Monday 30 October 2017

The Price of Freedom

Is there any hope that the message of the EU Referendum is getting through to our political and media Remain Establishment ? Leave voters were not thick, racist or misled - they voted to restore democratic self-government to the UK.

Moreover, since the Referendum, it has become abundantly clear that the EU is set on a course of full political union with control and governance fully centralised in Brussels. As ever, the cry heard from the EU is "more Europe". Laying bare such objectives has resulted in the phenomenon of Re-Leavers - reluctant Remain voters who now acknowledge that there is no "status quo" option and the UK simply cannot go where the EU is headed.

But then the pro-EU Establishment have never been honest about the political aims of the EU and have always tried to argue on economic grounds. Prior to joining the EEC in 1973, we were promised UK industry would sweep the world with a home market of 200m customers, yet by the time of the 1975 Referendum, we were economically diminished and could not possibly stand on our own two feet. Despite the salutary experience of the ERM in the early 1990's, by the turn of the century the pro-EU establishment were campaigning for the Euro, warning 3m jobs would be lost and UK financial services and car industry would be decimated.

So it is unsurprising that the Remain campaign was dominated by "Project Fear" and concerns over the impact of leaving the Single Market. One dire prognostication after another was rolled out, culminating in the Treasury's claim that the mere act of voting to leave the EU would trigger an immediate and painful recession - yet another totally discredited forecast.

The Referendum result suggests that the UK public have become immune to these tactics. When Philip Hammond opined on the EU Referendum that "no one voted to be poorer", he entirely missed the point. Leavers voted to be free, and if that comes with an economic cost, so be it.

But what is the economic cost of Brexit - the price of freedom from the EU ? While familiar commentators repeat their gloom-laden forecasts, there are alternative views. One recent paper by World Bank & UNCTAD economists suggested that in the event of a No Deal scenario, UK exports to the EU would drop by no more than 2% - a negligible impact. Even the IMF have revised their Armageddon level forecasts, suggesting slower growth but no recession in the next few years. To put context into the figures, "No Deal" forecasts on lost GDP tend to range range from 3-5% GDP, which is roughly £60-£100bn - coincidentally the size of EU divorce bill to be paid to secure a new UK-EU trade agreement. According to economic forecasts, deal or no deal, the price of freedom seems to be about the same.

Of course, economies and markets will always adjust to shocks such as Brexit. If trade with the EU becomes more expensive, trade and commercial activity will divert to the domestic economy and markets with the Rest of the World. In fact, the share of UK exports to the EU has already declined  from a high of 55% at the turn of the century to 43% today, less if the Rotterdam effect is taken into account.

Furthermore, a pivot away from an EU-centric economy is a necessity going forwards. The EU's share of the global economy is in decline (having halved from a high of 30%, even less once UK leaves). 90% of global growth will be outside the EU in future decades. The EU continues to suffer from the baleful effects of the euro and an anti-innovation regulatory regime. Leaving the EU is essential for our long-term economic prospects as well as for our freedom.

Economists for Free Trade go further and conclude that leaving what they view as the mercantilist EU / Single Market, designed to favour exports of  German manufacturing and French agriculture, will bring a 6.8% GDP gain amounting to £135bn.

Pro-EU commentators pour cold water on the global free trade opportunity provided by Brexit. Recently, pro-EU Sam Lowe claimed that NAFTA had only added 0.5% GDP, which he describes as "within rounding error". Yet the same commentators say it is an act of economic madness to leave the EU trade bloc. This of course ignores the obvious point that the EU is not simply a trade bloc, but also begs the question, how much value is the Single Market ?

In 2012, to commemorate 20 years of the Single Market, the EU commission published its own estimate that an average of 2% GDP had been added across the member states. To get to this figure, the commission ignored the downturn of 2008-12 and measured from the trough of 1992 to the peak of 2008. This period also coincides with the former Eastern Bloc economies experiencing high growth due to "catch-up" following decades of Communist rule. Furthermore, the UK was already developed and liberalised in 1992 and so would expect to gain less benefit than the average 2% across EU member states. So it is unlikely that the Single Market added 2% to UK GDP.

