“That” Osborne document

This is a week where George Osborne has taken centre stage. He started with selective quotes from Emmanuel Macron the French economy minister. Macron told us on the Andrew Marr show that there would be a price for access to the Single European Market (SEM).

Macron told us some other things too. Outside, Britain would “killed” in negotiations with China over steel trade, likening Britain to “Jersey or Guernsey”. He told us we are “enshrined in the European Union”. He even told us of other “consequences” so that further European integration can been established.

No doubt these will be the subject of further debate. On this site we are preparing a piece about what sort of reform we can expect from the EU. However, Osborne was clearly selective in what he chose to focus upon. He followed up with ‘HM Treasury analysis: the long-term economic impact of EU membership and the alternatives’.

We might expect a document from HM Treasury to be authoritative, independent and thorough, using sound principles for research. The document can be seen in full here. The analysis poses 3 scenarios, membership of the EEA such as Norway, a bilateral trade deal such as Canada and as a separate World Trade organisation (WTO) member.

Osborne has also told us that Brexit campaigners are “economically illiterate and dishonest”. That adds a different angle to the Treasury piece, especially when considering what one of Britain’s great economists, Patrick Minford, has to say.

Economists, by trade, have a process. One of the first parts of the process is recognising perspectives. Assumptions are made. These should always be made explicit. If not, a search is required to identify underlying assumptions which may demonstrate a bias in perspective. Omissions are as much a part of a story as what is contained.

There are some tools which might help Osborne on the way. One of the great tools, again from a great British economist, John Maynard Keynes, is the simple model of how an economy works:

Circular flow

If we see that an economy has autonomous consumption, let’s simplify that as basic needs being satisfied for survival, income levels throughout the economy are affected by what else goes on in the world around. Extra spending power can come into an economy, some spending power goes out.

Withdrawals from the economy come from savings (S) and where there is a government, taxation (T). Injections come from government spending (G), investment. If the economy is open to trade, we pay for imports (M) but gain from Exports (X).

Keynes described the economy’s national income as C+I+G+(X-M). Injections into the economy have a multiplied effect on demand. Using an industry previously used on this site here, the car market, an increase in demand for a car generates increased demand for steel at one end, demand for fuel to drive the car, maintenance and the distribution to go with it.

Money changes hands and flows into the economy. In a year, a one time increase in demand for that car will be spent in buying materials, into workers’ pockets, into pubs, into food and so on. The effect of an increase in expenditure is multiplied.

The Treasury’s, or should it be labelled Osborne’s, document focuses on the effects n the economy of not being a part of the SEM. Assumptions are not always made totally explicit. There is a focus on exports to, rather than imports from the EU. The Treasury model appears incomplete.

In reality, Britain imports more from the EU than we exports. A German steel industry web site identifies some links in the jobs chain here. Of all cars sold in the UK in 2015, 85% are imported from the EU. With 150,000 BMWs sold annually in the UK, those sales translate into BMW jobs, steel jobs and in the supply industries. The same applies to the other EU countries and their own car industries.

If, and it is a big if, the EU were not to seek a trade deal with us, the net import bill that provides injections into the EU economy will also reduce. Conversely, withdrawals from our own economy also reduce. The retained income is kept within the circular flow, with extra incentive to produce and generate income within the UK.

There is a knock on effect in the UK. If tariffs make EU produced cars more expensive, the 2 million plus cars that we import will need to be supplied from somewhere. This provides opportunities for other car makers to invest, or even reinvest, in the UK. The same goes for Mediterranean wine, French cheese, pasta and so on.

It is noted that makers like Ford and General Motors have disinvested in the UK whilst we have been members of the European Union.

The Treasury report glosses over the nature of the EU which can be seen from other perspectives.

For some, the SEM is a free trade area. To others it is a customs union. Of course the EU is both. It is a single market for those in Europe. As members of the EU, currently we have to impose trade barriers against other countries from around the world.

The Treasury document fails to offer any sort of valuation of the benefit from being an economy with a global perspective. Reduced costs from being subject to world prices rather than EU prices. In many cases, world prices are lower, providing the opportunity to increase real incomes.

Similarly, whilst it has been an electoral issue, the cost of ‘red tape’ has not been assessed. Estimates of those costs vary widely, the House of Commons library seeming to put faith in the Open Europe valuation of £33.3 billion from the 100 most burdensome regulations.

The analysis is only “rigorous” because the treasury has told us so. Opinion is presented as fact. Probability of outcomes has not been quantified. Data sources have been highly selective.

Even the net contribution to the EU has been minimised, reference being made to the average net contributions from 2010-14. Furthermore, no assumption is made about what savings are spent on since they will be “decisions for the government at the time”.

In practice, investment in infrastructure projects which might be directed at British sourced steel, for example, could be targeted to have maximum multiplier effects.

