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.

 

 

I trust the news headlines will blaze the good news from the markets. Since the Brexit vote UK government bonds have shot up to record high. The government which had to pay 1.37% on the eve of the Brexit vote to borrow for ten years now only has to pay 0.98% for ten years. That’s a record low.

Meanwhile the FTSE 100 main shares ended last week up a little, and today rose another 2.6%.  Let’s hear that instead of all the gloom. There is life after Brexit. We need to be confident about our prospects.

Yesterday  morning the Chancellor added his voice to the Governor of the Bank of England to reassure markets. It was important  to hear him say that there is no need for panic in financial markets. The Bank is making plenty of liquidity available to banks and the markets should it be needed. He also confirmed that there will be no emergency budget. I have always argued that such a tax raising and spending cuts  budget is undesirable and needless. I always knew it would not pass the Commons. I would have been one of many who would vote it down. What we need is a budget to promote expansion and prosperity, spending the saved contributions as soon as we are out.

The international reaction to the UK’s declaration of independence has seen shock give place to acceptance and in some cases admiration from outside the EU. I  expect various countries to come forward soon and to ask to enter negotiations with the UK for trade agreements, now we will be free to do so for ourselves. The government needs to set up and staff a Trade Negotiation unit and get on with it.

The business reaction to Brexit is also on the move. Many companies who did not want a Brexit vote are now saying they can do business in and from an independent UK, just as they do today from the UK as  a member of the EU. The new lower level of the pound will make the sums for investors better, as products made in the UK will be more attractively priced and more profitable at these sterling levels. Sterling may not stay down at its new level against the dollar indefinitely, but all the time it does UK competitiveness is much enhanced.

The fishing industry is happy, planning how a new UK based system of quotas and regulations could help us rebuild both our fishing industry and our fishing grounds. Farmers are coming to realise that freed of the EU they can help the UK government design a rural and farming policy suited to our needs. I have found some of the hostility and reserve about Brexit in the City is changing. City professionals recognise that Brexit brings opportunities. Many of the sensible ones  now want to help the government negotiate a good outcome on services.

I want to see the government inject some pace and purpose into the exit process. The next few days will see Conservative  MPs engaging with Leadership candidates wanting to be Prime Minister. My lead questions will be How quickly do you want to get the UK out? What route will you use to secure our objectives, clearly laid out in the winning Leave campaign?   Many of the answers have already been published on this site.

Much of the commentary about the EU referendum has been designed to maximise antagonisms in our society. We are told that the young, the better off and the better educated voted to remain, whilst the opposite of the above voted to leave. This is an unhelpful caricature of the voting patterns.  This was  no simple case of the have nots defeating the have yachts.

On the Leave side were a number of rich and very successful entrepreneurs, and a number of important businesses. Business was split, though it is true more of the large companies run by the international executive class were for remain.  Whilst it is also true that university cities like Cambridge,  Oxford and central London were more for Remain, there were other university centres that were for Leave.  More graduates overall may have been for Remain, but there were plenty of well educated and thoughtful people voting for Leave. One of the features of the campaign was just how many long, detailed and academic papers I received from all over the country from people in business, in academic life and outside arguing for the Leave case.  No campaign could win with just Have nots, and get 52% of the vote.

Nor was it a simple case of the economic argument against the immigration argument as various spin doctors and pundits kept telling us. It was true that the large Remain vote contained many people with genuine worries about what might happen next. They had fears about interruptions or damage to laws, spending programmes, jobs and economic activity. Few of the Remain advocates wanted full membership of the EU, as they did not wish to join the Euro, the common borders and the common army.

It is now vital that all work together to ensure the minimum of damage and the maximum of improvement and potential from the changes the nation wants to make. The government should reassure markets, companies and others that sensible arrangements will be put in place so our prosperity is not reduced and the prospects of those on low incomes or out of work are improved. Most Brexit advocates have no wish to scrap good employment laws, no ambition to  stop funding universities and farmers, no plans to impose barriers on our trade. All EU citizens here are welcome to stay for as long as they wish.