As well as leaving the Single Market, we will be leaving the EU's Customs Union, resulting in a new customs border with associated customs clearance and Rules of Origin (RoO). Open Europe has estimated this will add 4% to the transactional cost of trade resulting in a 1% impact to GDP.  Customs borders between EU states were removed at the introduction of the Single Market in 1992 (note that this does not apply to EFTA EEA states, who still have a customs border with the EU).  So in fact the optimistic estimate of 2% GDP gain from the Single Market since 1992 will include the removal of internal customs borders within the EU. Given that the 2% figure is likely over-estimated for the UK and Open Europe's estimate of 1% GDP for a customs border, the value of staying in the Single Market via EFTA EEA (which has customs borders) is of minimal value - perhaps 0.5%, the figure which Sam Lowe considers to be "in the rounding error".

The Single Market may not have added much value, but it has certainly curtailed our freedom and sovereignty. Norwegian euro-sceptics complain that the EU increasingly encroaches on their sovereignty via the EEA agreement and want a looser free trade agreement. It seems to me that the Single Market is another example of pro-EU establishment economic propaganda providing cover for political aims. To quote Jacques Delors on the founding of the Single Market: "Europe cannot attain political union ... unless it is in control of its economic destiny. That is why we need an organised economic area."  

But another question arises. If the Single Market has added so little value, how is it that leaving it will be such an economic  catastrophe ? Single Market advocates say that tariffs are not the issue and a simple free trade agreement is little better than No Deal. It's all about "non-tariff barriers". The argument seems to be that having become enmeshed in the EU's regulatory regime (for negligible economic gain), dis-entangling is so difficult it will create a shock and lasting damage to our economy.

Single Market advocate Pete North has recently published a blog post laying out his thinking on this point as a basis for a parliamentary briefing he has been asked to submit, covering Flexcit memes that I am very familiar with. The Norths deserve credit for leading the debate on non-tariff barriers, which is what initially attracted to me to Flexcit. Unfortunately, they refuse to countenance or engage with any alternative views or perspectives and instead double-down on their apocalyptic view of life outside the Single Market. As I explored further and learnt more, I found myself questioning the impartiality and accuracy of the North's claims. So I want to take the opportunity to respond to the blog post and write up my own perspective.

While Pete North has written up his thoughts in one (albeit relatively lengthy) post, he can give the impression of detail while glossing over complex points. So I will probably need a lot of blog posts to respond. I hope to examine the paradoxical claim that the Single Market has added little value but is somehow too expensive to leave. In essence, I want to explore the price of freedom from the EU and its regulatory union / Single Market.



Wednesday 25 October 2017

An Establishment Brexit


Assuming Theresa's May's recent overtures and concessions, combined with further capitulation requested by the EU, eventually results in meaningful discussions on the "framework of the future relationship" - what kind of deal is the UK Government seeking ?

It has been reported that May will not permit a cabinet discussion on this topic until the New Year, such are her fears over cabinet rifts. Meanwhile there continues to be speculation about whether it will be a Norway, CETA or swiss model or some variant of these. But could it be that the model has already been decided upon, and that actually the Government seeks to base its model on another country - namely Ukraine ?

Arch-federalist Andrew Duff has been pushing the idea of Ukraine's association agreement as a model for Brexit for some time. Note some of the phrases he uses:
"At the heart of the association agreement is a deep and comprehensive free trade area (DCFTA) .... requires ... approximation with the EU acquis ... The UK will only have to keep that technical and regulatory equivalence"
"very important provisions for future political cooperation in the field of justice and home affairs as well as foreign, security and defence policies."
Now note language used by May in her Article 50 notification letter:
"deep and special partnership that takes in both economic and security cooperation ....cooperation in the fight against crime and terrorism"
"a bold and ambitious Free Trade Agreement between the United Kingdom and the European Union. This should be of greater scope and ambition than any such agreement before .... both sides have regulatory frameworks and standards that already match."
Both Duff and May talk of a deep free trade agreement and refer to maintaining regulatory equivalence. Ukraine's DCFTA includes an Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) which requires "relevant Ukrainian sectoral and horizontal legislation, institutions and standards have been fully aligned with those of the EU". This is not "mutual recognition" - this is one-way traffic, an export of EU law to Ukraine. Rumours abound of the UK government seeking a Swiss option, which Brexiteers see as a trap. A UK Treasury spokesman is reported to have said "a Swiss-style arrangement would give legal sovereignty but in reality would ensure Britain never really diverges from European regulation". This doesn't sound like taking back control.

