Thursday, 5 January 2017

We need to talk about "Liberal Leave"

I was inspired to write this blog after reading this tweet: -
I understand Ian's desire and superficially what he says makes sense. Remainers were people who saw the value of immigration and trade. Meanwhile Liberal leavers despite their opinions on the EU were broadly disposed to both of those as well. Logically they should work together to get the best Brexit possible. Well it seems logical enough but there is a catch.... The catch is it probably isn't politically possible.

There are two potential problems with this approach; the viability of Liberal Leave and whether the general population would accept it. Sadly I believe the answer to both of these is largely a "no".

The first point I cover in my blog post. Liberal leave seems to have a strange view of the EEA that frankly doesn't seem to fit with that of any informed Norwegian. Most informed Norwegians see the EEA is essentially the EU via the back door (after Norway decided not to join). For Norway the key merit is being out of the common agricultural policy and customs unions.... which means that they are free to pursue a more protectionist agenda for their farmers.

Clearly "Liberal leave" think this looser arrangement with the EU could be used to pursue more liberal trading policies and forge trading relationships around the world. This might theoretically be possible but it would not be cost free. For example: -
  • Leaving the customs unions would introduce red tape for businesses and probably be a deterrent for new business. 
  • The EEA agreement not covering farm/fishing produce would hurt the export markets for these industries.
Meanwhile any new trading relationships would take years to establish. In short the costs would be immediately apparently whereas the benefits would be long term (if at all).

However the main problem with the "Liberal leave" position isn't its viability alone. Its whether it could work domestically. This seems even more questionable to me. Many twitter users who expose this Liberal leave have a habit of overthinking things. Its easy to show that:
  • 48% of voters voted remain
  • X% of leavers don't prioritise immigration (based on the latest survey)
And therefore conclude that there is not a majority for a hard Brexit.... This is easy but sadly wrong. For starters assuming all remainers are totally comfortable with immigration is as naive as assuming that all leavers are not comfortable.

It also assumes that people voted entirely rationally. Sadly I suspect people voted leave and remain for all sorts of irrational and illogical reasons. These may range from a trusted neighbour, concern about their jobs, to faith in David Cameron, to anger about anti-EU tabloid headlines, to fear of the unknown....

However if you look at the bigger picture, immigration has been a political hot potato since the first wave of Eastern European immigrants arrived and "Leave" were not afraid to play on this. Many people will probably (not unreasonably) assume that this will be a priority issue now "Leave" won. I'm aware that immigration is a benefit, but many people really have lost faith in experts, there is a compelling (but wrong) arguments based on the lump of labour fallacy and many people on lower incomes have seen their incomes squeezed. 

Given this the perception remains that "something should be done about immigration". Now I'm sure those polls that show the majority of people would put economic growth above immigration are right.... but there is a rub. Any deal that seemingly did nothing about immigration that wasn't substantially better for the UK is some other way would not be taking seriously by a skeptical public. 

Indeed I struggle see any PM telling people "no we haven't fixed immigration, our new deal is slightly worse but long term we may be able to do other trade deals". Such a deal would not fix any immediate concerns and would not be well received. Hard Brexit would be economically devastating but would be seen as fixing a political hot potato. Additionally the economic costs from such a hard Brexit would be more intangible (distributed over multiple years in the form of lost investment). Indeed, unless hard Brexit causes an economic catastrophe, most people will overlook the growth that didn't happen. PM May could well make a pretty awful deal with disastrous long term impacts  appear to be a political success. 

The sad thing is that many "liberal leavers" really do believe in free trade. These consequences of a the Brexit vote were not difficult to spot at the time. Indeed Janan Ganesh wrote a fine piece on exactly this

Brexit is looking increasingly like a national tragedy. The vote was a very confused affair with the leave position never clearly defined and much of the public rightly confused about what it would mean. The fact that the "Liberal leave" was even considered a viable position by some quite intelligent people whilst the mainstream leave campaigns were increasingly playing the "immigration" card ... seems to reflect the confused nature of the debate. Indeed the fact that these debates are still continuing on twitter by people who are relatively well informed shows that the issues raised by this referendum still are not settled. 

If people with a interest in politics are confused by all of this.... just think how much more confused becomes when you include people who are not interested in politics but have been drawn into this debate by an ill-advised and divisive referendum. 

