Brexit – the campaign so far

We are a few weeks into the referendum campaign. Arguably the most important vote for British people in over 40 years, what have we learned? Perhaps more importantly, what are we yet to learn?

Naturally, the parameters for early debate would be set by the Prime Minister. Beforehand, we were told that we would have the choice about staying in a “reformed” European Union.

Reform amounted to some tinkering around welfare payments with a promise that Britain would be able to opt out of the ‘acquis communautaire’, the drive to ever deepening union. Whatever has been achieved at Council of Ministers level has yet to be ratified by EU member states. Was the promise false?

wires crossed

Cameron’s campaign had a head start. He knew that he would be championing the cause of Remain. Revelations have emerged that in fact he was building up support, the evidence being dated 8th February in a reply, 11 days even before his “reform” negotiations were complete. In practice, he has had 6 years to build up his arsenal of dubious evidence.

It was not until 14th April that the Electoral Commission published its decision, which of 3 alternative groups should lead the Out cause. The decision was to designate Vote Leave, fronted by Boris Johnson who, ostensibly at least, had not made his decision in which way to go until 21st February. At the time, Johnson denied that he would take a leading role.

That Electoral Commission decision effectively threw two Conservative Old Etonians and Oxford graduates against each other. Were we in for a balanced debate representing a broad cross section of British society? The UKIP based Go faction has been marginalised.

So the campaign began, arguably ahead of schedule with £9.3m worth of leaflets outlining the “government” position. With its early start the Remain crowd were able to dictate the content of early exchanges. The lines were drawn on the economy, safety, strength and incomes.

Both the Labour party and Liberals are ostensibly pro Europe but on the whole, are strangely quiet. Perhaps this is a planned tactic with the next election in mind? Certainly, Corbyn in the past has voted against steps to further integration. Farron is clear in his views but has refrained from his repeating his inaugural conference speech, where he branded the Leave camp as “little Englanders”.

So how does the Remain argument translate?

Firstly, the extra time has allowed the Remain side to develop support. This has come from 150 Royal Society members (out of 1,653) felt we should Remain. Of Britain’s economists, 200 say we should Remain. Quite how many economists there are in the UK, perhaps several thousand, the rest did not sign.

From the international stage, Obama made a splash by relegating Britain to the back of the queue for trade deals. He conveniently omitted to mention that he would not expect Britain to be back of the queue for military support in Libya, Iraq and Syria. Neither did he put Britain at the back of the queue for a Trident replacement or the purchase of American fighter aircraft.

The popular view is that Project Fear has begun. If we leave, inflation rises, unemployment rises, exchange rate drops, incomes fall, Putin and Daesh are dancing in the streets, World War 3 will break out. Surely it couldn’t get much worse? Incidentally, EU trade sanctions against Putin are estimated to have hit Russian GDP by 1-1.5% which puts the wilder claims into perspective.

The economic views seem at first sight to be repeated by a variety of supposedly independent bodies. Of those, at least the International Monetary Fund and Institute of Fiscal Studies have quoted a barely credible Treasury report, the Treasury being stripped of its forecasting role by the very same Chancellor who advocates the Treasury model.

There is a sad absence of a positive message. The biggest objection is that we don’t know what Out looks like. That is hardly surprising, the Leave campaign has yet to derive a consensus to decide for sure but there is a serious point, the government of the day can decide.

boris-johnson-vote-leave-campaigner

So what of the Leaves?

There is a view of what Remain looks like. As yet, that particular fight has to be taken to the Remain camp. Strangely, the German white paper on defence, as revealed in the Financial Times, has not been flagged as a significant debating point.

The 5 presidents’ report from the EU has not been capitalised on. The Leave side have not picked up on shaky ground, that the direction of reform in the EU is towards further integration.

The Leave camp has not picked apart the harsh realities that the only currency unions that have provided success are those that include political integration. Given the late start, the Leave’s have been unwilling or unable to take the fight of what Remain looks like with the associated uncertainty that integration brings.

Instead, they have been left with the open goal to miss, that of immigration. It has been an ironic set up, that those who argue to prevent Eastern EU citizens can be dubbed as racist. Ironically, Britain remains able to control immigration by those from the Commonwealth Indian sub continent, from Africa and from the West Indies whose citizens’ sacrifices are strongly represented on the Menin Gate and war graves across Europe.

The Leave campaign as it stands have been unable or unprepared to challenge some basic spin, a classic example being the portrayal of trade figures such as 44% of our exports go to Europe but less than 10% of EU exports come to Britain.

In practice, this is an argument easily refuted. Prior to EEC membership, less than 25% of British exports went to the current EU. In terms of value, British imports make a net injection of, by the latest figures, £8billion per month into EU economies.  Percentage and value are different beasts. More EU jobs rely on trade with Britain than vice versa.

There are many arguments left to explore. How would the flow of manufacturing jobs from the UK to the EU core or cheaper fringes change either in or out? Are trade deals with Europe worth more than trade deals with the Commonwealth and new friends in South America, Asia and globally?

Which trade model would suit Britain best? Should we decide our own with a deficit that our EU partners would want to continue?

There are decent arguments on both sides, perhaps the most convincing for Remain being that an extreme British government can be neutralised by Europe, the most convincing for Leave being that British voters can help shape our own future.

Despite the head start, Remain flounder in presenting a positive message. Since one of the arguments is whether it is the EU or NATO and the UN that have kept peace in Europe, please forgive an analogy. Remain are fighting a rearguard action, seeking to minimise casualties, akin to Dunkirk in 1940.

Leave have 4 weeks rather than 4 years, to form the sort of alliance that can provide a vision for victory. Their own D (for democracy) Day is June 23rd. There is time yet for them to come up with a positive vision to capture the imagination of an outward looking nation.

Ultimately, Electoral Commission rules, which supposedly provide for a fair fight, have stifled planning, Leave having to fight a guerrilla war so far. The vote will ultimately be decided by those currently wavering. It seems to be a straight choice between fear and freedom but can either side provide a popular vision?

