UK never identified the deficiencies of most EU trade agreements for its own exporters? Why has the growth of goods exports of countries trading with the EU under WTO rules commonly exceeded that of countries trading with them under a Free Trade Agreement (FTA), and even that of members’ exports to each other? Why have UK exports grown fastest in markets where the Customs Union delivers no advantage? Why are the UK’s exports under WTO a picture of health, while those to the EU a record of failure across the board over two decades and more?

Further critical policy questions arise from the records of particular sectors which their own trade associations have singularly failed to ask. Is UK’s luxury vehicle manufacturing now moving to the EU because of competitive advantage or because of EU-compliant state subsidies? Is the pharmaceutical industry decamping to Ireland as has been claimed,  and if so, is it also because of competitive advantage, or Ireland’s low corporation tax rates? Will these moves adversely affect the UK’s non-EU exports over the long term? And looking at trade from the consumer’s perspective: what’s the likely future cost to UK’s food consumers as the EU’s grip on UK imports of food products and agriculture passes 70%, which it did last year.

Economists have years ahead of them to answer these and other questions. Unfortunately, the new UK Government, Parliament and the electorate have only weeks to decide on the key question of whether to continue the existing EU trade relationship into a transition period and beyond or to leave without an agreement.

The ONS data strongly indicate that the UK should make every effort to avoid the risks of doing so, and that it should try to bring two and more decades of disappointing failure to an end. If the EU decides that they cannot agree to a joint application to the WTO for a temporary tariff standstill while negotiating a new trade agreement, the Article XXIV option, then leaving without a deal must be the best option. 

Those who argue against it continue to rely on HMT’s fantastical long-term predictions or, when they offer any evidence at all, on various sequels prepared before the scheduled meaningful vote in late 2018. These adopted, without explanation or apology, a new economic model, but made similar far-fetched assumptions and estimates to make sure trading under WTO rules always appeared to be the worst option. 

Some of these are worth mentioning since they are the basis of the only ‘evidence’ that the current campaign against no deal can muster. In the EU Exit Analysis: Cross Whitehall Briefing published in various forms between January and July 2018, it was estimated that UK goods trading with the EU under WTO rules would immediately incur tariff, non-tariff and customs charges with a total tariff equivalent value (TTE) of 30%, which accounted for nearly 90% of the GDP loss of 7.7% that no deal would supposedly incur. Patrick Minford pointed out that, since the UK’s product standards are identical to those of the EU, it is difficult to see why the TTE would be higher than the 20% TTE value known to be incurred by such barriers on Japanese and American goods exports to the EU. Once this and other more realistic estimates were incorporated into the analysis, the predicted GDP loss after No Deal simply disappears. 

In the EU Exit Long-term Economic Analysis of November 2018, it was estimated (p.49, Figure 4.1) that the total value of FTAs that the UK might conclude with the US, Australia, Canada, India, China and 12 other non-members would be a 0.2% gain to UK GDP, even though, as Andrew Lilico observed, the European Commission had previously estimated that the gain to EU GDP of concluding agreements with a similar set of countries would be 1.9%. Negotiating exclusively in its own interest, the UK would apparently only realise about one tenth of the value that it might gain from EU template agreements, even though research shows that the vast majority of past EU FTAs have not helped UK exports in the least. This analysis also decided that the UK could not expect any GDP gain at all from any other trade policy or from taking back control of immigration or regulation. 

By such tendentious estimates and assumptions, the Treasury constructed its case against a no-deal exit which appears to have convinced many MPs, though some no doubt have found arguing against a no-deal exit a politically convenient cover of arguing for Remain. Our analysis, by contrast, rests firmly on how UK trade has actually performed inside and outside the Customs Union over the past 20–40 years, and the findings are virtually uniform across all major manufacturing sectors. They demonstrate beyond any doubt that a no-deal exit is now the best option.

Leaving with no trade deal would provide an opportunity – and the strongest possible incentive – for the new Government to devise and implement trade and fiscal policies that build on the UK’s remarkable success when trading under WTO rules. It would also encourage policy-makers to understand and address the UK’s chronic failure in EU goods markets before resuming EU trade negotiations. And it would provide an opportunity to re-negotiate trade agreements with other countries that have been designed to serve the common interests of EU member countries which the UK plainly has not shared. Above all, it would require policy-makers to discover exactly where UK’s comparative advantage in trade lies and to tailor future UK trade agreements to build on demonstrated success.

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European Central Bank launches financial stimulus to boost economies amid US-China trade conflict and Brexit uncertainty

The European Central Bank (ECB) has launched a new round of monetary stimulus to support economic growth in the face of uncertainties such as the US-China trade conflict and Brexit.

The central bank for the 19 Eurozone countries said it would cut the rate on deposits – a penalty rate that pushes banks to lend excess cash – from minus 0.5 per cent to minus 0.4 per cent in its latest quantitative easing efforts. It also said it would purchase €20bn (£17.7bn) a month in government and corporate bonds for as long as necessary. The purchases pump newly created money into the financial system to lower borrowing costs and raise inflation.

The bank also extended a promise to keep rates at record lows for as long as necessary and held interest rates at zero. Eurozone inflation remains well below its 2 per cent  target.

Marchel Alexandrovich, senior European economist at Jefferies, said: “What the monetary policy decision statement does not mention is how generous the tiering system is, the precise mix of assets the new QE programme will contain, and whether the ECB raised the issuer limit on its sovereign bond purchases.”

Germany set to fall into recession

Meanwhile, the Eurozone’s largest economy is expected to fall into recession in the third quarter. According to the Munich-based Institute for Economic Research (IFO), the German economy is set to shrink by 0.1 per cent in the third quarter, which would amount to a recession after a similar contraction in the April to June period.

“The outlook is weighed down by high uncertainties,” said IFO’s Timo Wollmershauser, pointing to possible risks to the economy from a no-deal Brexit and an escalation of US President Donald Trump’s trade wars.

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“Potential lifeline” for Harland and Wolff amid the backstop blues

 

The FT reports on a potential lifeline to build Royal Navy frigates for Harland and Wolff.  

A consortium led by defence group Babcock International has won the competition to build new frigates for the Royal Navy, securing hundreds of jobs at British shipyards, including in Northern Ireland and Scotland. Under the original proposal, the plan was to assemble the vessels at Rosyth using “blocks” built by H&W and Ferguson. It remained unclear if the role of H&W and Ferguson in the consortium would be affected by their predicament.

The question: is H&W with a  laid off work force of 130, in any position to benefit from this contract?

Northern Ireland  Business speaks truth to power to Boris Johnson.

“I think there potentially is some model there where Northern Ireland could potentially have the best of both worlds, in the sense that there could be full, unfettered access to the EU single market and the UK single market,” said Glyn Roberts, chief of Retail NI

This is against the predicted impact of Brexit papers, called Yellowehammer, practically identical to the leak to the Sunday Times, but only six pages published yesterday. How much more devil is in the detail?

Yellowhammer on Northern Ireland – “ the realistic  worse case scenario (whatever that means) From the Belfast Telegraph

It warns of electric price hikes, shortages on medicine and food supplies as well as concern for animal welfare over shortage of veterinary supplies, lengthly delays at ports, protests and disorder.

On Northern Ireland it warns there will be “significant pressure” to find arrangements to manage the border within days or weeks because of the barriers for trade.

It adds:

  • Plans to mitigate against imposing a hard border will be unsustainable.
  • Tariffs for goods entering Ireland will “severely disrupt trade” forcing business to stop trading or relocate with costs passed on to customers.
  • Agri-food sector hardest hit given its reliance on cross-border supply chains.
  • There could be a split in the single energy market on the island which – although not affecting supply – could see price hikes with “associated economic and political impacts”.
  • There could be clashes between fishing vessels in UK waters around Northern Ireland.
  • Disruption to key sectors, job losses, protests, direct action and road blocks.

“Price and other differentials are likely to lead to a growth in illegitimate activity,” the paper states.

“This will be particularly severe in border communities where both criminals and dissident groups already operate with greater threat and impunity.”

The document is broadly in line with a similar report by the Northern Ireland Civil Service. That warned of 40,000 job losses and severe disruption.

Assessment from BBC Economics editor Faisal Islam

The section on Northern Ireland is particularly concerning. In many respects it is incredible to have such a list of the plausible consequences of what is government policy. It is not difficult to see why the government resisted its release. It is unlikely to improve the mood of an already sceptical Commons. But it is really the first tangible, quotable, warts and all assessment of what Whitehall fears could be around the corner.

 

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UK firms created fewer new jobs but pay growth was up to 4% in fastest rate of growth in a decade

The UK’s job market is in danger of “losing its shine” despite unemployment remaining at record lows and wages continuing to grow at their strongest rate since 2008, economists have warned.