Wednesday, 26 October 2016

But leave won...

Despite the vote to "leave" winning the European referendum, there is still not clarity about how the UK should withdraw from the EU. This is in large part the fault of the "leave" campaign. Their approach was to win by any means necessary. Hence they painted a vision where the UK: -
  • Does not contribute to the EU (and spends £350m instead on the NHS)
  • Does not follow EU rules
  • Controls EU migration
This would seem to imply that we need to go into the Brexit negotiations with the EU with these as our primary objectives. However, the most likely outcomes (as most informed observers now recognise) is that this would lead to very poor trading terms with the EU (a Hard Brexit). Indeed the markets are now pricing this in by devaluing sterling and increasing government bonds. Unfortunately adverse economic outcomes was not something that leave raised. Indeed quite the opposite. Leaving the EU was supposed to usher in a new goldern era with: - 
  • More money for the NHS from not sending money to Europe 
  • A good trade deal with the EU because we buy German cars
  • The increased opportunities to trade with the rest of the world
All three of these are looking very dubious
  • Government money is likely to be squeezed by increased borrowing costs (as UK government debt is seen as more risk). reduced tax take (as businesses move overseas) and increased expenditure caused by a devaluing currency. This is likes to result in less money for public services
  • The good trade deal is still unproven but again there is scant little evidence that the EU will be falling over themselves to give the UK a great deal (indeed the fact that they are almost goading us into pressing Article 50 suggest strongly otherwise)
  • The opportunity to trade with the rest of the world seems to have been put on hold. EU rules stop us from negotiating trade deals with other countries. Countries like Japan are playing a game of "wait and see" to find out what our relationship with the EU will be like before the decide whether to pull investments from the UK (which seems rather the opposite of going global). Companies like Nissan are demanding "written assurances" from the UK government. 
All of which seems to prove that the premise for leaving the EU was at best flawed. However instead of taking a hard look at the empirical evidence rationality, two different and highly vocal camps are emerging. Broadly these camps can be defined as the populists and the liberal leavers. 

The Populists
The populists are lead by Theresa May the prime minister. They take the (correct) view that the referendum was probably won on the basis that people want controls on immigration and this is what needs to be negotiated through Brexit agreement with the EU. This approach matches the arguments that managed to win the referendum and therefore most accurately reflects the "will of the people" 

The challenge with this approach is that "leave" did not manage expectations on the economy. Realistically the EU are unlikely to go out of their way to offer the UK great terms. The EU will likely have a strong incentive to contain other populists but using the UK as an example. They may even go as far as to take some costs (associated with lost trade) to ensure the long term stability of the EU project! This means that many people who brought the populist arguments are likely to be disappointed with the outcome (or seek other scapegoats when the panacea that was promised fails to materialise)  

The liberal leavers
The liberal leaver take the view that we can now opt out of the EU and join the EEA as this will be the least economically damaging Brexit (in other words a soft Brexit). We would continue to adhere to much of the EU rules (including freedom of movement and EU regulations  - albeit using a slightly different court system). It will also give us some latitude to negotiate other trade deals outside the EU. 

There are some big problems with this approach. Firstly it would not be cost free as the EEA agreement does not include agriculture and fisheries. This would likely result in a combination of lost income from trade for farmers and more expensive produce in the shops. Equally there would be additional overhead for manufacturers who would be subject to rules of origination. Potentially significant regulatory challenges for financial services. The net effect is that there would be some costs for the UK. 

However probably the biggest problem is that it ignores the promises of the leave campaign. Immigration could not be controlled (which would upset a lot of leave voters who will with some justification believe that this is what they voted for). There will probably need to be continued payments to the EU (based on Norway these are likely to be at a similar level). Equally the EFTA court system used by the EEA would mean that we would keep most EU law. Net effect is that we would not be taking back control in any meaningful sense. Finally there is no guarantee that this approach anyway will be successful (although fewer demands are likely to lead to better trade terms with the EU). 

The Remainers
This leaves the remainers. This group was the losing 48% of the voting population hence some of the 48% feel that wee simply need to go for the least worst leave option.  Hence a significant number have been tempted by the liberal leave option whilst other have accepted the populists won the vote and need to try their hand at governing. 