Another view on the IFS report

A further report of doom and gloom after Brexit has been released, this time from the institute of Fiscal Studies (IFS), claiming the Brexit would bring two more years of austerity. Is the body of evidence from independent analysts really increasing?

The IFS is a charity, based in London specialising in taxation and public policy, claiming to be politically independent. Its formation had its roots in opposition to Labour Party policy in 1964, formalised in 1969 with a cross party Council being established the following year.

Of its funding, 54% comes from the Economic and Research Council (ESRC) whose parent body is the Department for Business, innovation and Skills. The bulk of the rest comes from foundations and charities (14%), the EU (11%) and other government departments (8%) with only 1% from corporations.

It is always interesting to look at personnel on any of these bodies, certainly well respected people with august backgrounds. President of the IFS is certainly august, in fact Lord Augustine O’Donnell, better known as Gus O’Donnell. Gus is not unaccustomed to public scrutiny having featured in the delayed Chilcot Inquiry over his decision not to publish correspondence between Blair and Bush.

On a more operational level, it is interesting to see the Director is Paul Johnson. Curiously, Johnson studied at Oxford, Keble College, a short walk along Parks Road from Brasenose College where David Cameron also read PPE at the same time.

It is not unusual to see a flow of personnel from the IFS to the Treasury and back. Another Old Etonian who was also a PPE graduate moved from the IFS to work with the Oxford educated George Osborne, both in opposition and for the Treasury. Nobody would suggest that the Oxford educated Chancellor, godfather to one of Cameron’s children, could be guilty of providing “jobs for the boys”.

Given that obvious total impartiality, it is worth a closer look at the IFS document which can be found here.

As ever, the report starts with an executive summary, which is expected to outline objectively how the study will be carried out. Surprisingly, as early as the first page, we see the pejorative use of the word “absurd” in relation to the commonly used figure of £355 million which is sent on average weekly to the EU.

Certainly, it is fair to question figures using non-emotive language. The language used appears to illustrate a potential bias. They are correct to highlight that part of that is what they call the “rebate”, which in fact should be correctly identified as an “abatement”. They might also point out the resources that are allocated by the EU which might be more efficiently allocated by a UK government.

There is a delicious irony in that having disparaged the total resource that the EU reallocates, the IFS argue that it “is not necessarily inappropriate to describe the deterioration in the government’s finances as making households worse off”.

In short, funds that households do not see are not equivalent to funds that households do not see. There is logic and consistency in there somewhere.

The IFS proceed to well worn arguments and, perhaps unsurprisingly given the movement of personnel between Treasury and the IFS itself, return to use the Treasury’s own figures. These have been widely discredited.

They also refer briefly to the 8 economists’ report, after 2 mentions consigning independent and eminent economists, including those who arguably steered Britain to above average growth rates, to the dustbin of “outliers”.

In essence, the IFS has fallen in, whether consciously or otherwise, to the myopic view induced by the Remain campaign, that there are a limited range of options available but not including those that come from an inspired generation of free thinkers associated with economic success.

Much of the report refers back to other reports, the Treasury and the apparently closely linked OECD report as well as NIESR and CEP. The Norway and WTO models seem to be interpreted as the only ones that are feasible. Unfortunately, the report was written before Bank of England Treasury Select Committee appearances by external members of the Bank of England presented their own views (here) , putting the risk and policy in context.

The “shock absorber” effects in an efficient Foreign Exchange market provide stabilisers, as does the potential monetary policy brief of the Bank of England. The Governor does not necessarily speak for those who have direct input into decisions.

The IFS ignores what Bank of England members consider as potentially greater risks to stability within the EU and indeed the global stage.

On a deeper level, in not having been able to consider the TSC questioning of Bank of England members, any contingency planning on how to deal with potential fall outs the IFS report can in no way claim to have been a comprehensive, therefore rigorous, analysis of Brexit.

In summary, the IFS have compiled a variety of reports before supporting the Treasury line. Their integrity is beyond question, despite the various links with the Treasury personnel movements, old school and university contacts. The report is just not sufficiently thorough.

To their credit, later in the text when many readers will be bored, the IFS group take steps to provide caveats that the central assumptions, therefore the outcomes may be wrong. In doing so, in the future, they provide Osborne with excuses for not hitting his own targets or to change policy, which Osborne and his neighbour are doing a lot of at the moment.

That may be a subjective judgement. Look at the documents and the TSC recording, you can decide for yourself. One of the great lessons is how to recycle the same dubious evidence to build a body of opinion.

Osborne 2, the horror movie

George Osborne, as he promised, has released a second dossier on the effects of a no vote on 23rd June. This time, the target of doom and gloom was the first two years after a Brexit vote.

Sadly, Osborne decided not to attend the House of Commons to defend the document, instead delegating to his deputy, David Gauke in a “departure from normal procedure”.

In short, the dossier predicted the shorter term effects to the economy. On a macroeconomic level, 500,000 job losses (a lovely round number), GDP would be 3.6% lower and inflation would increase to 2.3% higher. Sterling would be weaker by 12% while house prices would fall by 10% and public borrowing would rise.

osborne TSC

It is worth remembering that this is the Chancellor who, when announcing the Office of Budget Responsibility said “I am the first Chancellor to remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast”. Sometimes, temptation is hard for a Chancellor to resist.

The report identified 3 impacts. The first of these was “transitional effect” i.e. “the UK becoming less open to trade and investment under any alternative to EU membership”. The second was “uncertainty” the final impact being “financial conditions effect”, i.e. the extent of financial market volatility.

As with the report covering the longer term, a narrow range of assumptions were made. The language used was persistently negative. No consideration was given to any upside potential. Once again, there were a number of own goals.

The cycle of doom starts with consumers not consuming due to uncertainty. Producers will not produce through uncertainty, investors will not invest due to uncertainty. The same sort of vicious cycle is the sort that the Treasury predicted when the UK opted out of the Exchange Rate Mechanism (ERM) in 1992, before a decade of growth ahead of the rest of the EU.

