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.

Voting for a reformed EU

The referendum was presented by David Cameron as the opportunity to support a “reformed” European Union. Given the suspicion of the Prime Minister’s sound bite politics, perhaps we should ask the question what reform actually means.

From public utterances, it would be easy to deduce that Cameron saw his expensive tour of EU states to have been a step in the direction of reform. Cameron noted the key achievements which have been some minor welfare reforms and a statement that ‘acquis communautaire’, ever closer union, will not apply to Britain.

It would be easy to conclude that the impression Cameron has been trying to give is that EU reform means a drawing back of boundaries.

There certainly seems to be a case for reform. As previously discussed on this site, economies within the EU are diverging. Germany, the location of the European Central Bank (ECB) is experiencing steady if unspectacular growth. Nations close to the German geographical core are growing, albeit slowly. Those on the Euro currency zone periphery are suffering.

To some extent, there is already a two-tier EU. Of the member states, 19 have adopted the euro as their currency. They are still subject to the acquis communautaire. As such, their march to ever closer union is, according to the Treaty of Rome and subsequent treaties, irrevocable.

The existence of a single currency has significant implications on the direction of reform.

Single currencies have exited before. Early examples come from the Roman Empire and in the far East, the Chinese dynasties of Qin and Han. Their durability over centuries may have been due to centralised power combined with markets that were less efficient than today’s. Coins that carried their own value in gold, sliver or bronze may have also helped.

The Roman currency became devalued as coins became plated in silver and gold.

Further attempts at currency stability have been made over time. The Gold Standard provided a basis for currency values. This worked from 1717 until World War I. Promissory bank notes were supported by the value of gold.

The 20th century saw developments in money markets and currencies. Notes have become trusted without the backing of a commodity. Telecommunications and electronic trading have intertwined the values of currency and commodities. It has been the stability of governments that has allowed financial markets to develop.

Similarly, as compared with Roman times, commodities and their derivatives can be traded in global markets, between Europe and America at the touch of a button in Asia.

Smaller currency unions have worked in the 20th century onwards in some cases. These have tended to be when a smaller country has tied in to that of a larger neighbouring country. Others, such as on the African continent, have worked where neighbours shared a similar economic structure.

Modern currency unions on a larger scale can work. A classic example in the United States which has a diverse economy, with a range of climates that is even wider than those of the EU. It works because if one state or region does not perform, central government can redeploy resources around the union of states.

If the EU and the Euro are to work, does that indicate that reform should take a different direction to the looser affiliation that Cameron seemed to suggest before the last election?

Can the Euro succeed unless there is the sort of government that can divert funding flows from New York to Idaho? How can Greece, Portugal, Spain and Italy expect to remain in a currency union with Germany?

The answer probably comes from the EU 5 President’s Report from 2015 entitled ‘Completing Europe’s Economic and Monetary Union’.

This document sets out 4 further steps for integration:

  1. a genuine Economic Union
  2. a Financial union
  3. a Fiscal union
  4. a Political Union

These certainly seem logical steps if the Euro is to work. There is even a timetable for reform in 3 stages. Stage 1 “structural convergence, completing the Financial Union, achieving and maintaining responsible fiscal policies at national and euro area level” by 2017.

Stage 2 sees a completion of the “economic and institutional architecture”, through agreed benchmarks which could be of a legal or constitutional status. Stage 3, or completion, scheduled for 2025.

So we have a picture of reform generated from within the European Union. Far from being reform towards liberalisation, the proposed path is for closer integration. Whilst monetary policy I decided by the European Central Bank, fiscal policy is to be constrained through convergence criteria. Political union becomes inevitable.

Of course, it remains possible for those countries outside the Eurozone to opt out of those arrangements. The question remains, what sort of status will they have? Will we see Norway’s trading model? Does pooled sovereignty mean he majority of EU members decide on further bureaucratic measures that will suck in those nations who have opted out of the Euro?

One thing is clear, that at the moment we do not know what “IN” looks like. Uncertainty over the direction of travel creates risk. Will a Britain without an ability to create its own fiscal policies be able to attract sufficient inward investment to maintain high employment levels in the future?

With less than 2 months until the referendum, it is time for the government to make its case, tell us what IN looks like and explain their vision for a reformed EU. How does this compare with the EU institutions and what are the chances of success?

The time for Project Fear is over. The time for clarity has come.

EU Referendum, what’s it all about?