Both these approaches are wrong morally. Leave won by combining the political latitude of the hard Brexit with the economic consequences of a very soft (almost non existent) Brexit. Hence people voted for a mirage and the reality (in whatever form it takes) will disappoint. The honest approach for remainers is not to jump into a Brexit camp but instead point out the lies that were used to deceive people. 

I understand that politics is more complex than this. Telling people they were wrong is not a constructive way to engage (and sometimes a degree of triangulation is needed to bring them onside). Nevertheless at some level we need to face reality. Brexit is either economic suicide (if we make big demands) or pointless (if we move to the EEA). The only sensible option is to remain!

Sunday, 21 August 2016

No the EEA is not a good option

One of the most common statement post BrExit is that if we are out of the EU we should just join the EEA. Superficially it seems to keep us in the single market with the economic benefits whilst acknowledging the results of the referendum. However this is a panglossian view of the EEA which is a really rather terrible option (if indeed it is an option). Norway has a awful deal with the  EU which is hidden by a significant amount of oil money.

One of the reasons why the EEA deal seems superficially appealing it the appearance of staying in the "single market". However the term "single market" is somewhat abused when most people talk about the EEA. Technically Norway (and other EEA countries) are heavily qualified members of the single market. Specifically there are exceptions for agriculture and food and constraints around manufactured products with components sourced externally. Given this an EEA membership would come with a very heavy price for the UK.

Economic costs for the UK
The most obvious impact would be on food and farming. Being outside the EU would result in the lose CAP subsidies and tariffs when exporting to the EU. Norway has responded to this by in two ways, massive agricultural subsides (thanks to their oil money) and their own tariffs on imported food. The results in Norwegian farmers being looked after but expensive food for consumers.

The UK government would not have the luxury of a large oil revenues and a sovereign wealth fund. The savings from leaving the EU - of which there won't be any anyway- have already been promise elsewhere. Consequentially the UK government would need to decide whether to protect farmers (resulting in likely higher consumer prices) or whether to further punish farmers by allowing  competition. 

Meanwhile if Norway is any guide, the EU is likely to cherry pick the agricultural and processed food jobs and industries they would put trade sanctions on. For example, Norway are currently able to export their salmon but not their processed salmon. This means that whilst Norway continues to export Salmon (something it can produce more efficiently than the rest of Europe) the more valuable and mobile Salmon processing jobs having largely been moved out of Norway. A similar process would no doubt happen with our agricultural jobs and industries.

The EEA also would have a significant impact on our financial service industry. Currently EEA countries have limited passporting rights to the rest of the EU because the relevant legislation is not fully harmonised. In theory the UK could perhaps overcome some of these challengers with enough political will. However, given the mobility of this industry (and the potential upside to various European countries of building up their domestic financial services industries), its difficult to see there being the necessary political will. Losing a section of our financial services industry that currently services the EU market would have a significant impact on our tax revenues and therefore reduce public services.

Another side effect of this would be that UK manufactured goods would be subject to "rules of origination". "Rules of Origination" are common with most trade deals where countries don't adhere to the same external tariff rules. In summary, imagine a hypothetical situation where country A can sell country B widgets for with a tariff of 10% on each widgets. However country C has a free trade agreement for widgets with both Countries A and B. In theory a business in country C could circumvent such tariffs and make itself a tidy profit. Rules of origination are there to prevent this.

UK manufacturing exporter would need to provide significant documentation to demonstrate that there were no third party components subject to lower duties. Whilst this no doubt would be a minor headache for large manufacturers it would be prohibitive red tape for smaller businesses who would effectively be shut out of EU markets due to additional regulation. 

Good Friday Agreement
However probably the biggest impact of this would be in Northern Ireland. Once some good are subject customs controls then a customs border is required to monitor all exports. Norway (for example) has custom controls with all its neighbours and there is no "blue channel" option when arriving at an airport from an EU country. Invariably if the UK opted for an EEA arrangement there would likewise need to be a customs barriers between the UK and the EU.

In Northern Ireland, this would mean a customs barriers between Northern Ireland and the Republic (contradicting the promises of Theresa May). Legally there is no possible way around this whilst Northern Ireland is a full part of the UK and the UK is out of the EU. Customs controls would make the movement of good across the border harder and would have an obviously economically cost for the region. However perhaps of more concern is the impact on the peace process. Would new custom controls potentially drive republicans back to a violent struggle. Its difficult to see how Brexit would end well for this region!