Much of the negativity is based on a potential fall in the exchange rate. The inflationary effect comes from increased input prices. There is a certain logic if, but only if, the exchange rate were to fall to the extent predicted. Osborne’s 12% reduction would nullify the suggested 10% tariff on British car exports to the EU. The Treasury also suggests that overseas investors will divert investment to other EU bases.

As an indication of selected bias, the report ignores any extra incentive provided for British producers to sell into an export market with potentially higher revenues.

Unfortunately, once again, Osborne’s Treasury do not explore the options in the sort of detail that a truly “rigorous” report should, particularly the opportunity costs, that is to say if investors do not invest here, where would they invest?

A lower exchange rate has converse benefits. Any company producing in the UK would experience a lower level of costs relative to their own currency. If Sterling were to drop against the Euro, the relative cost of producing in the European Union, such as Germany, becomes higher.

It is conceivable that the withdrawal of production facilities from the UK by some of Osborne’s famous examples, the motor industry including General Motors and Ford, will have damaged their own cost base.

There is a good argument that in recent years, the Euro currency was undervalued for Germany, even if Germany’s exports made the Euro overvalued for the Southern EU countries. German exports were thus more attractively priced in the UK, hence the domination significant trade deficit that Britain has with the EU and Germany in particular.

Extending Osborne’s logic, whether a trade agreement were to exist with the EU or not, there is at least a positive reason to consider maintenance of investment in the UK, at least for the duration of the next two years. Afterwards, there may be more motivation for companies like Ford and GM to return production to the UK, lost whilst members of the EU.

It is also worth considering the opportunity cost of other investment, particularly in securities markets and government stock. The implicit assumption behind Osborne’s Treasury model is that the Euro provides a secure investment.

It is well publicised that Eurozone banks provide a source of insecurity. The economic troubles of Greece, Italy, Spain and Portugal are well documented.  The Euro is by no means a solid alternative currency in which to invest. Osborne’s pessimism may have been misplaced.

osborne lagarde

Interestingly, the Treasury report mentions the IMF 25 times. It will be remembered that the head of the IMF, Christine Lagarde, thanks Osborne for the Treasury’s help in compiling their pessimistic forecast (here at 9.09). Lagarde herself awaits the outcome of corruption charges.

Curiously, the IMF’s warning over £715billion of non-performing loans (NPLs) among Eurozone banks was not included in the Treasury report.

Further negativity is based on the assumption that trade deals will be hard to come by. The UK has to agree its own trading relationships with the EU. The point is made that the EU might be a priority for the 50 nations looking for trade deals. By definition, at least, at least at least 44 of those have smaller economies than the UK as a G7 member.

One thing that Osborne has got right is the uncertainty of being able to negotiate any sort of trade deal with the EU. His leader, David Cameron was unable to negotiate a successful outcome for reform, even with the backing of a near £10billion net budget contribution and imports from the EU running at £8billion per month.

The comedy value of this report was highlighted by some case studies selected.

The first of these was agriculture, where the report highlighted where DEFRA has seen agricultural support cut in the last 3 settlement rounds – whilst a member of the EU. The second inadvertently highlights how some companies are relocating out of Britain into the central EU area, even whilst members. The third reinforces this by referring to the Society of Motor Manufacturers and Traders (SMMT), an organisation largely dependent on revenues from importing over 2million cars last year.

In short, Osborne’s illusion is easily dismantled. He exhibits no faith in his government to secure trade deals from a position of strength. In running down Britain’s ability to respond to a “shock”, the british Chancellor would risk creating a self fulfilling prophecy, wee he to retain any credibility at all.

On the plus side at least, should Lagarde be found guilty, he has a job to apply for where inaccurate forecasts appear welcome.

George Osborne’s leaky defence and own goals

The Treasury Select Committee (TSC) met on the afternoon of 11th May to question George Osborne and Treasury official, Mark Bowman over the EU Referendum campaign. The session can be seen here.

For those who are unaware, select committees are broadly organised to reflect government departments. Naturally, the TSC reflects the Treasury. The committee is made up of 11 MPs from across the parliamentary spectrum, at least as far as party representation is concerned.

In practice, the significant majority of the committee are currently on the IN side as far as the referendum is concerned. Seasoned observers of the TSC, that Jacob Rees-Mogg usually cuts a lonely figure, sitting at one end of the horseshoe of tables. For once, he had two other Conservatives positioned adjacently.

Those who have seen other recent TSC meetings might have expected a forensic examination of Osborne’s figures. When figures from Leave campaigners, Arron Banks, Richard Tice and Matthew Elliott had appeared, questioning was penetrative. TSC made recommendations to change figures on their web site. Could we expect the same?

TSC Osborne

The Chair, Andrew Tyrie, opened proceedings revealing that a further document will be produced by the Treasury, concerning the short term impact of a Leave vote.

The first challenge, from the Chair, came from a Cabinet paper, the Best of Both Worlds. The question was whether Britain can unilaterally enforce access to the European Council over management of the economy, as outlined in the document, if principles are not being respected.

osborne TSC

Osborne showed what he does well, obfuscated the process with a long winded tangent of his own agenda, of the type he was to repeat for much of the afternoon. What appears to be the case would be met based on the balance of probabilities rather than legally enforceable.

Stephen Hammond started to probe on two points, whether sensitivity analysis was conducted. Bowman and how the famous figure of being £4,300 worse off was arrived at. The sensitivity analysis question was asked several times, to which Bowman replied not fewer than 6 times that the Treasury used “cautious neutral assumptions”.

So what is sensitivity analysis and what is the point? This is a method of accounting for uncertainty, using alternative assumptions to test how robust a model is, sometimes removing some variables. The fact that it was not carried out can suggest that a model is not “robust” as we were told when the document was released. In short,l the Treasury did not challenge its own assumptions.

The question set up Osborne to return to the increasingly hackneyed phrase that “we don’t know what leave looks like”. At this point nobody challenged as to how this government would seek to shape what leave looks like whilst they are in power.