Figures from the Office for National Statistics (ONS) show that firms hired fewer people in the three months to July.

Companies and public sector bodies brought on 31,000 more workers in three-month period, less than economists had predicted.

A consensus of analysts and commentators predicted that there would be 55,000 more people hired, following a reported increase of 115,000 last month.

Pay grows but jobs stall

The ONS said new job postings had fallen sharply in 2019 (Photo: ONS)

Economists reported that the fall in job vacancies was its fastest for more than eight years, despite wage growth figures suggesting there was more health in the UK jobs market.

Pay for workers – including bonuses – was up to 4 per cent in the three months between May and July, its fastest rate of growth since 2008. Excluding bonuses, average pay growth was up to 3.8 per cent.

Despite these recent increases, the average worker in the UK earns less than they did a decade ago, when allowing for inflation: an average pay packet today is worth £502 per week, compared to a peak of £525 recorded in February 2008.

Pay growth is watched closely by the Bank of England as an indicator of future inflation pressures, with the latest increases coming in higher than all forecasts in a Reuters poll of economists.

“Once adjusted for inflation, they have now gone above 2 per cent for the first time in nearly four years,” ONS statistician David Freeman said.

No vacancies

Meanwhile, the number of new job vacancies fell to 812,000, the lowest level since the end of 2017 and signalling that employers lacked the confidence to make hires.

The ONS said that the number of new job postings has fallen steadily since the beginning of the year, after a period of sustained growth starting in 2012. It added that small firms had been particularly cautious about adding new staff.

Economists had predicted the UK’s job market to continue performing strongly (Photo: Getty)

Unemployment fell back down to 3.8 per cent, which remains its lowest rate since the 1970s.

Samuel Tombs, chief UK economist for Pantheon Macroeconomics, said that the UK’s ‘jobs miracle’ had started to “lose its shine”.

He added: “The renewed fall in the unemployment rate distracts from an otherwise troubling labour market report.

“Employment was only 31,000 higher than in the previous three months, well below the 89,000 average increase seen since the Brexit vote in 2016.”

Margaret Greenwood, the shadow work and pensions secretary, said: “The slowdown in job creation is a concern with the current uncertainty over Brexit, and average pay still has not returned to the level it was in 2008.

“For millions of people, the reality of work is one of low pay and insecurity.”

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Fear of recession recedes after GDP grows in July

The UK economy grew more than expected in July, easing fears that Britain might slip into a recession

According to the Office for National Statistics (ONS), the UK economy grew by 0.3 per cent in July, compared with the previous month. This is better than the 0.1 expansion predicted by economists polled by Reuters.

The service sector helped to boost growth in July

Britain’s services sector, which accounts for about 80 per cent of the economy, increased by 0.3 per cent in July, providing the bulk of the growth.

The manufacturing and construction sectors also expanded with increases in output of 0.3 per and 0.5 per cent respectively.

However, while growth in the services sector helped to boost July’s stronger-than-expected growth figure, the ONS noted that in the three months to July the economy showed no growth.

The ONS head of GDP Rob Kent-Smith said: “GDP growth was flat in the latest three months, with falls in construction and manufacturing.

What is GDP and how is it measured?

Gross Domestic Product (GDP) is the total value of goods and services produced in the economy. The figure to focus on is the percentage change in the growth of the economy in real terms, which strips out the effect of rising prices or inflation.This is measured in three month quarters during the calendar year. If GDP is up on the previous three months, then the economy is growing and that means more wealth and more jobs. If the GDP figure is down on the previous quarter then the economy is contracted, leading to fewer jobs and less wealth.

GDP is based on three key measures:

Output measure: The total value of the goods and services produced by all sectors of the economy

Expenditure measure: The value of the goods and services bought by households and by government.

Income measure: The value of the income generated  via company profits and wages.

Fears have escalated that the UK could enter a recession this year after the economy contracted in the second quarter on the back of a sharp fall in manufacturing and construction output.

There was a 0.2 per cent fall in GDP in the second quarter of the year, and if there are two consecutive falling quarters the country is officially in a recession.

The pound rose in reaction to the figures, rising 0.6 per cent against the dollar to $1.2357. PA Wire

However, Monday’s latest statistics from the ONS only concern July – before the latest political uncertainty and data from around the world that shows economies slowing.

Howard Archer, chief economic adviser at the EY Item Club, said: “While GDP growth of 0.3 per cent month on month in July looks to go a long way towards guaranteeing that the economy will return to growth in the third quarter, disappointing survey evidence for August ­relating to manufacturing, construction and services activity, as well as retail sales, suggests that the economy is currently finding life challenging, as it is hampered by serious ­uncertainties relating to Brexit, the domestic political situation and the global economy.”

Additional reporting by PA

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Strong July Growth as Recession Threat Dies

Threats of a recession in the UK have faded after the UK economy showed solid growth in July. Defying remainer expectations.

As the BBC’s Economics Editor, Faisal Islam, concedes, “strongly suggesting [a] return to growth in Q3, albeit Q3 hasn’t finished yet – so recession not looking likely”.

The 0.5% growth rate – driven greatly by construction growth – comes after a 0.2% contraction in the second quarter of the year, and marks the strongest month of growth since January. 0.3% growth is three times higher than predicted – expect more economic predictions to be defied over the coming months…

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A primer on Brexit for Americans who dare to harbour sympathy with the Remainers

Sitting under the “rockets’ red glare” on July 4th this year, witnessing the patriotism and pride of all Americans, irrespective of their political affiliation, I could not help but puzzle over the general animus and disdain that much of the American mainstream media and academia hold for Brexit.

How could a country forged in the flame of Independence, with a pertinacious commitment to be a united nation of “free and independent States”, be so dismissive of another united nation’s democratic decision to take back control of its own destiny?

An opinion columnist in the New York Times back in the spring declared that the “United Kingdom has gone mad… and can’t even decide how to kill itself”. On Merionwest, a regular essayist declared that Brexit “has been calamitous for the economy”. These allegations are worse than unsubstantiated hyperbole, they are the sort of ‘fake news’ that Trump trades in.

Au contraire, for the facts tell a different story. The British economy has the highest levels of employment in modern history and the highest levels of Foreign Direct Investment of any EU country. Indeed, UK plc enjoys better growth than Germany. The reality is that, despite predictions by the then Chancellor of the Exchequer (an unrepentant ‘Remainer’) that a Leave vote would cause an “immediate and profound” economic shock with “rising unemployment and a recession”, the sky has still not fallen in.

The facts show that none of the doomsday predictions have come true. So why is it that the establishment continues to frame the most existential British political quandary of our time as being an issue of ‘right or wrong’?

It isn’t.

Those in power will always prefer the status quo, so trying to frame such a critical socio-political issue in terms of who is right and who is wrong is not only intellectually lazy and dishonest, it is politically disingenuous. The issue that divides Britain isn’t that one group is wrong. It is that one group holds a different set of principles and values to the other. Neither set are misanthropic, nor malevolent.

‘Remainers’ believe in the power of collectivism; that individuals and their nation state should put aside their innate values and beliefs in the interest of a greater good; that the world would be a better place as a one-planet collective where separate creeds, tribes and cultures coalesce into a world that sings “in perfect harmony” – a federated world guided and controlled by a mother ship that guarantees ‘liberty, equality and fraternity’ for every single individual.

This is a bold and noble aspiration; an ambition that shouldn’t be ridiculed as naïve or progressive but, rather, respected for its inspiring imagination. After all, it makes sense to address the threats of climate change, excessive and irresponsible capitalism, international tax loopholes, extreme religions, international terrorism and the impending challenges of a world dominated by networks that democracies no longer control, and intelligent machines that may be uncontrollable.

‘Leavers’, on the other hand, believe in the power of individual rights with mutual responsibility; that nation states should be run by directly elected and accountable representatives who have direct control over a country’s borders, laws, security, currency, economic policy, taxation and trade; that cultural identity, national values and patriotic personality should be celebrated in a world of diversity and individuality – a world of Independent yet Interdependent nation states.

If appealing to the principles at the heart of the United States ‘Declaration of Independence’ isn’t enough, perhaps the Brexit naysayers in America should inhale some more facts – facts that give the 17.4 million Leavers confidence in the future success and prosperity of a Global Britain freed from the shackles of the EU.

Britain is the fifth largest economy on the planet. Do they really believe every other nation or trading bloc will not want to trade with us under mutually favourable terms?