The areas of justice and home affairs were under Theresa May's remit in her time at the Home Office. Britain had secured a full opt-out from around 130 Justice and Home affairs measures in the Lisbon treaty of 2009. In 2013, May opted back in to 35 of these measures, including the infamous European Arrest Warrant. It seems likely May will again choose to opt-in to EU Justice and Home affairs measures - even as we leave the EU.

But most worrying are the references to security and defence co-operation. Ukraine's agreement states "The Parties shall intensify their dialogue and cooperation and promote gradual convergence in the area of foreign and security policy, including the Common Security and Defence Policy (CSDP)". VeteransForBritain have tweeted that the UK Government has now signed on to six EU Defence Union measures since November 2016, all of which pave the way for a Single European military capability, including a post-Brexit UK.



















The UK Governments stealthy commitment to EU military union throws light upon a statement made by Theresa May in her Article 50 notification letter:
"We want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats.  And we want the United Kingdom to play its full part in realising that vision for our continent"
This appears to be an unambiguous statement from a UK prime minister promising that UK defence and security capabilities will be seconded to the political and security goals of Europe - and it is obvious that in this context, Europe means the EU. Even as we are supposed to be leaving the EU, May's government is actively delivering UK defence autonomy into the hands of the EU - even though concern over an EU military union was a major factor in the Leave Referendum victory.

The leak of a draft paper prepared by the Foreign Ministry in Berlin seems to confirm the nature of this proposed relationship:
"a broad partnership that includes “at a minimum” the fields of foreign and security policy; fighting terrorism; cooperation on criminal justice; agriculture and fisheries; energy; transport, and especially air transport; research and digital issues."
"the degree of access to the EU’s single market conditional on the extent to which the U.K. is prepared to adhere to regulatory norms. Even where the U.K. agrees to common rules, there can be no “cherry-picking” that gives the U.K. a competitive advantage"
Duff has described an association agreement like Ukraine's as the best the UK can hope for. Duff has also suggested that "the difficult part of an association agreement will be trade policy, especially in services" and "any half-decent new relationship with the EU will come at a price to HM Treasury that might not be much lower than the UK’s existing net contribution to the EU budget". He's hardly selling it to us is he?

Combined with the EU's demands regarding the "divorce bill", citizen rights & ECJ oversight, customs border in the Irish Sea, "safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices"  - this all adds up to very bad deal, as discussed in my previous post on this blog.

So why are we on this trajectory ? It may be tempting to think that this is due to the General Election result which weakened Theresa May. But May's Government has been signing up to the EU Defence Union since November of 2016. The "deep and special partnership" rhetoric pre-dates the disastrous General Election.

I suspect the problem is that a Remain-supporting Prime Minister who does not really believe in Brexit, along with a Remain-dominated Cabinet and Parliament have been charged with delivering Brexit. The vacuum of ideas left by May's vision-less leadership is filled by a group-think civil service geared towards the Brussels status quo - they are more than happy to draw on whatever Brussels proposes. The end result is an "establishment Brexit" - Brexit in name only which leaves us even more enmeshed in "the EU project", with less freedom of manouevre and no influence.

This is of course political ineptitude of the highest order. The Tories got to their highest vote share in a generation on the back of being trusted with Brexit. They will never be forgiven by Leave voters for the betrayal of an "establishment" Brexit. Nor will they pick up support from Remain voters who will ask (rightly) why did we reject membership with some influence if we are to still so tightly bound to the EU ?

The Government and the country are in need of bold leadership to make a success of Brexit. Instead Brexit is entrusted to the Remain establishment who will deliver a dire "establishment Brexit". Change is needed - and quickly.