Rees-Mogg took his turn to question. The early part of his questioning concerned productivity growth, highlighting that European productivity growth has indeed been a problem since 1992, at least compared with international competitors. Osborne chose an alternative time frame to disagree.

The Chair intervened to suggest that the £4,300 figure was “the product of imprecise modelling, ranges”. Osborne had been given a lifeline of an alternative position to defend.

To his credit, Rees-Mogg persisted to attempt to identify what other reasonable assumptions had not been included by the Treasury. In his 4th apparent attempt to cut Rees-Mogg off, the Chair shifted the discussion to Foreign Direct Investment (FDI) and an admission that statistical significance was not established.

Attention shifted to Labour MP Rachel Reeves, Osborne’s “new very close friend” which was perhaps reflected by her approach, including Tweeting from inside the committee. Unsurprisingly they agreed that all was doom and gloom outside the EU. Osborne let himself off the hook by shifting policy measures to the Bank of England.

reeves

One curiosity out of the Reeves/Osborne love in was that house prices would fall but would not stop foreign investors buying UK property due to a falling exchange rate? Unfortunately, there was nobody left who was allowed to challenge his economic literacy as to why foreign buyers would want to invest in a falling market with weak exchange rates and nobody able to want to buy their failing investments.

Some tests came from Steve Baker who asked why Osborne made “the assumption of no confidence as to what the British government can achieve”. He received the response that it would take 15 years to get a trade deal with the EU. Apparently, existing templates would not provide a basis for other trade deals.

Chris Phelps briefly highlighted foreign trade, growth in trade deficit with the EU, the 61% growth in trade with the USA (with who we don’t have a trade agreement) compared with 44% growth in the EU over the last 10 years. According to Osborne, the EU is the only area to have had a hard time over that period. There was no challenge as to why the EU is stagnant.

The soft questions secured the potential for an own goal by Osborne in admitting that the German and French would beat us in any negotiation over freedom of movement. Unfortunately, the defence had gone missing so nobody was there to knock in the winner over the extent of our trade deficit with Europe.

The last real challenge came from the Chair, with what turned out to be around an hour before the Monty Python like inquisition. This was over deregulation should the nation choose to remain. Even though new regulation has shrunk by 80%, no existing costly regulation was to be repealed.

Further questions resembled the comfy chair, soft cushions, coffee and glass of milk coming from Anne Goodman, George Kerevan, John Mann, Wes Streeting and the particularly helpful Andrew Garnier.

More potential own goal emerged. This government has no contingency plan. We can not project public expenditure savings. We are apparently in a position from inside to clean up the EU, despite being unable to pressure them into producing signed off accounts for a quarter of a century.

Strikingly, there was no challenge as to the EU’s ability to remain protectionist, reducing the scope and impact of WTO deals over decades.

The Chair summarised with an attack on the Leave camp, glossed over the lack of contingency planning and set Osborne up for the potential winner. Osborne was invited to reiterate his slogans.

The questions that were not asked were glaring. What if we were to reciprocate with tariffs on the EU? How would we spend the receipts? Would the EU want to protect their biggest export market? Would the EU really be stronger with Britain out? What did the report cost? Is it moral to use Treasury resource to scare the public?

Sadly, the forensic questioning that we have seen of late was not forthcoming. There is no requirement for the deeply flawed Treasury document to be edited. We can see that in our parliamentary democracy, some are more equal than others.

You are invited to judge for yourself, based on the links provided in the text. To finish on a positive note, congratulations to those on the TSC on their stamina. Listening to George Osborne for two and a half hours demonstrates certain qualities.

House of card tricks

The debate surrounding Britain’s referendum on the EU is well under way. After making some surprising statements at the end of February and start of March, Foreign Secretary, Philip Hammond, has been surprisingly quiet.

Hammond’s reputation was once that of being something of a Euroscpetic. As recently as 2013, in an interview with the BBC, he suggested that he would vote to leave the EU.

On appointment to his current position, with a general election in sight, he insisted that his position was to renegotiate for a reformed EU. This general thrust of policy was enshrined in his party manifesto (page72 et seq).

After an election win, the position changed within a couple of months. In further interviews, his line was distinctly middle of the road. Mr Hammond also said the government wanted to engage in the debate “in a fair way” and would ensure public money was not allowed to be “inappropriately spent”.

By 26th February this year, he boasted on Twitter “I lead a robust #EU debate in Parliament today. The UK is safer, stronger & better off inside a reformed #EU. #EUreferendum”.

hammond 2

In an interview with Andrew Marr, Hammond sidestepped the issues of what would be achieved relative to manifesto commitments. Effectively, he did not deny that manifesto commitments had not been realised. His suggestion, a repeat of what he told Parliament, was that voters would see the outcomes “in the round”.

The phrase “in the round” is an interesting one. Apparently its roots are in the theatre where a performance can be seen from all sides. One interpretation is that the performance can be exposed. Another is akin to a firing squad forming a circle.

Since his comments after the announcement of a referendum, Hammond might be seen as a weak link. His promises about fair debate and public funds appear to have been contradicted by the notorious £9.3m pamphlet and Osborne’s Treasury dossier.

He does seem to have been strangely quiet on EU affairs since February. What has he been up to?

A trawl of Foreign and Commonwealth Office press releases, combined with his Twitter account give us some answers. He has been incredibly busy on the world stage.

Leading up to the Easter period, Hammond was seen in Afghanistan, Pakistan, Paris, Baghdad, Georgia and Lebanon. Since then, his travels have taken him to Hong Kong, Beijing, Vietnam, Tripoli and Colombia.

hammond_cuba

His latest overseas appearance was in Mexico, discussing economic reform and investment opportunities for UK investment in energy and infrastructure. His previous stop was in Cuba where he was able to declare a bilateral agreement arguably to the embarrassment of the IN campaign who tell us how long it takes to strike a deal.

He has certainly been a busy bunny. During those trips, his absence from Foreign and Commonwealth question times received criticisms from both sides of the House.