To add fuel to the Leavers’ fire, it is a nation state that:

  • has one of the most respected and proven armed forces, intelligence services and diplomatic corps in the world
  • is the leader of the Commonwealth, a coalition of 53 independent countries with a congenital legal system and a population of 2.4 billion people, almost 5 times larger than the EU, of whom 60% are under 29 – an economic powerhouse, with GDP approaching $10 trillion and a growth rate that is nearly three times higher than the EU.
  • enjoys a reputation as one of the most influential arts and creative cultures on earth
  • has the most respected and revered legal, governance and democratic architectures
  • is home to four of the top ten universities in the world (when the UK leaves, the EU will be left with no universities in the top ranking)
  • has a capital city that is one of the world’s leading financial and international business centres; as well as being one of the most desirable tourism destinations – a city and a country that the great and the good, the rich and powerful, like to call home.

If all these inherent socio-economic advantages are not enough to alleviate the hysteria of the doubters, perhaps the fact that our native language just happens to be the lingua franca of the globe will add some cold comfort to their negativity.

Yet I still hear the clarion calls of cynicism and doom, so let me chronicle an analogy that is closer to home for US doom-mongers. Imagine that 50 years after signing NAFTA, a small group of politicians and bureaucrats determined that along with free trade, Canada, the United States and Mexico should also create the North American Union. The NAU. A federated nation with its own Supreme Court, central bank, common immigration policy, common agricultural policy, centralised foreign policy, free movement of people, its own flag, its own national anthem and led by a group that is not directly elected by citizens and who harbour a brazenly stated ambition of unified armed forces and a centralised fiscal and taxation policy.

Does anyone seriously imagine, let alone believe or propagate the idea, that the same people who clasp their hand to their chests and replicate the bombs bursting in the air every Independence Day would embrace such a union?

Yet this is the history of today’s European Union. It was conceived originally in 1950 as a ‘European Coal and Steel Community’ to create a trading bloc that would act as a well-meaning prophylactic against Europe’s history of war, just in case the formation of NATO wasn’t protective enough. The ambition for a federated union morphed first into a free trade area known as the European Economic Community, which Britain joined in 1973. Then ultimately gave birth, via the Maastricht Treaty and then the Lisbon Treaty, to a political union with its own constitution and led by the European Commission – a body whose Members are not directly elected or accountable to the citizens or voters in any of the Member States, and the only body that can write or withdraw primary legislation. At no stage since joining in 1973 were Britons given any vote in this relentless march towards European federalism.

These are the facts, and the historical context, that any fair-minded and rational critic should consider before lambasting the majority of Brits who chose to give up membership of the European Union (or indeed before sympathising with the minority who preferred to Remain).

Yet, beyond facts and history, ‘Leavers’ simply embraced the principle of an independent nation state. They voted with their heart as well as their heads and wallets. Their choice echoed history; formed in a crucible of emotion, not just in the logic of debate. Great Britain is today an ‘emocracy’, a term coined by Ayaan Hirsi Ali to reflect the reality that politics is as much about ideas, principles and values as it is about policy, facts and reason.

With that reality in mind, it seems fair and reasonable that, when debating the binary choice given to the British people in the biggest plebiscite in their history, their democratic choice is respected. A clear majority chose to “leave the European Union”, clearly stated on the ballot paper – a majority whose government explicitly committed to “implementing their decision”, whose Parliament was elected by 82% of the country on manifestos to deliver Brexit and whose MPs voted overwhelmingly to leave the EU voluntarily.

Despite the subsequent betrayal by those MPs in Westminster, those in America who side with the minority should not dismiss the majority of British voters as being “wrong”. ‘Leavers’ just have a different set of principles and values to those who chose to vote ‘Remain’. ‘Remainers’ may believe their principles and values are better. They may be right.

However, a majority were motivated by a different, yet equally considered, code. What is the point of a liberal representative democracy if not to champion and reflect the principles and values of the majority?

That principle should be respected and held to account every day in the ‘land of the free’.

This is an edited version of a piece first published as a letter in MerionWest.

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Concern deepens in both parts of Ireland over the state of paralysis in Brexit negotiations

Evidence mounts of the economic damage of No Deal to the economies north and south and the implications for the border which are disputed between the British and Irish governments. A no-deal Brexit would mean Northern Ireland’s economy would be at least 3% smaller compared to if the UK stayed in the EU, a new analysis highlighted by the BBC NI Economics correspondent John Campbell suggests.

That is a much less severe impact than a UK government analysis which suggested a 9% hit. he two studies are not directly comparable as they use different economic models with different underlying assumptions.It also suggests the backstop would negatively impact the NI economy

However, the study, from the Fraser of Allander Institute (FAI), finds that the impact of a hard Brexit is worse than the backstop. The backstop is a position of last resort to prevent the hardening of the Irish border in the absence of other solutions.It would see Northern Ireland staying aligned to some rules of the EU single market and the whole of the UK forming a “temporary single customs territory” with the EU

It would mean some products coming into Northern Ireland from elsewhere in the UK would be subject to new checks and controls. Those checks would be new “trade frictions”, adding to the cost of doing business.

The study suggests a backstop would make the NI economy between 1.3% and 2.7% smaller after 15 years, compared to its size if Brexit did not happen. The size of the impact would depend on how much the UK diverged from the single market with more divergence leading to a more negative impact.

The least damaging Brexit – according to the study – is the “Norway option” where the whole of the UK effectively remains in the single market.It would cost Northern Ireland’s economy an estimated  1.1% of GDP compared to no Brexit… It makes a rough estimate that a weaker UK economy could lead to a further 1% to 1.5% GDP loss in Northern Ireland.

The Northern Ireland Department for the Economy, which commissioned the report said, the analysis showed “there will be material and significant economic consequences arising from the decisions that will ultimately be made around the terms of the UK’s withdrawal from the EU.

Campbell also analyses the UK’s plan to keep their side of the border open. Apart from having a disastrous effect on NI food producers it  almost certainly violates World Trade Organisation (WTO) rules  and is unsustainable for more than a matter of months.

If the UK leaves the EU without a deal, Northern Ireland and the Republic of Ireland will immediately be in different customs and regulatory territories….The UK government has promised that it will not harden the Irish border in any circumstances.

For Irish exporters to Northern Ireland, it would be like Brexit hasn’t happened.

However, Irish goods going direct to Great Britain, such as on the Dublin-Holyhead route, will be subject to new tariffs and controls.

So won’t Irish exporters just ship their GB exports through Northern Ireland to avoid tariffs?

To some extent this will be possible.

HM Revenue and Customs (HMRC) say there will be a “general anti-avoidance rule” to discourage Irish firms from using Northern Ireland as a tariff-free back door into GB.

However, if Irish businesses have traditionally shipped through Northern Ireland, they can continue to use this route without facing tariffs.

HMRC will not be applying any new checks or controls on products crossing from Northern Ireland ports to GB. Instead, there will be “intelligence led” enforcement.

What about products going from Northern Ireland to the Republic?

The no tariff, no checks plan is a unilateral initiative by the UK – it will not be matched by Ireland.

As an EU member, Ireland will be obliged to impose tariffs on Northern Ireland goods crossing the border and carry out checks to protect the single market.

In effect, this means Northern Ireland goods, particularly in the agrifood sector, will face substantial new trade barriers but Irish goods going in the other direction will not..  The government has acknowledged this will impact on the competitiveness of Northern Ireland businesses.

The Ulster Farmers’ Union said that in order to protect the food industry in Northern Ireland the plan should be changed.

The union’s president, Ivor Ferguson, said the current plan would mean a “catastrophic” outcome for farming and food production in Northern Ireland.

“Steep export tariffs, additional checks and regulations, combined with a proposed zero tariff on agricultural goods from Ireland to NI, will result in significant disruption and pose a logistical nightmare for farm businesses.”

Does the plan comply with World Trade Organisation rules?

The most important WTO principle is that members do not discriminate. So, if zero tariffs are applied to one member, they should be applied to all other members.

.

South of the border…Ireland will try to ensure checks in a no-deal Brexit will be done away from the border, Tánaiste Simon Coveney has said..

Ireland would have to work to protect its place within the EU single market.Doing this without the backstop will lead to “unpalatable decisions…..These are difficult choices. We do recognise the reality that Ireland will have a responsibility to protect its own place in the EU single market and that will involve some checks. But I can assure you that we will try to do that in a way that limits the risk, and we will try and do it, obviously, away from the border.”

Ireland’s latest contingency plan, published in July, said no deal would mean cross-border trade could not be as frictionless as it is now.

The costs of a No Deal are even higher for the Republic than previously thought and have shaken the cabinet  as Pat Leahy reports in the Irish Times

Cabinet members were told that 10,000 jobs in the tourism and hospitality industry were likely to be lost in the first three months after Brexit.. The implications for parts of the agri-food industry also shocked some of those present while Mr Coveney told the meeting that there would be “carnage” in the fishing industry after a no-deal, according to one person present.