For the first time in 41 years, the British people will have a say on continued European Union membership. What are the British people really being asked?

Going back to the referendum 41 years ago the question was: “Do you think that the United Kingdom should remain part of the European Community (the Common Market)?” The word “Economic” appears to have been left out.

A lot has changed sine 1975. The European Economic Community has evolved into the European Union (2009), expanding from 9 member states to become the 28 state organisation that it is today.

David Cameron claims a victory in four fronts:

A brake on migrants claiming in work benefits for 7 years.

Restrictions on child benefit for offspring of migrant workers not resident in the UK until 2020.

Protection of the city of London from some Eurozone regulations, yet to be clarified.UK exemption from the principle of “ever closer union”.

The achievements have yet to be ratified by other EU member states. A referendum will be carried out before such ratification.

The first two of these so called achievements highlight a particular point. After those 7 years of benefit restrictions, nothing has been decided. The UK is powerless to decide who does not receive taxpayer benefits for the next 4 years.

Taking a different perspective, other areas remain untouched. Britain has not regained any control over how other expenditure is allocated. Agricultural and fisheries policies are still subject to EU treaties and regulations.

The UK can still not reduce VAT below 15%, should a government decide on supply side policies to stimulate the British economy. Although some migrant social welfare benefits are marginally curbed, the UK can still not restrict migration from member states.

The United Kingdom can, however, curb immigration from Commonwealth countries. A part of British history includes the colonisation of Australia. Criminals were subject to “transportation” for a range of offences including the theft of a rabbit or cutting down a tree.

Although the United Kingdom can stop the descendents of British tree fellers or rabbit thieves from migrating back to their ancestral home, we seem incapable of stopping Eastern European rapists, paedophiles or murderers from settling here and claiming benefits.

David Cameron is not the first British Prime Minister to claim a victory in negotiations with the European Union.  In 1992, John Major appeared to have won over the principle of `subsidiarity’, which he defined as “the principle that the EU should act only where a nation state cannot”.

Subsidiarity in practice is subject to definition by the EU. The EU decides where the nation state cannot act. If a decision affects activity across borders, then the EU decides that subsidiarity does not apply. This also only affects bringing in new laws and regulations, not repealing other EU laws.

An illustration of EU powers can be seen in Red Meat Directive 91/497. A sight that is no longer seen in butchers’ shops is pork chop with a kidney attached and a peculiarly British phenomenon.

The directive stated that when slaughtered, an animal’s kidney had to be detached from its perirenal fat and be examined by a vet. Apparently, slicing through the kidney for internal inspection was not sufficient.

Although local traditions were to be preserved, the EU has decided that consumer protection makes this a cross border issue, therefore, a British tradition has died a death. Similarly, the Pound of British sausages has been downgraded from 454g to 400g in our supermarkets.

The removal of `acquis communautaire’ or “ever closer union” might be argued to be a formal extension of subsidiarity. In practice, if it means anything, the abandonment of the principle for Britain is that we do not have to opt in to future measures agreed by the rest of Europe. It does not mean that we can reclaim powers already conceded. It does not stop the European courts from using this as a guiding principle in disputes.

Despite all of Cameron’s so called victories, there are several areas that remain untouched, agriculture, fisheries, consumer, employment, labour, health and safety, commerce, justice, social policy, energy, transport, foreign and security policies to name a few.

Britain’s society has historically developed through free trade and taking a global perspective. Far from being “Little Englanders”, the British maritime location has facilitated exploration and development around the world.

By comparison, mainland Europe can be argued to have become introspective and protectionist. As members of the EU, Britain has effectively being forced to support restrictions on our global associations, with North America, the Commonwealth and byond, rather than act in her own interests.

On 23rd June, Britain is to be given the opportunity to commit to a stay in the European Union for another indefinite period. The package which has been sold as “reform” is nothing more than a little tinkering around some short term popular measures that merely scrape the surface of the EU’s powers over Britain.

The EU is a body, remember, that has not been able to sign off its accounts for more than a decade. Is that demonstrative of a competent body that we should choose to decide on key issues of domestic policy?

On this occasion, David Cameron has aligned himself with politicians who he labelled as recently as 2nd December 2015 as “terrorist sympathisers. On this occasion, we are invited to join him with them. Are we voting to remain a part of a reformed EU, or simply the EU?

Obama’s intervention – a view

During his visit to the UK, President Obama has made two key interventions in the Brexit debate. How critical will this be to the outcome?