Some cynics might suggest that it has been decreed as a potential liability in the campaign, Hammond is being kept out of domestic view. Certainly, some of the unease of Conservative colleagues about taxpayer funded information might be traced back to Hammond’s own comments in June 2015.

Others, arguably more cynical, might liken his disappearing act from the domestic scene to John Major’s wisdom teeth at the time of Thatcher’s toppling.

Of course, a return to the firing line would be welcome. If Britain is a democracy, it is entirely appropriate the Foreign Secretary shares his views on the most pressing foreign policy question for over 40 years. He should not miss another question time and his achievements or otherwise should be open to public scrutiny.

It will have been noted that Hammond took his front bench seat for PMQs on 4th May. The following day, he met with the delegation from Japan accompanying Prime Minister Shinzo Abe. He has been silent on the outcomes.

Therefore, the question remains, has Hammond been gagged, has he gagged himself or is the flurry of meetings with representatives from around the world merely coincidence?

Victory for IN means he can claim to have won all the reforms achievable, victory for OUT presents him as a candidate who has credibility around the globe, even if his earlier slashing of defence budgets leaves him without the military power to back up support for some of the regimes he has visited.

According to opinion polls, the debate is a close run thing. Cameron has already stated that he will not stand for another term. Politicians from both sides have suggested that in the event of a LEAVE vote, his position becomes immediately untenable. Either way, there are fractures to repair in the Conservative Party.

Who is most likely to succeed him? The majority of Conservative MPs identify with the Remain camp. The decision is ultimately theirs. Even in the event of a Leave vote, internal disputes will be a challenge for those most ardent supporters to Remain. The most ardent in the Leave camp face a challenge to gain a majority.

Hammond can claim to be a suitable compromise candidate. The longer he stays quiet, the more he can be regarded as one not to have offended either side.

Perhaps more critically, he can realistically claim to have a presence on the world stage, a potential Prime Minister who can bridge gaps with those outside Fortress Europe, one with a history of bilateral agreements.

If the outcome is to remain, he might expect to be regarded as instrumental in securing the “reform” necessary to secure the vote. If the outcome is to leave, he is the man who can negotiate deals with the EU in a timely manner. In either event, he was the man to present the referendum bill.

As Iain Duncan Smith, himself a compromise candidate, famously stated at the 2002 Conservative party conference “do not underestimate the determination of a quiet man”, but why is Hammond so quiet?

Obviously, there are several weeks for Hammond to make a public contribution to the greatest debate on policy from the Foreign and Commonwealth Office for over 40 years. Whilst he is waiting in the wings, his views will not be seen “in the round”. Until he does, there will inevitably be conjecture that he sees his real place as centre stage.

It is said that history repeats itself. After the 1975 referendum, when the Prime minister of the day stood down, he was succeeded by the Foreign Secretary. Just as Callaghan followed Wilson, Would anyone really bet against Hammond following Cameron?

Philip-Hammond drink

Is Britain really safer in? (Part 1 – military)

One of the early claims in the referendum campaign, even before the campaign started in earnest, is that Britain is “safer IN”. Let’s have a look at these claims.

There are three aspects to the claim. The first of these is militarily, the second is in terrorism, the third crime. The focus of this piece is on the military security between nations, a follow ups will consider terrorism and crime.

In attempting to assess the principle threats to Britain, it is worth taking a brief look back at history.

One of the main arguments about security has been made for decades, that we have averted wars in Europe since 1945. Indeed, one of the aims of the founding members of the EU was to link economies to an extent which made countries interdependent.

Both world wars had their origins in Europe, even though for the second, Japan and China had been in conflict since 1937. War in Europe came from German expansion into neighbouring countries, starting with Poland in 1939, with fluctuating alliances.

In 1941, the war extended, Germany invading the Soviet Union and with the Japanese attack on Pearl Harbour. The conflict became global. The allied victory came in 1945. Settlement in Europe meant division, the East being controlled by the Soviet Union. Until 1989, the Communist ideology was seen as perhaps the biggest threat to peace in Europe.

After 1945, a range of international treaties and groupings evolved. Immediately, the League of Nations was established, now the United Nations. NATO followed in 1949 with the Warsaw Pact established in 1955, its demise coming from 1989 to 1991 as countries on the periphery of the eastern bloc sought freedom. The Soviet Union also disbanded in the same year.

It is true that there has been no military conflict between members of the European Union since 1945, despite there being other conflicts on the continent of Europe. Whether relative peace can be attributed to the existence of the European Union is open to debate. The UN, balanced alliances of NATO and the Warsaw Pact countries may have been a factor.

It is also true to say that there have not been conflicts between members of NATO.

The European Union had been involved in a variety of operations in different parts of the world, in fact 30 since 2002. These have inevitably included a British presence. In Europe these have included the former Yugoslavia, monitoring missions which included Gaza and policing missions.

There have been no large scale operations, however, some have been linked to trade protection, such as piracy off Somalia. Perhaps the most significant operation was EUFOR in Libya in 2011, largely an airborne campaign.

So where are the threats?

Led by Cameron, the IN crowd would have us believe that Putin would be the happiest if Britain voted for OUT. Does that mean that Russia are a threat to either Britain or the European Union?

putin

For a moment, let us assume that Putin might consider an attack on the United Kingdom. What would he face?

Britain is ranked 5th -6th globally amongst military powers depending on criteria, more or less alongside France, behind USA, Russia, China and India. The above, as well as North Korea and Pakistan have declared possession of nuclear weapons. Retaliation could be apocalyptic.

It is true that Russia’s volume of military assets is far greater than those of Britain. However, as members of NATO, an attack on one country would be seen as an attack on all. A declaration of war would trigger a combined response, not least from USA military assets within Europe.

During the Syrian crisis, a Russian aircraft was shot down, allegedly encroaching Turkish air space. Turkey are also members of NATO. The lack if a military response from Russia might be seen as a clue to Russian intentions and sensibilities. It is barely conceivable that Putin would take on NATO in the European Union area.