Ministers were also told it was inevitable there would be some checks on goods imported across the Border but that those checks would not take place at the Border. When pressed by some Ministers for more details about the nature of the checks, Mr Coveney declined to elaborate – though there was some mention of mobile checks – but it is understood that discussions are taking place in Government Buildings about issuing more detail to the public, perhaps as early as next week.

Indo columnist Dan O’Brien is a leading critic of the Irish government’s rigidty in public over  the backstop which eliminates  border checks but would require them if the backstop contingency was abandoned without a viable alternative. Ireland is squeezed between  protecting the all-island economy and agricultural  trade with Britain and protecting the wider EU single market. With the British currently vowing to keep the border open on their side, the immediate pressure falls on the Irish in ways they have yet to face up to fully.

Yesterday, the Tánaiste and Foreign Affairs Minister Simon Coveney spoke of the risk of Ireland being “dragged out of the EU’s single market” in the event of no deal.

He said that because EU countries’ commitments to policing borders with non-EU countries could not be clearer.

The treaties that form the EU’s de facto constitution state “products coming from a third country shall be considered to be in free circulation in a Member State if the import formalities have been complied with and any customs duties or charges having equivalent effect which are payable have been levied in that Member State”.

Coveney yesterday spoke of having to convince other members that Ireland is meeting its treaty-enshrined obligations.

Yet more than three years after the British vote to leave the EU, the Government’s position is that it is still talking with the European Commission on how those treaty-enshrined commitments to police the Border will be met.

All other external frontiers of the EU have traditional border checks, not least so that the “duties and charges” mentioned in the treaty are paid.

Instead of de-dramatising these checks, something the Government always had the power to do, it sought something that was never in its power to deliver – absolutely no change to how the Border functions (in the form of the backstop).

If that gambit fails, the Government will have the choice between policing the Republic’s side of the Border to the satisfaction of the guardian of the treaties – the European Commission – and other member countries or face those countries treating Ireland as a non-member of the single market sooner or later.

  

 

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The true costs of No Deal – the most complete independent assessment yet

Britain in a changing Europe is as near as we’ve got to an objective think on the subject of Brexit. Today as the Commons votes  to forestall a No Deal outcome, they publish their independent assessment on what No Deal actually means for the UK (not the Republic).  

 

This is the Executive summary

No deal will mean a prolonged period of uncertainty. Not only do we not know with any certainty when and how no deal impacts will reveal themselves, but the longer-term UK-EU relationship will still need to be negotiated and agreed.

 

  • Half of UK goods exports will face disruption. The share of the UK’s goods exports that go to the EU would face border checks where none currently exist, with new tariffs applying to a substantial proportion, especially agricultural exports and cars. Advance planning, and reductions in trade volumes, may reduce immediate disruption at key ports, but some disruption to trade is inevitable. Some preferential trading arrangements with a number of countries, including Canada, Turkey and Japan, would also no longer apply

 

. • Northern Ireland would be particularly badly hit. The speedy reintroduction of border controls for goods moving to Ireland would mean a decrease in exports, the curtailment of supply chains in key industries, and an increase in black market activity. Unemployment would rise. There would be a very real possibility of a return to direct rule from London, undermining the Good Friday Agreement. (a value judgment there).

 

  • No deal would likely reduce the safety of UK citizens. In a world where data is key to solving crime, there will be a significant impact on policing and security. The UK will lose access to EU databases and other forms of cooperation including the European Arrest Warrant, the Schengen Information System and Europol. No deal would lead to the immediate suspension of EU assistance to operations, including ongoing operations.

 

  • The UK’s international reputation may suffer. The UK may not be legally liable to pay the remainder of the £39 billion Brexit bill (although this is contested). But should it fail to do so the EU may withdraw some of the unilateral mitigations that it has put in place, let alone negotiate a new trade deal.

 

  • Any deal with the EU after no deal would be much more difficult. Striking a deal outside the Article 50 framework would be far harder, take far longer and might lead the EU to ask for more concessions as national parliaments in member states get involved.

 

Impacts on 1 November:

  • The impact on trade would be immediate. Sterling would almost certainly fall further. However, by 1 November the impact of no deal may already have been ‘priced in’ to the value of the pound. The financial system overall will remain stable.

• Traders from Northern Ireland crossing the Irish border would face an increased burden. They would have to make customs declarations, pay tariffs, ensure proper certification for goods, make sure notification is given in a timely way and be registered as economic operators.

• There would be some disruption to supply chains. This would have knock-on effects on production in sectors such as the car industry and others that are dependent on just-in-time production processes.

• Residency rights will mostly remain unchanged. EU citizens currently resident in the UK, and UK citizens resident in the EU, will not lose residence rights and will mostly see no immediate changes.

• However, the position of new arrivals would be much less clear. There would likely be a sharp drop in migration flows. The UK would face significant administrative complications in distinguishing between EU citizens who arrived before and after Brexit. Recent government statements have been confusing and potentially damaging

• If disruption were prolonged, it is likely there would be shortages of some foods within a fortnight. November and December is the worst time of year for storage in the food and drink industry. • Given current trends, the UK economy could fall into recession, although its depth and severity would be uncertain. The overall economic impact in the short to medium term would depend on a number of factors: the extent of the direct disruption to trade, the impact on consumer and business confidence, and the effectiveness of any government and Bank of England policy response.

Long term implications:

 

  • No deal would not bring the Brexit process to an end. It is highly unlikely that debate would cease or that it would mark an end state for the UK’s relationship with the EU.

 

  • The longer-term impacts would depend on the terms of the future relationship. These will depend on how quickly and on what terms both sides return to the negotiating table. It is likely that future negotiations would be acrimonious and that the UK’s negotiating position could be significantly weaker.

 

  • ‘WTO terms’ would mean the UK economy growing more slowly. If the future relationship with the EU was on WTO terms, the UK economy would continue to grow but at a significantly slower pace than if the UK had remained in the EU. Per capita income could be 4% to 9% lower in ten years than it would otherwise have been.

 

  • It would take years to resolve long-term arrangements for key economic rights of UK citizens abroad. This applies for issues such as healthcare and social security requirements. • A bespoke future security arrangement would take a substantial amount of time to negotiate. The Europol-Norway agreement took seven years to negotiate.

Northern Ireland in full

When it comes to Northern Ireland, the UK government’s long-term economic analysis estimated a fall in gross value added (GVA), relative to remaining in the EU, of 9.1% of a no deal exit for the province. According to a paper released on 10 July by Northern Ireland’s Department for the Economy, some 51% of NI goods firms and 46% of NI services firms involved in external trade have low profit margins and/or low sales growth, putting them ‘at risk’ in a no deal Brexit. These businesses have a limited capacity to absorb market access shocks. In light of this, the Department for the Economy has estimated that at least 40,000 jobs are at risk in Northern Ireland as a consequence of no deal. This equates to one in 20 jobs in the region, particularly damaging in a context where private sector employment is already 10 percentage points lower than the UK average.

And of course whatever happens on or around the Irish border has extraordinary symbolic and political significance in Northern Ireland. For republicans, it would be a material and stark demonstration of the indifference with which the British government view Irish concerns. They can be confident of a rise in support and sympathy for their analysis in the event of a no deal. Although some will treat the negative effects of no deal with political expediency, the fact is that those negative effects will not be confined to just one sector or community in Northern Ireland. The consequences will be measurable, deep and difficult to recover from. Placed in a context of political tension and a crisis in British-Irish relations, this will be extraordinarily difficult to manage.

Conclusion

This report has attempted to cut through the chatter. Drawing on the work of a number of academic experts in their respective fields, we try to elucidate what we do – and do not – know about the potential nature and impact of a no deal Brexit.

But in far more important ways, we stress that we do know what no deal ultimately means. Whether it be on day one or day 10, or day 50, it means that the UK will no longer be able to trade as it does now with the European Union. That as a ‘third country,’ the UK will see checks and tariffs applies to its products on the EU border. That it will lose access to data and anti-policing that have been crucial in the fight against crime and terrorism. And the economic consequences will be negative not only on the country as a whole but also on specific sectors.

 

At an individual level, we also draw attention to the problems it would cause both to EU citizens in the UK and UK citizens in other member states. In the medium term, much will hinge on whether, and when, the two sides return to the negotiating table. Yet even should they do so, the fact that negotiations can no longer take place under Article 50 means they will be far harder, longer, and potentially more politicised (on the EU side) than during the period since March 2017.