Similarly, the impact of migration is a “stylised projection rather than a forecast”.

As a document, the perspective adopted combined with selective data becomes irritating. Omissions become glaringly obvious.

Since Osborne has accused those who disagree of economic illiteracy, for the time being we shall gloss over the restrictions on supply side policies of the VAT straightjacket imposed by the EU. Similarly, his rosy view of EU economic performance of peripheral EU economies as discussed here is a separate debate.

Instead, an appropriate place to end might be where we started, with Monsieur Macron. Our friends in the EU still want our money, whether it is in the form of EU contributions, our trade deficit or investment in the British economy for future returns. Macron confirmed the intention for EDF, the French state-owned energy company, to progress with Hinkley Point nuclear power station.

Even though our friends may no longer be our bedfellows, as traders, it is clear that we can still be of mutual benefit. Their cooperation with China over Hinkley Point may even prove him wrong, that the Chinese will not want to talk to us.

In the meantime, we are left to form our own conclusions as to who is “economically illiterate and dishonest”.

Britain and car exports

It is becoming clear that car exports from the UK to the EU are becoming something of a flagship for the Remain campaign.

David Cameron talks of the “success story” of Britain’s car industry. During Foreign office questions on 12th April, an exchange took place between Pat Glass MP and David Lidington, Minister for Europe, suggesting that Brexit would see tariffs of 10% placed in British car exports to the EU.

It always arouses suspicion when some figures are partially quoted, such as a cash value for exports, without providing a cash figure for imports. Let us have a look at some facts. In this case, SMMT figures from 2015 are used.

Of the 1.7 million cars that were built in the UK, 57% were exported to the EU. In return we imported 85% of the 2.6 million cars bought in the UK. These include from Ford and General Motors (Vauxhall). Ford has ceased both car and van assembly in the UK by diverting production to Europe.

GM now only produces one car brand in the UK, the Astra in Liverpool, having diverted assembly to Europe from their Luton plant for other models. British jobs have been lost to Europe whilst we have been members of the EU.

There are of course no British owned car manufacturers in the top 30 of brands sold in the UK. Mini is now owned by BMW who invested their increased production capacity of Minis into the Netherlands and Austria.

Whilst the Rolls Royce Chief Executive has said that his business is better off if we remain, he is in fact a German born executive of BMW who sell 150,000 cars in the UK annually. Rolls Royce’s biggest markets are in the Americas, Asia and the Arab world.

Quite simply, if EU members were to put up barriers to trade with Britain, reciprocal tariffs imposed by Britain their own car production would be severely hit including in Germany, France, Spain, Netherlands, Austria, Romania and others.

Other makers might be encouraged to invest in producing a net shortfall of over 1 million cars in the UK. By making cars the last item on the agenda, respectable negotiators should be able to produce a free trade deal quickly.

The Office for National Statistics (ONS) summarises graphically the patterns for imports and exports for the UK from 1988 to 2014:

car trade

Car exports to the EU have certainly grown, from £8.0bn to £11.9bn. The side of the story that has been hidden by “Remain” politicians is that imports have from the EU have grown from £14.3bn to £31.3bn. Our deficit with the EU has grown by a net £13.1bn.

There are other markets, with Commonwealth countries apparently welcoming the chance to restore historic links that were shelved in 1973. The Commonwealth covers 1/3rd of the world’s population and 1/6th of economic activity. Further markets exist around the world.

Let’s just have a look at patterns of car trade with the rest of the world, using the same source, the ONS.

From 1988 to 2014, car imports from the rest of the world grew from £2.2bn to £4.0bn. Exports grew from £2.9bn to £17.9bn. The surplus with the rest of the world has grown by £13.2bn.

When looking at the totality of the facts, not excluding the rest of the world and not excluding imports, some questions arise:

Are British politicians and civil servants really not capable of negotiating a free trade deal with the EU when our balance of trade injects so much into EU economies?

Should we be looking further afield for markets in which we can grow at a faster rate than we do with the EU?

Are jobs really more secure if we remain, given that Ford, GM and Mini (BMW) have been shifting production away from these shores whist we have been members of the EU?

On 23rd June, we, the public, will have to choose between the arguments on offer. Hopefully this piece uncovers some of the hidden facts on one of the showpiece industries.

There are of course other industries. Here in York, Terry’s chocolate production has ceased, the jobs exported to Sweden, Belgium, Slovakia and Poland. The supply infrastructure is in those countries. York’s rail carriage works is now closed, having lost business to a German/Spanish joint venture.

It is for the individual to decide, preferably with full rather than partial facts. Just hearing about exports to the EU provide 25% of the story.

EU Economies

Better off in or out?