Certainly, Russia has flexed its military muscle in the annexation of Crimea. Ukraine is not a member of NATO. The European Union response has been limited to trade sanctions.

Whilst Putin may be presented as some sort of pantomime villain by Cameron’s cronies, it is worth reflecting for a moment why Russian forces have been deployed in Syria, or from another perspective, why they have been deployed against ISIL.

Initially at least, the campaign declared in support of efforts to counter terrorism. Later, a Russian passenger aircraft was shot down over Sinai with ISIL claiming responsibility. The campaign intensified.

It seems fair to say that Russian, and indeed USA approaches differ to Britain’s view on “collateral damage”. There is certainly a case to challenge other superpowers’ less discriminate activity. Both Russia and America have bombed hospitals in war zones. It is hard to argue that Putin has destabilised the Arab world any more than Bush, Blair, Obama and Cameron.

Of course, British forces have been deployed in conflict zones, during this century. The first of those was in Sierra Leone without external support. The next was Afghanistan, led by USA as a NATO campaign with EU support coming from France, Germany, Poland, Italy, Romania, Denmark and Spain, by no means all 28 nations.

The Iraq war was again led by USA with EU involvement also including Poland and Denmark. The Libya campaign was largely a NATO led enforcement of a no-fly zone, naval blockade and civilian protection. The main EU participants were Britain, France, Denmark, Italy and Sweden.

The ongoing campaign, involving 9 EU states currently, is against ISIL. The terrorist battle in Europe will be the subject of a further piece. However, it is clear that the EU does not necessarily contribute unanimously to each military intervention. It is also clear that UN involvement tends to ensure that the risk of expansion is limited.

A partial explanation of different levels of contribution may be the resource allocated to defence. NATO’s recommendation is 2% of national income, a figure that is currently only matched by Britain and Estonia. France and Poland are not far behind with around 1.95% whilst of the other larger nations, Spain is less than 1%, Italy and Germany at 1.32% and 1.23% respectively.

At 22.7% of total defence expenditure (EDA 2012), Britain’s is the largest financial contribution. It is clear that Britain’s military power enhances the European Union. The bigger question for the referendum is how much does the EU strengthen Britain?

In practice, NATO forces undertake joint exercises. In conflicts undertaken, the more active participants obviously deploy more resource than the less active. If those activities are of benefit to EU members, it stands to reason that those who contribute less gain benefit at the expense of others. Put another way, Britain contributes more than she gains, other nations gain more than they invest.

There are other threats to British interests. We can take two simple but linked examples, the Falkland Islands and Gibraltar. The Falklands were invaded by Argentina in 1982. Argentina maintains their claim, supported by Spain.

falklands

In 2013 a European Parliament delegation visiting Argentina led by Spanish MEP Luis Yanez-Barnuevo Garcia declared that “British sovereignty over the Islands, as such, is not accepted”.

During a recent trip to Argentina, Spanish Foreign Secretary José Manuel García Margallo said: “Our two countries, Argentina and Spain, wish resolutely to put an end to the two colonial situations”. Interestingly, Spanish control of the North African enclaves of Ceuta and Melilla are not seen as equivalent.

Were there to be a further attack by Argentina on the Falklands, it is clear that support from EU countries would not be totally forthcoming. It is hard to see how that would change by either remaining or leaving the EU.

The situation could be further confused in the longer run. The prospect of the creation of an EU army has been floated before. Most recently, in 2015, EU Commission President, Jean Claude Juncker, said “a common army among the Europeans would convey to Russia that we are serious about defending the values of the European Union.”

Similarly, Tony Blair stated in January this year “I would argue that in the medium term, there will be a growing requirement for Europe to build defence capability.

Only this month, the Financial Times (not the express or Mail as Cameron’s cronies claim) reports on a white paper to be put forward by the German government which allegedly claims “It is therefore necessary that military capabilities are jointly planned, developed, managed, procured and deployed to raise the interoperability of Europe’s defence forces and to further improve Europe’s capacity to act”. According to the FT, proposals include plans to “create a joint civil-military headquarters for EU operations, a council of defence ministers, and better co-ordinate the production and sharing of military equipment”.

Credibility is given by comments last year from German Defence Minister Ursula von der Leye along with the Dutch 11th Airmobile Brigade and 43rd Mechanised Brigade coming under German command between now and 2019. Dutch and German submarine operations were integrated in 2013.

Clearly, if British armed forces were to be integrated in the long term under the umbrella of the European Union, Britain’s ability to protect those who have chosen to remain British might well be subject to compromise.

In other pieces on this site, the direction of “reform” has come into question. There are other threats from within the EU to stability and British interests. Unrest and protests have been seen in Mediterranean countries suffering from austerity measures. It is yet to be seen how far that unrest will spread.

The question is whether Britain really is “safer in”. In order to answer, we have to question what the real threats to Britain and British interests really are. We also have to question the direction of reform in the EU. Ultimately, we have to ask if we believe that Britain’s nuclear deterrent remains in British control or whether it will pass into the hands of a President from Luxemburg, Slovakia or indeed any other country.

The British government is asking us to decide for the first time since 1975. It is up to them to now give clear guidance on how British interests are safeguarded. Merely stating a subjective opinion is not enough.

Cameron and his cronies have from now until 23rd June to convince us.

Cameron’s insult to Parliament, Britain, the EU and others

David Cameron yielded to pressure to face the Parliamentary Liaison Committee on the afternoon of 4th May. The committee Chair had previously written to express disappointment that he did not intend to face the committee. Proceedings can be seen here.

Following his earlier admonition of the Leader of the opposition about wearing a suit and tie, Cameron was one of only 2 people (the other being Crispin Blunt) in attendance not to wear his suit jacket.

Before progressing, it is worth visiting how the committee system works at Westminster. Committees are set up to scrutinise government policy. Many committees are set up relative to different departments such as Health, Education and Treasury. Their make up reflects the balance of the House of Commons.