Looking further forward, we identify real problems ahead for the car industry, for aerospace firms, for the health sector and financial services.

And we emphasise the enormous problems that a no deal outcome will cause for Northern Ireland, not simply in terms of the economic damage it will inflict, but also in the political, social and security challenges it will give rise to.

And it is worth bearing in mind that the politics of no deal more generally have not received the attention it should. And yet no deal will shape what happens thereafter as much, if not more, than any economic implications.

 

Clearly, the economics will be important. But the political narrative that dominates the immediate post-no deal period will be crucial (and will in turn hinge on how no deal comes about). How politics in the UK and the EU develop, and the nature of relations between the UK and EU are exceedingly hard to predict, which is why we have not addressed them directly in this report. It is worth emphasising, though, that they will shape the nature of the economic relationship, and hence the impact of a no deal Brexit.

As far as we can tell, however, and given the difficulties that will be confronted if and when the two sides return to the negotiating table after Brexit, the impact of a no deal Brexit will be significant, damaging and long-lasting, albeit not as immediate and visible as some earlier reports have suggested. Perhaps most importantly, there is no sense in which no deal will give governments, businesses or households ‘certainty’, either in the UK or in the EU. No deal will not be the end of Brexit as the central political issue in the UK, or even the beginning of the end. When the dust clears, however, it may be – in the words of Winston Churchill – the end of the beginning.

 

 

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UK economy ‘in danger of entering recession’ as service sector slumps

The British economy could be about to enter its first recession since the financial crisis, as economists warn that business confidence has all but disappeared in the face of a disorderly Brexit.

A closely-watched measure of how confident firms in the UK’s services sector are slowed to a crawl last month, while business expectations were at their lowest for more than three years.

The IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) gave a reading of 50.6, down from 51.4 in July. A reading above 50 indicates growth; below indicates contraction.

Combined with gloomy readings for the manufacturing and construction industries, which were published earlier this week, IHS Markit says the overall economy is on track to shrink again in the third quarter of 2019 – a result that would officially indicate a recession.

Stockpiling hangover

Though the services sector gave a positive reading, growth has slowed significantly (Photo: Markit)

Although not an official measure of the UK’s Gross Domestic Product (GDP), the IHS Markit/CIPS surveys are a robust indicator of how confident businesses are about their current economic prospects.

The unexpectedly low reading is likely to add questions over Britain’s ability to bounce back from economic contraction last quarter, when a hangover from the stockpiling boom before the original Brexit deadline in March hit output.

A Reuters poll of economists had predicted a reading of 51.0 for this month’s services PMI.

Earlier this month, the Office for National Statistics (ONS) reported that GDP fell by 0.2 per cent in the three months to the end of June, the joint largest contraction since 2009 when the global economy was gripped by the financial crisis.

The slowdown left the annual growth rate at 1.2 per cent, and is considerably worse than the Bank of England’s forecast in its quarterly inflation report.

If the ONS reports that the economy registered a consecutive drop in GDP during the three months from July to September, then the UK will be officially in recession.

‘Malaise could intensify’

It comes as all three of this month’s industrial PMIs indicated a degree of uncertainty and lack of growth.

On Monday, it was reported that the UK’s manufacturing output had slumped to a seven-year low as demand took a hammering due to widespread uncertainty.

The sector shrank at the fastest rate since 2012 in August, the fourth consecutive month of contraction, with a PMI reading of 47.4 for July.

A day later, the PMI for construction firms revealed that builders had suffered the sharpest drop in new orders since the depths of the financial crisis in July.

Combining all three PMIs indicates that the UK economy is likely to have contracted in the third quarter of 2019 (Photo: Markit)

“After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession,” IHS Markit chief business economist Chris Williamson said.

“While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn.”

The survey’s measure of optimism in the services sector fell to its lowest level since July 2016, while growth in new orders also slowed sharply.

The post UK economy ‘in danger of entering recession’ as service sector slumps appeared first on inews.co.uk.

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Pound to euro exchange rate: Sterling slides as Boris Johnson reveals plan to suspend Parliament ahead of Brexit

The pound fell dramatically against the US dollar and euro following reports that Prime Minister Boris Johnson will ask the Queen to suspend parliament shortly after MPs return in September.

A pound was worth $1.22805 at 8.45am before the expected announcement was made public, falling to $1.21720 an hour later.

Against the euro, a pound was worth €1.10644 at 8.45am, falling to €1.09760 at 9.45am.

Johnson said on Wednesday he would schedule a Queen’s Speech for 14 October in order to launch new legislation. He denied he was seeking to prevent parliament from obstructing his Brexit plans.

The move limits the amount of parliamentary time available to lawmakers who want to prevent him taking the country out of the EU without an exit deal.

MPs urged to ‘get their acts together’

The likelihood of leaving the EU without a deal is ever-increasing as the 31 October deadline approaches, leading financial strategists to call on MPs to “get their acts together.”

“For the pound to recover the fall this morning, anti-no deal MPs will have to get their acts together in the first weeks of September,” Jordan Rochester, a strategist at Nomura said, raising the odds of a no deal Brexit to 44 per cent versus earlier 40 per cent estimates.

An activist waves a combination of the Union and the EU flags to the summit
An activist waves a combination of the Union and the EU flags to the summit (Photo: AP Photo)

The latest move from Johnson comes a day after lawmakers who are opposed to a no-deal Brexit met to discuss ways they could use parliamentary procedure to force Johnson to seek a delay to Brexit.

Sterling had rallied in recent days on hopes that Britain’s opposition parties can stop a no-deal Brexit.

On Tuesday, it hit a one-month high against the dollar and the euro.

‘Inflict further unnecessary economic damage’

Mr Johnson is inflicting unnecessary economic damage on an already vulnerable UK economy, warned Nigel Green, chief executive and founder of deVere Group, who branded Mr Johnson a “tin-pot dictator.”

Mr Green said: “It could be argued that Boris Johnson’s decision to ask the Queen to suspend parliament, and therefore to prevent democratically elected representatives of the people doing their job, is deeply unconstitutional and has the hallmarks of a tin-pot dictator.

He continues: “What we do know for sure though is that this step will inflict further unnecessary economic damage on an already extremely vulnerable UK economy.

In an interview with the BBC, Boris Johnson admitted the chance of a Brexit deal is 'touch and go'
In an interview with the BBC, Boris Johnson admitted the chance of a Brexit deal is ‘touch and go’ (Photo: Andrew Parsons/PA Wire)

“Depressingly, a recession is looming for Britain and Johnson’s highly controversial tactics seriously increase the uncertainty which will further drag on investment and trade.

“In addition, it will further batter the beleaguered pound, which reduces people’s purchasing power. Weaker sterling means imports are more expensive, with rising prices typically being passed on to consumers.”

This is the second time the pound has fallen sharply in the last month, while the UK inflation rate has also risen unexpectedly in anticipation of a no-deal Brexit.

The rate of Consumer Price Index inflation increased to 2.1 per cent year-on-year in July, the Office for National Statistics said, following a 2 per cent consumer price inflation in June, overshooting the Bank of England’s 2 per cent estimate.

Additional reporting by Press Association and Reuters

More on Brexit

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Brexit, Johnson, Merkel, Macron – and 30 days in the wilderness

“We were also over-reliant on Angela Merkel, even after she showed us that she wasn’t as dependable a supporter as we might have wished,” wrote Daniel Korski, in his account of how David Cameron lost the EU referendum.  “She certainly seemed to take much more of a back seat during the final, crucial weeks of negotiations, giving advice, offering support and laying out red lines, but not getting too involved.”

An entire library could be assembled of stories claiming that Merkel would, at one time or another, come to the aid of a British Government during its to-and-fros with the European Union.  The claim is that Germany – as another pro-free trade, pro-American, pro-market economy country – is a natural UK ally.  But when push comes to shove, Merkel has stuck with France and the EU Commission.

Korski reminds his readers that she deserted Cameron over the appointment of Jean-Claude Juncker as the Commission’s President, to which she was originally opposed.   As with Cameron, so with Theresa May: as recently as February, the German Chancellor called for “creative” thinking on…yes, the Northern Ireland backstop.  “We can still use the time to perhaps reach an agreement if everyone shows good will,” she said.

And as with May so, now, with Boris Johnson.  Once again, Merkel has said that there is time to agree a deal – 30 days, to be precise.  “The backstop has always been a fall-back option until this issue is solved,” she said on Wednesday, during a join press conference with the Prime Minister.  “It was said we will probably find a solution in two years. But we could also find one in the next 30 days, why not?”