Given EEA countries are outside the customs barrier, the only way that Norway can truly be considered part of the "single market" is through regulatory harmonization and adhering to EU rules such as freedom of movement. The advantage of this for Norway is that their exports are not subject to paperwork (and delays) to demonstrate they are compliant with EU standards.

To achieve this level of harmonisation Norway has to include relevant EU legislation into its domestic law (what remainers have termed "fax democracy"). Any issues arising are then escalated to the EFTA courts. The EFTA courts adjudications are not always legally binding on EEA countries (as liberal leavers often like to point out).

However this misses a key point, should Norway fail to include a recommendation from an EFTA court into its law it could easily find itself non compliant with single market rules. As a result it would lose the full access it has to the single market. Norway's parliament therefore tends to pass any such regulations into law unanimously. [Indeed the fact that "Liberal leavers" think that EEA membership gives Norway significant latitude shows that monomaniacal zeal for their cause which is closer to that of creationists than serious open minded thinkers] 

For Norway this lack of influence is not such a huge burden. Norway is a small country that would in any case have a limited voice inside the EU. For the UK. this would be a much more significant loss as we would lose any ability to shape the rules out of Brussels. Indeed given the UK voted to leave the EU to "take back control" and "controlling immigration", it's difficult to see how this situation would be acceptable.

Is it feasible
Even if a significant majority could be persuaded that EEA membership was an "improvement" on our current relationship, its difficult to see how this any arrangement would be stable for long. When the EU next demands new regulations be implemented in our law, will the politicians and tabloids who campaigned for the UK to leave be happy to see this implemented. It is not difficult to see how such as relationship could break down quickly! Based on the recent past, other EU countries could easily conclude that (unlike Norway) the UK will not be a reliable EEA partner and will veto our perspective EEA application.

Even if all EU member states could be persuaded this was an appropriate path, would other EEA countries be convinced? At the moment this seems unlikely. Norway has indicated that it would potentially block such a deal. This is because the only influence Norway has on EEA regulations comes from being the largest country in the EEA. Consequently the EFTA courts which evaluate EU legislation are heavily influenced by Norway. If the UK joined the EEA this dynamic would change. The EEA bodies would become more dominated by the UK interests and the judgements would reflect British legal concerns. The net effect is that Norway would be marginalised in an organisation where it sees itself as the dominant player!  

The EEA upsides
The big upside that "Liberal Leavers" see in the EEA option (assuming it can be achieved) is the ability to make trade deals with the rest of the world independently of the EU. No doubt there are a few areas where this would be beneficial. However, any deal that requires another country to open up its market would almost certainly required a "quid pro quo". Given that many UK industries are likely to be suffering from the lose of the single market, its difficult to see how removing tariffs and further punishing domestic producers would be politically viable. 

In any case significant trade deals are likely to involve changes to domestic legislation that may not be politically popular. Perhaps a good example of this again comes from Norway. Recently they started discussion on a prospective trade deal with India, however, reports quickly surfaced in the Norwegian media about a proposed deal. It was alleged that the proposed deal involved India opening its salmon market (for high quality Norwegian Salmon) in exchange for easier visa access for Indian IT consultants. In theory the UK could do similar deals with India and China. Although given the anti-immigrant sentiment that drove a lot of the Brexit vote, its difficult to see how this would be popular. 

Perhaps the biggest EEA upside is simply all the other BrExit options are either less feasible or a lot worse. A "Canada style" agreement for example would involve a completely new free trade agreement and almost certainly could not be negotiated in two years. Any such agreement would probably involve more compromises that would be on the EU's terms.

Given all of this the Norway options should not be dismissed as EU-lite. It is far far worse than that. The marginal benefits (of WTO membership and the ability to strike trade deals independently of the EU) would be offset by customs barriers, additional regulations and loss of full single market access (particularly for food and agriculture). 

In any case it probably is not politically feasible. Domestically its unlikely to abate the anti-EU rabble. Externally it could easily be vetoed by any number of EU countries and Norway. Its a bad option, indeed its only merit it is less economically disastrous than any equally feasible BrExit option! Really the only good EU option is staying in. Remainers need to start saying this confidently. Pretending that we can do workable compromises is dishonest only emboldens leavers who having been sold an impossible dream of being rich through trade and "taking back control" who collectively will never be happy anyway.