Committee Chairs are elected. Committee members go through a nomination process. Eventual appointment depends on elections where needed but with horse trading behind the scenes virtually eliminating a contest. They are effectively chosen by party Whips.

It is worth remembering that the leader of the opposition was not the choice of the parliamentary Labour party but of party members. The occasional rebel may slip through but on the whole, the majority of committee members will reflect official party lines. Therefore, eurosceptics remain in the minority.

The Liaison committee is made up of representatives of other committees.

Unsurprisingly, given his performance at PMQs earlier in the day, Cameron evaded the first questions. His starting point was to claim a successful negotiation in his recent talks with EU representatives. He identified his achievement as bringing a “reformed Europe”.

The renegotiation is an additional reason to stay. He identified 4 issues with the current EU, “too much emphasis on a single currency club, too much on a political union, too much on our welfare system … not enough emphasis on growth”.

Bill Cash highlighted that Cameron had promised “a fundamental change in the relationship which we have with the European Union”. He also highlighted that “treaty change” had not been achieved and that EU institutions remained unchanged. In fact, constitutionally, treaty change has yet to be ratified.

Debate will continue as to whether or not, whether Britain is, or will be, exempt from “ever closer union”. Cameron describes ours as a “special status in the EU”.

Meg Hillier asked about funding flows, highlighting that the Prime Minister’s own advisers said that “things would get worse before they get better”, before reverting to party political points of calling a referendum which might upset the status quo.

Ian Wright brought the line of questioning around to trade deals. Cameron suggested that it is harder to negotiate trade deals as an individual country. He highlighted how the British economy is service based, how 44% of our exports go to the EU.

The first thing we would have to do is sort out our trading relationships with the EU. Full access such as Norway would require similar costs and are subject to free movement of people. Canada has a good deal but that has taken 7 years. Do we want to be a “rule taker”? “Any deal is worse than we have now”. Food is still protected.

“Is business as usual good enough?” “Power passed to Brussels initiates a referendum”. TTIP is a big deal for Britain. In the steel industry 40% of Port Talbot output goes to Europe. Britain could be subject to anti-dumping tariffs on steel.

Can we get better arrangements than we have now? “I don’t think we can”.

Particularly helpful to Cameron was Neil Carmichael, comparing Britain’s prospects in the market to Albania. Carmichael asked about the 8 economists compared with reports such as OECD. Minford, one of the great economists of his generation, arguably behind deregulation which spurred growth in the 1980s, was summarily dismissed.

According to Cameron, Minford’s views require examination, farcical reports from the Treasury are authoritative.

Cameron returned to British exports and how they would be hit in Europe, tariffs of 10% on cars, 30% on clothes perhaps as much as 70% on beef. Carmichael made the prospect of 66 new free trade agreements seem daunting.

Crispin Blunt asked “why can’t we negotiate with anyone we choose?” Cameron returned to the 44% of exports going to Europe. After Blunt followed up with why wouldn’t we be faster to negotiate on our own, wouldn’t we be faster? Once again we heard that 44% of our exports go to Europe with 8% of Europe’s coming to us.

Bernard Jenkin provided some relief, highlighting the questionable legality of the £9.3m taxpayer funded document sent to households. He followed that up with suggestions from the Unite trade union that Cameron had compromised over other legislation over EU support.

Where it suited Cameron, he was sceptical over statistics, notably when the SNP representative, Pete Wishart, approached the Scottish situation.  Cameron stressed how passionate he is about the union, apparently nobody else is. Wishart probed about scare stories, whereupon Cameron produced one more, about 100,000 Stock Exchange (currently subject to German take over) jobs being lost.

Keith Vaz brought up the question of EU migrant criminals costing the British taxpayer. Cameron briefly conceded that more could have been deported.

Frank Field had a brief shot at whether Cameron’s position would be tenable if Britain said no. Field followed up with migration figures and prospective Turkish membership, both of which were glossed over.

The impressive Nicola Blackwood uncovered some fascinating technical information on intellectual property and EU funding, a point that merits further investigation. Her questions pinpointed the lack of contingency planning by Cameron and his government.

The Chair returned to the strength of Cameron’s deal, that it is yet to be approved by the European Union Parliament. Apparently, the President of the European Parliament can guarantee which way independent members vote.

What Cameron did is what he did best, as you would expect from the self-styled `heir to Blair’. He repeated points that he had been challenged on but not answered. His talent is for spin, as in a recent PMQs when he stated that increased contributions to the EU budget were good thing because our economy was growing faster. Documents are “legally binding” even when they haven’t been legally approved.

So how did he insult all and sundry?

Firstly, he insults the British people by suggesting that we accept tariffs on British exports lying down. If EU members impose tariffs on British made cars, clothes and beef, we will not respond by imposing reciprocal tariffs.

He insults EU countries, notably near neighbours. France will accept reciprocal tariffs on champagne, camembert, Italy and Germany on pepperoni, salami and other agricultural products.

On manufactured products, Germany, France, Romania, Czech Republic, Netherlands, Spain and several others will accept job losses for BMW, VW, Skoda, Dacia, Seat, not to mention the American producers of some of Britain’s most popular cars produced by Ford and General Motors in other European countries.

He also insults our biggest single trading nations, the USA by belittling transatlantic trading links, similarly, Commonwealth countries such as Canada, our fastest growing markets for luxury goods such as India and China, other suppliers of meat such as New Zealand and Australia.

In short, we are a nation dependent on a European Union whose trade with us accounts for a mere 8% of their trade. Put another way, were we outside the EU, we would still be the EU’s biggest trading partner. That 8% is an output from around 400million people.

Our 44% is from around 60million people. Multiplying through, in cash terms we are more important to the EU than the EU is to us.

Finally, he insults our own civil service, people and politicians. We are incapable of seeking trade from around the world, the civil service is incapable of negotiating from a position of pumping £80billion per year into Europe, British politicians lack the ability and the will to have a vision for the future.

As a post script, Britain has a proud tradition in Economics. People such as Minford and Congdon produced schools of thought that underlay growth through deregulation. They are a huge part of the reason that Britain’s growth exceeded that of the rest of Europe. They follow the likes of Adam Smith and John Maynard Keynes as innovators.