Some have put that remark alongside Emmanuel Macron’s declaration that “the framework that has been negotiated by Michel Barnier that can be adapted,” and concluded that the EU is preparing to blink at the last moment, climb down on the backstop, and present Johnson with an amended Withdrawal Agreement – which will then at last pass through Parliament, thus bringing this chapter of the Brexit story to a close.

According to one version of events, the Prime Minister himself believes that such an outcome is still possible, while others in his top team don’t.  If so, the balance of the argument strongly suggests that they are right, for four main reasons.  First, the EU collectively takes its ideology seriously, and this demands sticking with the Withdrawal Agreement, or an agreement so like it as to make no difference.

Second, it must show Donald Trump, and the rest of the world, that if it takes a position on a major strategic issue, such as Brexit, it will hold to it.  Third, Germany and France must ultimately be sensitive to the concerns of smaller EU countries, of which one is in the Brexit front line: Ireland.  Fourth, they have reason to wait, along with the rest of the EU, to see if the Commons, when it returns in September, blocks Brexit yet again.

Finally, it is worth remembering that Merkel’s position is not as dominant as it was during the Cameron years; and even then, to quote Korski once again, she was prone to “not getting too involved”.  Seen in this light, Merkel and Macron’s words – which in any event must be considered in the context of everything else they said – look more like more gambits in a blame game than a genuine change of heart.

Johnson wants to signal that he’s up for a deal: that was the point of his visits before this weekend’s G7 summit in Biarritz.  Macron and Merkel do, too: hence their hints of flexibility.  But the sum of the evidence is that “nothing has changed”.  In any event, it is far from certain that even a revised Withdrawal Agreement would get through Parliament.  That would require a Bill, which would of course be amendable, and time is very short.

If the EU had prized mutual gain over protecting its project, it wouldn’t have insisted that the Withdrawal Agreement precede trade talks.  Perhaps there will be a last minute shift after all, if Johnson can demonstrate that Parliament cannot stop the No Deal Brexit that his Government is actively preparing for: the European Council will meet on October 17.  But it appears that all concerned are now bracing for No Deal.

Some in Number Ten are hopeful that, if it happens, the EU will go for mass mini-deals – and so oil the wheels of economic co-operation.  That would be a rational response to the threat of recession in Germany and elsewhere, and the hard border in Ireland that a No Deal Brexit would bring.  But the EU’s clinging to the backstop, despite its commitment to seek alternative arrangements by December next year, suggests that rationality is in short supply.

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Why investment should rebound after Brexit

First, the bad news. UK business investment in non-financial assets, which includes factories and machinery, has stalled since the vote to leave the EU in 2016. Indeed, investment has fallen outright in five of the last six quarters, and is now about 1½% lower than a year ago.

This is still not the ‘collapse’ that some would have us believe. The UK’s overall economic performance over the past year has also still been better than many of its peers. But it does make the UK an outlier in terms of capital spending. The level of business investment in the UK is roughly the same as it was three years ago, compared to typical increases of 10% in other major economies. If growth in investment here had kept pace with that elsewhere, our GDP might now be 1% higher.

Foreign Direct Investment (FDI) has also been softening. This is partly a global trend and there are still plenty of bright spots, such as the tech sector. But the UK has seen a relatively sharp fall in cross-border investment in new physical projects.

For once, there is little doubt about the cause. Numerous surveys show that both local and foreign businesses have been deterred from investing in the UK by the extended Brexit uncertainty. Given that their main concerns are about new barriers to trade, it is no surprise that cross-border investment has been hit particularly hard.

Nonetheless, the current weakness of investment is not a good argument for cancelling Brexit altogether. For a start, it need not have been like this, if the negotiations had been handled better. Investment began to pick up again shortly after the referendum once firms had overcome the initial shock of the result, and as the warnings of an immediate recession were proved wrong. The high point in capital spending did not actually come until the end of 2017.

Since then, unfortunately, the needlessly prolonged and botched process of leaving the EU has led many firms to put spending back on hold. The mixed signals about the preparedness to leave without a deal – summed up in the Yellowhammer leaks – have only compounded this problem.

It would also be wrong to argue that the solution is to delay the departure from the EU even further. This would presumably require some combination of an early general election, another referendum, and a takeover by an interim government, perhaps led by Mr J Corbyn. This would surely prolong and increase the uncertainties over Brexit, and add others.

There are much better reasons to believe that investment will rebound once Brexit finally happens. There is plenty of evidence, such as EY’s UK Attractiveness Survey, that the UK remains the top destination for FDI in Europe, and that many firms have only ‘paused’ projects rather than cancelled them altogether. Similarly, London is still well ahead of other European cities in the Global Financial Centres Index (GFCI).

What’s more, even if the UK does leave on 31stOctober without a deal, many businesses would surely prefer the certainty of some short-term disruption, for which both sides will now be much better prepared, than continued dithering with no idea what happens next. As the Aston Martin CEO, Andy Palmer, succinctly put it, ‘I’d rather leave with No Deal than drag negotiations on’.

Of course, leaving on 31st October without a deal would not end all the uncertainty, especially about the long-term relationship between the UK and the EU. It is possible that, in a few areas, it might simply confirm some of the worries about the short-term impact, and provide certainty of a bad outcome. But even in these areas, businesses would finally know what they have to cope with, especially in terms of any new tariffs and red tape.

The investments that are currently only on hold will then gradually be restarted, just as in 2016 when the economy initially stalled, then accelerated again. This time the UK would actually be leaving the EU. But this also means that businesses will have even harder evidence that the nightmare scenarios – including those apocalyptic Yellowhammer headlines – are more ‘Project Fear’.

Leaving sooner rather than later would also allow the new administration under Boris Johnson to crack on with a broader package of measures to maintain – and enhance – the attractiveness of the UK as a place to do business. This should include additional investment in infrastructure, and tax cuts. And even if sterling fails to recover, the benefits of a more competitive currency will gradually outweigh the increase in the cost of imports.

Finally, there is already evidence that all this is more than just wishful thinking. For example, the July services PMI reported that ‘a number of survey respondents commented on improved sales to clients in external markets, helped by the weak sterling exchange rate against the euro and US dollar. Moreover, the latest survey indicated the fastest increase in new work from abroad since June 2018.’

And in the July manufacturing PMI, ‘manufacturers maintained a positive outlook in July. Over 46% expect output to be higher in one year’s time, compared to less than 10% forecasting contraction. Optimism was linked to new product launches, an expected rebound in export sales, strong order pipelines, reduced uncertainty following Brexit and improved infrastructure (including 5G networks)’.

In summary, Brexit uncertainty may mean that investment is down, but it is not out. Provided the UK now leaves as planned on 31st October, businesses who have been fearing the worst should soon start spending again.

The post Why investment should rebound after Brexit appeared first on BrexitCentral.

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Cutting Air Passenger Duty can give us the flying start to our post Brexit future

If there is one tax cut that would show in totemic fashion that post Brexit Britain is truly ‘Open for Business’, it would be to cut Air Passenger Duty (APD). Since its introduction in 1994 by then Chancellor Ken Clarke, APD has increased by 680% for long haul flights and 160% for short haul at the same time that flight costs overall have fallen by 30% as a result of increased competition
amongst airlines. This has left the UK with the highest aviation taxes in Europe and the developed world, more than double Germany, the next highest in Europe.
 
We are competing in a global market for businesses and investors.  As Brexit approaches the new Chancellor must look with urgency at the impact that APD has on creating a truly global Britain. Put simply, APD is not working. It places an unnecessary cost on passengers and prevents a large number of routes from being economically viable, particularly in our regional economies. 
 
Aviation is crucial to our Brexit future beyond the EU. It is perverse that we are taxing planes and routes ‘out of the sky’ that we need to connect us to future trade opportunities.  Research conducted for Airlines UK last year showed that APD prevented a significant number of routes from being financially viable. APD is causing the UK to miss out on new routes like Bristol to Dubai;
Edinburgh to Delhi; and Birmingham to Tel Aviv. 
 
When my colleagues and I press ministers on this, they will often respond that passenger numbers have increased over the last few years so ‘what’s the problem’. Whilst this is true, it masks the real problem. In trade, ‘connectivity is king’. We lag behind our European neighbours in connectivity terms, with Germany having considerably more direct connectivity to China, Japan, South Korea and Brazil than the UK. This connectivity problem is also exacerbated by our regional airports losing routes, with Edinburgh Airport losing its valuable routes to the USA when Norwegian Airlines pulled the routes citing sky high APD as a key factor.
 
Over the last year, I have met with, and had representations from, airlines from across the world. The clear message from them is that APD is holding back our ability to connect our airports across the UK to the nations that we will need to be connected to for our global trading future.  One international airline made clear to me that they want to add more connections into the UK but are
prevented from doing so by the additional cost of APD to their cost base.
 
