Author: johnredwood

On Saturday  Mr Osborne was back with the Treaury pro EU gloomy playbook. Their disgraceful short term forecast of what would happen on a Brexit vote has already been proved hopelessly wrong in most counts.

They said exit would drive up the cost of borrowing. Instead the government cost of borrowing has plunged and private sector loans are available at the same rates as before.

They said asset prices would fall undermining investor confidence. Instead shares of our large companies on the FTSE 100 are higher and people are out buying homes  again at prices 5% up on a year ago.

They said the UK deficit would rise. Instead the Treasury can now slash its forecast for future state borrowing costs as the price of future state borrowing has fallen by a remarkable 36%.

They said there would be a rush to cancel investment projects. So far there has been no such rush.

 

They said consumers would cut back their spending. Why? Who is doing that?

The only thing they have been right about is sterling has gone down. This is a substantial monetary stimulus to our economy. It means foreign buyers of UK assets now find them cheaper and better value. It will boost export activity and make inward investment more attractive.

It means we will buy more home goods and fewer imports.

Governor Carney need not offer lower official interest rates. That is unhelpful, pointing to an extra monetary easing we probably will not need. We do not want negative talk from those in charge of our economy. The danger us such talk will lower sterling too much.

When we come to see the immediate post Brexit figures I expect to see continued growth, and no falling off a cliff in demand as forecast by the Treasury.

GETTING OUT OF THE EU

 

 

The vote requires the government to take back control of our laws, taxes, borders  and spending. It left open how the negotiations would be handled. Vote Leave did rule out the Norwegian and Swiss models (and any other named country). By ruling out Norway the campaign also knowingly ruled out EEA membership, as this too entails accepting freedom of movement. Vote Leave said there would be a British model. The campaign argued that it could not predict what would result from the negotiation, but could live with the worst case which would be no special status, requiring the UK to rely on WTO rules.

 

WHAT DOES OUT LOOK LIKE

 

Model One

 

Special deal after negotiation:

The UK refuses to accept freedom of movement and explains the points based system to control numbers, geared to reducing total flows into low paid jobs. Also refuses to pay general contributions to EU budget. After haggling the rest of the EU decides they have a lot to lose from WTO levels of tariffs and other barriers against their exports to us. WTO allows 10% tariffs on cars which the Germans do not want, and much higher tariffs on some agricultural products which the French do not want, so there should be scope to bargain these down or keep zero as at present.

The City wants to keep the passports for services. There are ways round its loss, through the equivalence provisions of MIFID II and/or through subsidiaries in other countries. Most UCITs are anyway already based in Luxembourg or Dublin. The passports could be a trade off for not putting a 10% tariff on German cars. We also need to remember that many of them want passports to London as the largest market by far in the EU.

The ideal deal would be no new tariffs or barriers on access to single market, with no freedom of movement or contributions.

 

Model Two

 

No special  deal – exit and rely on WTO rules

 

The US imposes an average tariff of just 3.5% under WTO, with 45% of all items tariff free.   The EU imposes an average tariff of 5% on the rest of the world, which we can negotiate down as we develop trade deals with other countries in our own right. If they insist on their 5% average against us we will still be more competitive, as sterling has fallen by more than 5%.

 

BEST NEGOTIATING STYLE

 

Inject pace, and make clear we do  not want it to drag on for 2 years, as neither side rally wants that length of uncertainty. If they have no intention of giving in on money and movement then end the talks and go for WTO. If they will flex, then we can seek to persuade them that it is in our mutual interest not to place tariffs and barriers  in the way of their very profitable trade with us.

 

WE ARE ONLY OUT WHEN WE HAVE REPEALED THE 1972 ACT. 

 

We need to progress the repeal, transferring all EU law into UK law pending review and amendment. This could be done immediately, leaving the question of date of bringing into force until we know the negotiating timetable.

 

 

 

 

I am exceptionally busy with constituency matters, the leadership election and briefing on Brexit, so I am afraid there may be delays  in Posting. To get posted early please keep contributions brief without citations of other sites which need checking.

As bonds stay at record high prices  and the FTSE 100 share index surges above the levels  prior to the referendum, there are quiet signs of more activity around the economy. Local estate agents tell me buyers are back viewing and making offers for homes after a lull before the vote. Retail sales were growing at a fast 6% in May, and are probably still growing after the events of June 23rd. A local Independent Financial adviser told me that only four of his clients had phoned after the vote to ask about what was going on and two of those saw it as a buying opportunity. His portfolios were generally up in value on the pre vote levels.

Yesterday Governor Carney seemed to be  still trying to talk things down with revisions to the Bank of England’s  outlook with possible lower growth at some date in the future. Sometime making comments allegedly designed to stabilise can have the opposite effect as it gives media and journalists another chance to run out the old Project Fear estimates and forecasts. Some large companies are still being pessimistic, but many more are now coming round to the idea that there can be a profitable and successful life after Brexit. Indeed, there are many new opportunities. Various countries are indicating they want a trade deal with a newly independent UK.  What a refreshing contrast from punishment Europe, sending out harsh words of how the UK has to be taught a lesson so no other country wants to leave.