Ultimately, it is for the British people to decide how transparent bland repetition of contestable points actually is. We can make up our own mind as to whether slight tinkering of welfare benefits constitutes “reform” and whether huge omissions constitute facts.

What does out look like? (Part 1)

It has been outlined before that the aim of this site is to explore arguments around the forthcoming EU referendum, helping people to make a decision based on complete information.

So far, the campaign had been dominated by “official” information from the government’s position labelled as ‘Project Fear’. Exports will be hit. Britons will suffer a reduction in income. In previous articles, it is hoped that where information has been incomplete has been highlighted, particularly on the car market and in Osborne’s treasury dossier.

For a change it is welcome to see a coherent piece put together by some of Britain’s leading economists. Some of the language may seem technical but the document is appropriately referenced.

Central to the debate is Professor Patrick Minford, a free market economist, reiterating much of his presentation to the Treasury Select Committee on 3rd November 2015.

The debate has been focused by the IN side on where export trade with EU countries may be hit. The Osborne model led us to consider what alternative trade deal models could be followed, namely Canada, Norway and the World Trade Organisation (WTO).

Arguably, we have been led into thinking of a world with tariffs and Britain carrying a begging bowl to secure new deals from a position of weakness. Looking back at the car market may highlight why Britain can negotiate from a position of strength.

Minford takes a bolder position entirely.

In an attempt to bring the argument back to basics, perhaps we should remind ourselves why a high proportion of our trade has been with the EU. In 1973, we joined the ‘Common Market’. At the time, what is now the EU accounted for 25% of our trade. By 2013, that balance had been increased to over 50%.

It is also worth reminding ourselves of perspectives. What we call a “free trade area” from within can be referred to as a “customs union” from outside. During his tour around the time of the Maastricht Treaty, the deputy Governor of the Bank of Japan frequently used the term “Fortress Europe”.

In our summary of the car market, we were sucked in to focus on why a trade deal would be likely with the EU. If tariffs were imposed on our exports, we could impose reciprocal tariffs. The car producers in Europe would still want to sell into our market, as would wine producers across the continent. Our trade deficit with the EU benefits them more than us.

Minford takes the argument to a different focus. Fortress Europe’s imposition of tariffs with the rest of the world maintains higher prices for goods in Europe than in the rest of the world. A free market approach would allow us to pay world prices for commodities. Consumers are instantly better off. Companies in the EU also have to charge lower prices to UK consumers.

If this does not at first appear to make sense, we can take a simple example. Where we now buy our BMWs from Germany, we can now look at alternative sources, from their factories in the USA, Brazil or India which produce at lower prices.

Minford takes his argument further, into supply side implications for policy and outcomes, which gives us the opportunity for something of a refresher on elementary Economics.

A market is essentially where buyers and sellers meet. Demand from buyers is determined by a variety of factors, notably price, price of other goods, incomes and tastes. Supply is based on profit, in turn the difference between revenues from consumers and costs of inputs. For some goods, environmental factors, technological progress and government intervention also apply.

In general terms, the higher the price, the less will be demanded, conversely, the more suppliers are prepared to supply. Economists love their graphs. We are used to seeing the following:

SandD1

In a normal market, if the price is set too high, what is supplied will not be sold. If the price is too low, the supplier will see that goods sell too quickly. The market will find its balance or equilibrium, on our graph at a price of p1 and output of q1.

If Minford is right and world prices for commodities are lower (without tariffs) than EU prices, British suppliers will be able to make more profit at any given price. This has the effect of shifting supply, diagrammatically, to the right:

SandD2

We can see that our market produces more, resulting in a lower price, or at least with no inflationary pressure.

The same basic principle applies to a whole economy. If we can reduce costs by increasing productivity, whether that is in pure costs, technological progress or by any other means, we can experience economic growth without unnecessary increases in price. For Price, in a whole economy we can think of the Retail Price Index (RPI). For Quantity we can think of Gross Domestic Product (GDP).

In a nutshell, the essence of supply side policies in a free market leads to lower prices, higher output and incomes and potentially higher employment to meet that increased output. If Britain is capable of more supply, we will attract inward investment.

Minford, being one of the Economics masters of his generation, of course takes the argument further. As a country, we may have to look at alternative markets. Given that Britain’s export growth has been higher with the rest of the world than with the EU in recent years, this is perhaps a natural evolution.

Remember that earlier figure, the EU accounted for 25% of our trade before entering the Common Market and over 50% more recently. From our car article, we can see that the between 1988 and 2014, value of car exports has grown by £3.9billion but with the rest of the world by £15 billion. Britain is already adjusting to global opportunity.

What we have covered in this article is a broad overview of what one of the leading Brexit economists has argued. As for precise numbers, that is down to the economic modelling techniques which will be saved for another day. Suffice it to say that the conclusion diverges with that of Osborne.

We have already looked at the EU model for what a reformed IN looks like. Does this tell us what OUT looks like?

The simple answer is no, not yet. Article 50 provides for a transitional period. We do not know if the EU would slash their own trade arteries by refusing to deal. In all probability, we will also have a general election before formalities are completed.

What OUT looks like therefore depends on which prospective government makes the case that British voters most closely identify with. Will it be a trade deal with the EU, will it be as a global free trade nation or will it be anywhere in between?

Surely, the point is, OUT looks like what Britons choose out to look like, in the hands of a democracy where British people choose rather than industrial satellites of Germany and the Mediterranean agricultural economies who divert trade from poorer developing countries?

Where the current government may appear negligent is in narrowing the argument to total negativity. There appears to be no vision of a positive alternative. There is apparently no contingency plan. Neither is there any sort of recognition of what the future holds if we stay in.

Perhaps our Foreign Secretary’s intervention in reaching an agreement with Cuba signals that Britain can deal with the outside world after all.

In our quest for relevant information on which to base a decision, the sources are there, it is for the public to decide.