It was not true that most Leave voters just wanted to control immigration. Yes, the idea of a points based system of migration control which would allow lower overall numbers was popular with many. Vote Leave did not put any numbers on what the new system can achieve or make promises on numbers, as that will be for the government to determine and to put to Parliament once we are free to have our own policy. The government itself has put numbers on what it wants to do, but has been unable to achieve it with current policies.

Most Leave voters I spoke to were principally concerned about taking back control. They liked the central slogan of Vote Leave. The understood that when the UK is again a self governing country it will not be all powerful, and will still have its problems. The difference will be that the electorate can lobby known individuals in Parliament for change, or can change the Parliament if it fails to do their bidding.

Wanting to preserve our current arrangements with the EU, including opt outs, was popular with some on low incomes as well as with the rich, some well educated and some unqualified. Wanting to go forward as a self governing country was also popular with many and varied people. It is now time to concentrate on what binds us as a nation. The new language of class hatred on either side is not helpful. Remain leaders should not scorn those who voted against them. You do not need a degree to cast a sensible vote. Leave  should not attack people for being successful who happen to disagree with Brexit.

Parliament needs to work sensibly to implement the wishes of the UK electorate. We cannot put everything on hold until Mr Cameron has gone and his replacement is in post.

Remain voters are understandably apprehensive and wish to see everything done to minimise disruption and to reassure markets, companies and investors. So do I wish to see that.

The main items which Leave voters wanted can be summarised as

1. UK control over new law making and over our courts
2. Cancellation of our EU contributions, with more spending on the NHS and repeal of VAT on fuel out of the cancelled contributions we do not get back
3. A new fair system of immigration control, delivering lower overall numbers
4. Replacement of lost EU spending by UK spending paid for out of saved contributions we do get back
5. Maintenance of trade, tourism and other regular contacts through negotiation of the best deal for future relations

 

Next week Parliament will need to push the government to provide more information upon how these objectives can be secured. Many are within UK power regardless of the  views of our partners. It is a UK government matter to prepare legislation to repeal VAT and to  change the migration system. It is within the power of the Treasury to spend more on UK priorities and on replacing lost EU grants.

There are issues over future trade and investment arrangements which require  both sides to agree any changes. The UK has no proposals for changes to current trade and business arrangements. We need to discuss with the others what if any they would like us to accept.  Starting these talks does not require a new PM, merely a committed negotiating team which the current PM could appoint.

There is a legal issue over our right to break EU law on VAT and stopping contributions. Some say we can only do that if we submit to the process of the Treaties under Article 50. Others say we can do that by amending the 1972 European Communities Act ourselves. After all the UK voters voted to reject the Treaties and to re establish UK control. That is the debate we need to have at an early opportunity in parliament. Draft legislation is already prepared to take back control, but it will need government support to carry. The legislation includes transferring into UK law all current EU laws. the UK  should not seek to  vary trade and business laws and arrangements without agreement and should uphold them until both sides agree any changes. This will also reassure those who want the full range of EU employment rights to remain as good UK law.

All post vote attention has been focused on the fall in the pound against the dollar rather than the surge in UK government bond prices or the good performance of the FTSE 100 since February. It is true that the pound hit a  ten year low against the dollar of $1.36 on Friday, compared to $1.38 in January 2009 (when we were firmly in the EU). Over the years we have been in the EU the pound has been up and down against the dollar in a very wide range of $1 to $2.  Much of the recent slide of the pound against the dollar has been part of a general strengthening of the dollar and a weakening of the Euro, yen and pound as well. The more immediate moves can be put down to market responses to the vote.

The pound against the Euro gives us a different picture, and arguably a more relevant one on Brexit. The big plunge in the pound occurred during the banking crash. The pound fell from a high of Euro 1.51 in January 2007, to just Euro 1.03 in December 2008, a fall of one third. From Euro 1.14 in July 2013 the pound rose to Euro 1.43 in July 2015, before gently declining as the Euro started to strengthen more broadly. On 23 June before the referendum result the pound stood at Euro 1.31. Yesterday it closed at Euro 1.23, still almost 20% above its previous low.

A modestly lower pound will be welcomed by many exporters. I will keep people posted next week to see how it settles down.