In a series of pieces looking at arguments over the European Union referendum, RexN looks at economic data to explore the cases for and against. In trying to look at economic data, a common source of statistics was found, namely tradingeconomics.com. It should be noted in advance that the compilation of economic statistics varies between countries, with depth of data easier to come by for some more than others.

The starting point for each of the countries selected varies. This is not an attempt by the writer to show bias but down to the sources. Trend lines have been added using the system provided on the site. The Y axis shows percentage change.

The first country selected, quite naturally, is the United Kingdom, whose data goes back to the 1950s. What we can see over the period in question is a slight long term decline in trend economic growth.

UK GDP

It is interesting to reflect on Britain’s currency policy with regard to the rest of Europe. We joined the Exchange Rate Mechanism (ERM) in 1990. The Maastricht Treaty, paving the way for currency union and the Euro, was agreed in 1992.

It is interesting to note that there was an economic decline during the ERM years. After leaving the ERM steady growth, above long term trend, followed. Indeed, extracting the 10 year trend, the UK shows upwards growth.

By comparison, the next stop on the journey was to see what had happened within the Eurozone since the inception of the Euro:

EU GDP

The initial observation is that economic growth in the Eurozone has a long term downward trend, from around 0.8% at its inception to zero. As expected, there was negative growth as there was with many countries from around 2008, the downturn in the Eurozone being more exaggerated than in the UK. The 10 year trend is downwards but still positive.

What then becomes interesting is to see what happens in the rest of Europe, starting with our near neighbours also in the G7, France:

France GDP

We see similar patterns as in the UK from the 1950s, volatility in growth being reduced but with a downward trend, approximating to zero towards the end of the period. Could we expect the same with another G7 country, Italy?

Italy GDP

Sure enough, the pattern is the same, a downward trend, which is maintained over the period. However, when we look at the last 10 years, the trend has been downwards, reaching negative growth.

So, what about other countries that are on the edge of the European Union? What would we see in Spain, one of the countries who have attracted investment away from Britain in the shape of car assembly and other manufacturing, bearing in mind that cars once made in Dagenham and Luton are now made there?

Spain GDP

Sure enough, we see the same overall pattern, a trend for growth rate decline, moving to negative despite an improvement over the last few years. Another peripheral economy, also with the benefit of car assembly shifted from the UK, is Portugal:

Portugal GDP

Perhaps unsurprisingly by now, we see the same again, the trend being towards negative long term growth.

Of those countries that have received high profile publicity, we should have a look at Greece:

Greece GDP

Although the long term trend has been downwards, again moving to negative. The majority of the last 10 years have seen negative growth.

A major part of the European jigsaw is Germany, the manufacturing powerhouse of the EU:

Germany GDP

Of course, there has been scope for growth, bearing in mind the divergence in prosperity between the former split of West and East which was resolved in 1989 after incorporating the less productive East. To our surprise, even though the trend has been towards positive growth, the overall picture is flat.

Does it give a different perspective to look at a couple of other logical choices, firstly our main trading partners across the Atlantic?

USA GDP

There is a slight decline in long term trend, given the range of data available from the 1940s. However, at times recent growth has on occasions approached 5% with the 10 year trend showing as above 2%.

Another example is the most populous Commonwealth country, India:

India GDP

Once again, the long term growth rate is significantly above the EU average, India seeming to be relatively protected from global downturns.

Intuitively, 2 major questions arise. The first of those relates to the export markets that British companies have chosen to align themselves with. Certainly, the majority of our international trade is within the EU. Should British companies stick with that, or should they be exploring other trading links more aggressively?

The other big question is about the long term sustainability of the European Union. Sir James Goldsmith, who created the Referendum Party, would speak lyrically about the history of empires and their downfalls.

Arguably, those unions which came about from empires, have tended to collapse when there has been a high degree of centralisation with its accompanying bureaucracy. These could be argued to have been exemplified by Rome, the Habsburgs and indeed the Soviet Union.

Notably, these unions have dissolved from the periphery; Rome from Germania, the Holy Roman Empire from adjacent revolutionary France, the Habsburgs ultimately with World War 1 and the Soviet Union from the shipyards of Gdansk and the Autumn of Revolutions.

Has the European Union grown too far, become too bureaucratic and too centralised, does it do enough for those on the fringes?

Time will tell whether the greater risk is staying in or leaving. Economic prospects outside the EU, in faster growing markets such as North America and the Commonwealth, might make us question whether it is right to maintain our exposure to less dynamic economies.

Ultimately, it is for the British people to decide on 23rd June where our long term interests are best served, preferably with a balanced view of the facts.

Hello world!

This has been set up with a view to the EU referendum.

My own interest derives from teaching Economics, making lessons relevant by using the various treaties to add relevance to theory.

Views expressed are my own and hopefully contribute to debate.