The Government’s approach to Air Passenger Duty is motivated by one factor – cash.  Air Passenger Duty brings in over £3 billion each year to the Treasury.  But this approach is simplistic and self-defeating, with research showing that more tax revenue would be raised from other taxes than would be lost from its abolition. It is estimated that there would be a net £570 million in extra tax
receipts in the first fiscal year following abolition, and positive benefits through to 2022 that could add up to as much as £2 billion in additional tax receipts.
 
Aviation is a key driver of economic growth. Take for example the Emirates route from Newcastle to Dubai, which has helped grow trade between North East England and Australasia from £150 million in 2007 to over £360 million for 2015.  Our post Brexit future needs more of these routes and APD is acting as block on airlines adding the routes that we desperately need.
 
APD is an out dated, exorbitant and perverse tax that is preventing us from having the connectivity that we need in a truly global Britain.  The Chancellor has the opportunity to end this and give us the flying start to our post Brexit future by cutting APD by at least 50 per cent, I urge him to do so.

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Andy Street: Making connections to change our region

Andy Street is Mayor of the West Midlands, and is a former Managing Director of John Lewis.

When the Prime Minister gave his first speech at the Manchester Science and Industry Museum on July 27, he spoke of the “basic ingredients of success for the UK”.

He spoke about culture, liveability, responsibility in power and accountability – but the subject that resonated most with the experiences of the West Midlands was his belief in the power of connections.

He said: “Inspiration and innovation, cross fertilisation between people, literally and figuratively, cannot take place unless people can bump into each other, compete, collaborate, invent and innovate.”

The West Midlands provides a case study for the UK in how connectivity can transform an area by linking its communities, its geography, its businesses and its people. In the UK’s most diverse region, this commitment to connection is a key part of the new Urban Conservatism we are building here, which is winning support.

In a region spread across the seven boroughs of Birmingham, Coventry, Dudley, Sandwell, Solihull, Walsall and Wolverhampton, connectedness has been vital in building a sense of unity. Most obviously, huge investment in our transport network is allowing our communities to physically meet.

But as the Prime Minister said, connectedness isn’t just about tramlines and buses, it’s about encouraging the sharing of ideas to drive growth – and it’s as old as the hills.

Successful city states – going back to the Italian Renaissance and beyond – flourish by bringing people together to drive social and economic progress through greater understanding and innovation. The lesson of history is that places that unite different cultures to distil their ideas and harness their ambition are successful, be it 18th century London or 20th century New York.

Here, that ambition means connecting an increasing number of economic hotspots. From the cluster around the NEC known as ‘UK Central’ to the massive Phoenix 10 brownfield reclamation scheme in the Black Country, the resurgent economy in the West Midlands is creating jobs that require connectivity. Investment in public transport is building an arterial network taking people – and their ideas– into these centres of opportunity.

But the real lesson of the West Midlands story is how we are learning to connect people, not places. The Mayor’s Community Weekend, for example, brought tens of thousands of people together over 165 events through a partnership between the West Midlands Combined Authority and the National Lottery Community Fund. A hundred workplaces joined in with the Mayor’s Giving Day, encouraging charity in all forms. My Faith Action Plan brings together different faiths. We are even connecting the generations through my Cricket Cup at Edgbaston on September 8, which will see grandparents and grandchildren take the field together.

In such a diverse place, these soft social initiatives solidify to bind the connections we make, simply by getting involved. The alternative to connectedness is isolation, which breeds intolerance. It’s critical to stand against intolerance of any kind, whether it’s racial, religious or the kind of schools protest against equality teaching we have seen in Birmingham.

We are also making great strides in closing divisions in our communities to improve social mobility. In 2007, 20% of our young people left school with no qualifications, a figure that has been brought down to 11% through retraining in areas like digital and construction, and growth in modern apprenticeships.

That’s being helped by a unique feature in the West Midlands – the Apprenticeship Levy Transfer Scheme, which allows us to spend the unused apprenticeship levy paid by big firms more sensibly. Closing skills gaps like this is another way that we promote connectedness across and within our communities.

Connectivity in a more literal sense can be achieved through technology. I was encouraged by the PM’s commitment in his candidacy to speed up the roll-out of Fibre Broadband across the country. This kind of quick expansion is vital if we are to ensure that no areas are left disconnected from digital opportunities through under-investment.

However, with 5G coming first to our region, we aren’t prepared to wait for connections to spark innovation. Just a few weeks ago a ground-breaking trial here hinted at what can be achieved with 5G, when we linked local ambulances to doctors in A&E in real-time. The same technological connectivity is driving our automotive sector in its ambition to become the UK capital of driverless vehicles.

Sitting as we do at the heart of England, the West Midlands is positioned to benefit from the Prime Minister’s ambition to better connect the nation and rebalance the economy. As the PM said, “We need to literally and spiritually unite Britain, and that means boosting growth and bringing our regions together.”

To me, there is no greater instrument for this ambition than HS2 – the single piece of investment that will unlock millions of pounds of transport and housing infrastructure our region desperately needs.

Sites like the new tram line from East Birmingham to Solihull are indelibly linked to HS2. We have a target to ensure local people are never more than 45 minutes from a HS2 station, and schemes such as reopening closed railway lines and the impressive Sutton Coldfield Gateway have been meticulously planned around this major investment by the Government to sew our country together. Without it we are definitely poorer.

Connections need to be international too. As Michael Heseltine pointed out in this report ‘Empowering English Cities’, which was commissioned by the West Midlands Combined Authority, the underperformance of our major cities on the world stage is a critical problem that must be solved if we are to balance our economy.

However, this does not mean adopting an adversarial position to competing city regions like Rotterdam, Lyon, Frankfurt, Milan, Chicago and Sapporo, it means ensuring that we have the global connections to take in the best ideas and turn them to our own advantage.

This crucible of cultures concept is the very purpose of the civic university, and you will not find a better example than Chamberlain’s University of Birmingham – which is why our universities must, post-Brexit, continue to welcome International students. They literally connect us to the world and the ideas developing beyond our shores.

Travel opportunities are also important in nurturing our global position. Birmingham Airport has its sights set beyond the Brexit horizon with continued growth in passenger numbers. Work is due to start on its T18 project – named because it will create a terminal that can handle 18 million passengers a year, a rise of nearly 40% on the previous record, achieved in 2017.

HS2 makes this project even more important, as the airport will only be 38 minutes away from Euston, much quicker to get to from North London than both Heathrow and Gatwick.

Finally, I consider my own role as Mayor of the West Midlands to be one of connectivity. Overseeing a region where Labour control the majority of local authorities has meant that my job has often been about providing the glue that holds us all together, encouraging teamwork. In the UK’s youngest, most diverse area, this Urban Conservative approach is paying dividends politically as we attempt to make more of our constituent authorities Conservative.

This kind of inclusive Conservative leadership is where the party must be – and we are looking to Prime Minister Johnson, as the former Mayor of Britain’s mega city, to understand this and follow it through in Government. The Prime Minister will know what a Conservative Mayor in an urban region can achieve through physically connecting people – whether it’s through social connections, transport connections or digital connections – and I hope he will be considering how we can replicate this across the country.

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Patrick Spencer: What the new Government should do to ensure migrants are better skilled – and supported

Patrick Spencer is Head of Work and Welfare at the Centre for Social Justice.

The debate around immigration has become fraught to the point of complete intransigence in recent years. Events as close to home as the Grenfell Tower tragedy and as far afield as the Syrian civil war have brought the subject to the fore again. Inflammatory rhetoric here as well as in other countries hasn’t helped. As we leave the European Union, cooler heads must prevail.

The Centre for Social Justice (CSJ) is today releasing a report that brings a level-headedness to the debate that is sorely needed. Importantly, it places the interests of immigrants squarely at the centre of its proposals. Immigration policy should not just be about who is allowed to come and work in Britain, but also how we support those people who do, so that they can avoid the trappings of low pay, unsafe working conditions, crime, social marginalisation and poverty.

The reality is that uncontrolled immigration growth over the last 15 to 20 years has worked – to a point. Our services, manufacturing and agricultural industries have benefited from skilled and inexpensive labour from EU new member States.

However, the economic costs of low-skilled immigration have been both wage stagnation at the bottom end of the income spectrum – analysis at the Centre for Research and Analysis of Migration found that “an inflow of immigrants of the size of 1 per cent of the native population would lead to a 0∙6 per cent decrease at the 5th wage percentile and a 0∙5 per cent decrease at the 10th wage percentile” – and low levels of productivity boosting capital investment. High-skilled immigration has had the opposite effect though, increasing wages, productivity, innovation and capital investment.