It is odd they want to make the EU into a prison where you can check in but cannot check out. Surely if membership is as good as they said before the vote no other country will want to leave. Or are they  now accepting that it has the drawbacks others identified, and it is an inconvenient truth they do not want out?

It’s also an odd idea that free trade is an advantage to just one of the two sides, which can only be granted if you accept lots of other things you do not like. I suspect we will discover that continental service businesses want passports  to the UK for their products, that  German car companies want tariff free access to our market, and French farmers want to be able to sell without difficulty to us as well. They will realise free trade is a two way process which requires  both sides to agree.

Isn’t it time the UK authorities and leading companies either said nothing, or found something positive to say?  Why try and talk confidence down, when in the market many people are still willing to buy and sell, and when most of the UK  the financial markets are now performing well.

They need to understand that the move down in sterling is a monetary stimulus. it means the UK is cheaper for foreign investors, tourists and buyers of our goods. No wonder many UK shares are surging. I don’t remember that bit in the gloom laden official forecasts.

If the EU sticks to its view that it cannot allow the UK to have any control over migration, the negotiations will be very short. The UK must refuse to continue with freedom of movement, so there will be no basis to reach a new agreement.

This means the Uk will simply need to withdraw from the EU and  rely for our trade with the EU on most favoured nation status under World Trade Organisation rules. Average tariffs are very low, though they can be higher against German cars and French agricultural produce. The UK does not want to impose tariffs, but if the rest of the EU does impose tariffs up to WTO limits the UK will obviously retaliate.

The UK could make a good living under WTO rules. The UK will still benefit from the main advantage of the single market, the fact that you can produce a product to the same standard to sell anywhere in the EU. The recent fall in the pound is bigger than the extra costs WTO tariffs and ruled could impose, so our competitiveness will still be better.

 

In some ways this makes it so much easier. If The EU does not want to listen to the UKs needs then they have to accept we can just leave and they may end up imposing obstacles to their very successful exports at a time when the fall in the pound has just made them dearer.

Latest figures show retail sales up, average earnings up, employment up  and continued economic growth. The fear of Brexit or the run up to the vote did not depress the economy in the way forecast. It is good news that bonds are so strong, and shares have rallied after an initial relapse. Government needs to instil  confidence and work as it used to promote investment, job creation and economic progress.

I have been in discussion with the government about how we can best ensure a smooth and early Brexit. Most people want a speedy move. Those who want out do not wish to wait for long until the result of their vote is achieved. Many people who voted Remain did so from their professional and business backgrounds, as they worried about what the uncertainty might do to confidence and activity. Some also worried about what terms we will secure for continued trade and investment. We need to move in a purposeful and friendly way to achieve an early settlement which deals with the worries and fears of those who voted Remain.

The aim should be to secure the main point of the campaign, taking back control, as soon as possible. We have only achieved this aim when we have repealed the European Communities Act. We can also reassure and make it easier to achieve exit by taking over all the current EU laws and rules and incorporating them en bloc into UK law, so nothing else changes other than control. This should reassure our former EU partners and assist the negotiation over trade and other matters.

Once we have taken control we will need to legislate urgently to put in place the points system promised to control migration from the rest of the EU. This matter is not negotiable. We will also need to take back our contributions, so we can get on with the spending and tax plans set out in the Leave campaign.

The negotiations with the rest of the EU will centre over how many other changes they might like in our current business regulation and trading arrangements. These for choice will be agreed. The UK need not seek any changes to the current arrangements to  minimise disruption. The other 27 will need to decide amongst themselves what additional barriers if any they want to place on their trade with us, and then negotiate them with us bilaterally. I would be surprised if they wanted to impose much by way of impediments to their trade. So far they have not suggested any I have seen, other than trying to cancel the financial sector passports. I have written at length on possible  responses to this. Under World Trade organisation rules there are strict limits on tariffs on most items anyway which would keep them to low levels, well below the recent fall in the value of the pound which has improved our competitiveness.

The situation is very different from trying to negotiate a free trade agreement with a foreign country that has high tariff and non tariff barriers at the moment. There it takes time as each side weighs up the advantage of surrendering a protection it think matters, even if the protection  is in fact self defeating. This negotiation starts from free trade and common rules for some services between us and them.  The only question is therefore why change anything? What do they want to change as punishment, and is it legal to do so under global rules? Won’t it do them more damage than us? As it is more imports than exports for us there are plenty of other places around the world who would like to sell to us if the EU decides to become dearer or more difficult. Once anger has been calmed and business has lobbied them not to do damage, it should prove easier to achieve a decent answer for  both sides.