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!

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