In the long term, it is also likely that the British economy will demand less low-skilled labour. Automation, technology and changing firm dynamics are likely to mean a greater focus on hiring higher-skilled workers, and more fluid jobs in which individuals are expected to take on multiple roles and work across multiple teams. The CSJ argues therefore that is irresponsible to continue to operate an immigration system that is deaf to the demands of our changing economy, and risks leaving migrant labourers unemployed and at risk of falling in to poverty.

It is for this reason that the CSJ’s first policy recommendation for this Conservative Government post-Brexit is folding all EU immigration in to the existing Tier 2 skilled immigration system, and tightening up the eligibility for Tier 2 applicants so that they are genuinely skilled and can command a wage well above the UK median. Key to this recommendation is carving out occupations that are deemed of strategic interest to the UK economy, for instance nurses and doctors who come to work in our NHS, but do not earn above average salaries.

The Government’s responsibility to immigrants should not stop there. For those that do come to Britain legally, whether under refugee status or another route, we must make sure support is there to reduce the risk that they and their children become socially marginalised, end up in low-paid work or unemployed, and get stuck in the criminal justice system. It is naïve to think the immigration policy debate ends on day two.

In that vein, the CSJ also recommend more integrated support for refugees when they come to Britain, including better financial support, longer term housing options and help with English speaking skills. The report also calls for a beefing up of the Director of Labour Market Enforcement financial powers and reach. There are potentially thousands of foreign individuals kept in forced servitude in Britain today, and many more working in unsafe conditions for illegally low pay.

Finally, it is high time the Government addresses the huge disparities in economic outcomes among minority and indigenous ethnic groups. Generations of immigrants from some groups still perform poorly in the education system, labour market and criminal justice system.  The Joseph Rowntree Foundation found that poverty rates among Black and Minority Ethnic (BME) Groups are twice as high as for White British groups. Dame Louise Casey discovered that individuals of South East Asian and Caribbean descent were three times and twice as likely to live in deprived parts of the UK, when compared to White British groups. Just one third of Bangladeshi women living in Britain are in employment compared to three quarters of White British women. One in five Black African and Black Caribbean men and almost one in four Mixed Race men are economically inactive. Unless the Government addresses the problem with real gusto, it will persist.

This report calls for calmer and more long-term thinking on immigration policy that prioritises high-skilled immigration and increases support for parts of the country that have struggled due to uncontrolled low-skilled immigration. Public opinion reflects this – polling by Hanbury Strategy earlier this year found that 51 per cent of the UK public recognise that not all parts of the UK have benefited from immigration, while YouGov polling in 2018 found that ‘treating EU citizens who want to come and live in the UK the same as people from elsewhere in the world’ was supported by 65 per cent of respondents and scrapping the limit of high skilled immigrants was supported by 46 per cent of respondents.

This is a great opportunity for the new Government to fix this long-standing issue of contention in British politics for the long term.

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How Johnson could play the politics of an economic contraction

Yesterday, another of the Brexit Wars’ endless fronts opened up as both sides tried to put their spin on the news that the British economy shrank in the last quarter.

On the one side, Remainers keen to jump on anything which bolsters their view that our departure from the European Union will bring about severe economic disruption. Arrayed against them are Brexiteers who argue that this is either unrelated to Brexit or at least in part due to the previous administration’s botched efforts to get Britain out.

Who is right? On one level, it scarcely matters. Both sides are sufficiently entrenched by this point that it is difficult to imagine the voter who is politically-engaged enough to register a 0.2 per cent contraction and yet sufficiently agnostic on Brexit for it to swing them one way or the other.

For what it’s worth, experts such as Ed Conway of Sky News and Rupert Harrison, until recently chair of the UK Council of Economic Advisers, seem sceptical that yesterday’s figures were the lip of a precipice. Instead, they both seem to expect the economy to grow again in the third quarter (Q3), with the Q2 dip a result of the unwinding of companies’ No Deal planning, which inflated the Q1 figures.

Moreover, the publishing schedule for this economic data means we won’t even find out if the UK has entered a so-called “technical recession”, i.e. two consecutive quarters of contraction, until after October 31.

Of course, this doesn’t necessarily mean that the Government is out of the woods – Conway says that the numbers will be a “challenge” for Sajid Javid to explain, and the Prime Minister won’t want press speculation about economic bad news undercutting his attempt to rejuvenate the Government, and indeed the country, with his new, optimistic style. The UK is also exposed if trading partners on the Continent run into difficulty.

However, there may nonetheless be a few political opportunities in the story.

First, Britain continues to outperform its principle EU rivals, such as France and Germany, on a range of measures, and raising this story with ministers will offer them more opportunities to hammer home this message.

Second, speculation about a recession might lend Boris Johnson more political cover for his clearly-signalled intention to turn on the spending taps. What might once have looked like vulgar pre-election bribes can now be recast, or at least spun, as prudent investments to bolster the economy at a crucial moment. Handy, if you anticipate an imminent election.

Finally, it can bolster the Prime Minister’s push for a decisive resolution on Brexit. Some commentators have noted that certainty around the exit date, even including the possibility of a no-deal exit, is preferable to many businesses than running their stockpiles up and down whilst the Government prevaricates. There is now something to point to which illustrates the economic risks of kicking the can.

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How to make the British economy grow post-Brexit

It is still, of course, far from clear what the outcome of the Brexit negotiations will be. Whatever happens, however, the UK is going to be faced with some very crucial economic problems, regardless of the form that Brexit finally takes.

For a start, the proportion of our national income which we invest in our future every year is far lower than it is almost anywhere else in the world. Furthermore, what we do spend money on tends not to be the most productive forms of investment – i.e. those in industry which produce big increases in output per hour. This is why productivity increases have stalled and living standards are static.

We have deindustrialised on a scale unmatched by any advanced economy. Even as late as 1970, almost a third of our GDP came from manufacturing. Now it is less than 10% and still falling. As a result, we have lost millions of good jobs; there is a huge disparity between the prosperity of London and our former industrial heartlands in Wales, the Midlands and the North of England; and we have missed out on the productivity increases which are much easier to achieve in manufacturing than they are in services.

In addition, because we now make so little, we do not have enough to sell to the rest of the world to pay for our imports. As a result, we have a balance of payments deficit every year averaging close to £100 billion. This may allow us to have a living standard 4% or 5% higher than we are actually earning, but only by borrowing money from abroad and selling off masses of UK assets to foreign owners. As a consequence, we have lost control of swathes of our economy while at the same time, both as a nation – through our government – and as individuals, we are getting deeper and deeper into debt.

These imbalances all matter hugely. The slow growth which is the result means that most of the population are no better off now than they were ten years ago, with little prospect of any improvement as far ahead as we can see. Our political class is drifting into more and more disrepute. We are falling further and further behind other countries. Our politics are getting more and more fractured as the country becomes increasingly deeply divided – both between the regions, the generations and socio-economic groups.

What can we do about all these problems? My new book, Economic Growth post Brexit: How the UK should take on the World, published by Bite-Sized Books and available on Amazon and elsewhere, tackles these issues head-on. Here is what we need to do. We need to change our primary economic goal away from chasing inflation down to 2% and to set ourselves a growth target instead. Inflation is largely tamed and the dire consequences of slow growth are a much bigger risk now than slightly more rapid price rises.

To get the growth rate up, we need to invest much more in technology, mechanisation and power, which are the main drivers of productivity increases. To do this we need to make it a lot more profitable than it is now to invest in industry in the UK, by making sure that we have a sufficiently competitive exchange rate on a sustained basis as key government and Bank of England policies.

To rebalance our economy, we need to get manufacturing back to being around 15% of our national income – not as high as the 20% it is in countries like Germany, Switzerland and Japan, because we are good enough at services to close some of the gap between them and us; but not all of it, because services on their own are too difficult to sell abroad in sufficient quantity. We will never pay our way in the world, or keep up with other countries, or get our living standards up in any other way than manufacturing more goods and selling them all over the world.

A huge problem about the way that the Brexit negotiations have been handled is that, ever since the 2016 EU referendum, they have distracted us from thinking about almost anything other than our involvement with the EU. If we are going to make a success of Brexit, this is going to have to change. We need to start thinking hard about how we are going to keep up with the rest of the world by getting the UK growth rate up to somewhere near the 3.5% per annum world average. This is a massive challenge but maybe the national rethink which Brexit ought to be producing will make it happen. It very badly needs to do so.

John Mills’ book Economic Growth Post Brexit: How the UK Should Take on the World is published by Bite-Sized Books and is available via Amazon

The post How to make the British economy grow post-Brexit appeared first on BrexitCentral.

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