There were two headline grabbers. The first was his piece in the Daily Telegraph. The key message was a positive one, that Britain’s voice is magnified in the EU. The second, in a different meeting, came across as more threatening; Britain would head to “the back of the queue” on any future trade deals if it leaves the EU.

The gist is that America’s view, or rather his view, is that we should stay in. In fact he made the debate even bigger.

It is easy not to look beyond those headlines which Obama grabbed. However, in context, Obama highlighted the stake that the USA has in the American lives given during both Worlds Wars. His script could have been written by Paddy Ashdown who made the same points on BBC’s Question Time.

Ashdown’s own notable contribution so far is being photographed with his wires crossed with the PM.

wires crossed

It may be worth a sideways look at Obama’s visit. His presidency expires in 2017. He is effectively on his last legs and must have some photos for the family album from his lunch with the Queen as well as the 3rd in line to the throne.

He is clearly friendly with Cameron. The British Prime Minister himself has declared that, like Obama, will not stand as democratic leader of his country again. Much has been made of the language Obama used, the “back of the queue” being a British rather than American phrase.

For a moment, we can take a reminder of historic link of the World Wars. The USA famously entered WW2 with Pearl Harbour. Prior to 1942, help to Britain had come in the form of commercial deals for military hardware.

The United States also arrived late to WW1, in 1917. The context was that German military had targeted United States’ shipping. Germany provided support to Mexico in their attempts to recover Texas, New Mexico and Arizona, states which had come under American control some 70 years earlier.

The United States does what is in the United States’ interests. That is not to say that America’s efforts in both wars are not appreciated. Their support was not entirely philanthropic.

Of course, the United States has its own perspective. From Obama, it is not offensive to sideline the efforts of the Commonwealth. From Paddy Ashdown, ignoring the sacrifices of those Commonwealth countries whose citizens’ names adorn the Menin Gate, let alone those who have been interred around Gallipoli, amounts to ignorance.

Before returning to military implications, Obama’s second headline grabber should be investigated. The “back of the queue” comment was delivered in a wider context. Obama told his audience that the USA’s priorities are to negotiate with larger blocs.

One wonders what sort of detail Obama has been able to grasp. As a member of the EU, Britain has implicitly supported European protectionism, working against the sort of free trade deals that both Britain and America have supported in the past. Britain’s seat at the World Trade Organisation (WTO) has been absorbed into an inward looking Europe’s position.

Assuming that Obama was not speaking with a forked tongue, would Britain really be pushed to the back of the queue?

Presumably, Britain would also be shunted to the back of the queue in military support for America’s overseas military operations. As we await the final Chillcot report, it adds a different perspective to any concerns over deployment of British forces, the loss of British lives and British military personnel with life changing injuries as well as British expenditure.

The interaction of American business interests does not stop there. Should Britain be looking for alternative security arrangements? Perhaps Obama is telling us that we should look further afield than the F35, to furnish our new aircraft carriers? Should we be looking at alternative partners for Trident’s replacement? Should our potential partners include France, India, even China, Iran, Israel or others?

Obama did also leave a much more positive message. He urged youngsters “to reject pessimism and cynicism, to know that progress is possible”. Perhaps this is a message that taps in to the British spirit. Despite pessimistic and cynical campaigns, focused on why we can not survive outside the EU, Obama is really telling us that we should, go for an independent role in a brave new world.

For Obama’s benefit, it may be worth highlighting some of Britain’s attributes. Britain is the 4th/5th largest economy globally, a key member of G7, the United Nations, the WTO and NATO.

Of current EU members, Britain, along with Estonia, is one of the two nations to meet the NATO target of 2% of national income on defence, the average of the rest of the EU being below 1.5%. Britain accounts for 23% of the EU’s expenditure on defence.

Central to the Commonwealth, Britain’s influence is global. Britain’s support is useful in economic, diplomatic and security issues.

Yes, Obama’s contribution is welcome. We should judge his comments critically. We can discriminate between his mixed messages, look beyond the headlines and make our own interpretation. We can recognise that in reality, the United States needs friendly allies, both in opening world trade and in its global interventions.

A final reminder to Obama comes from America’s own history. America sought its own independence from remote government. America sought to control its own destiny. 340 years later America has become the biggest economy in the world. It has become a successful free nation.

Independence is not a four letter word. If we are at the back of your queue, you afford us the opportunity to develop other alliances. Your successor might even appreciate and value us.

“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.