Author: johnredwood

The Stay in campaign seem to think the fall in the pound against the dollar is the result of Brexit fears. I don’t think so. But let’s humour them and agree that the chances of Brexit have become much higher recently and this drives markets. Then on that basis they need to explain the following:

In early May 2015 on the election of a Conservative government offering a referendum it cost the government 1.9% a year to borrow 10 year money. Clearly before the election there was no chance of a Brexit, and after the election there could only be a chance of Brexit on a Conservative win.
By January 3rd this year this had fallen to 1.77%.
On February 1st it still cost 1.626%.
Over the month of February, the first month of serious campaigning for Brexit and the first month that markets focused on the possibility of exit, the cost fell to 1.37%.

Clearly markets think the UK out of the EU will be more credit worthy! That makes sense, as we will no longer need to send huge sums of borrowed to the EU and not get it back.

The only thing the Stay in campaign wishes to say is that the Brexiteers are muddled over coming out. This is far from the case. Let me try one more time to explain our view.

There is no need for the UK to seek a Norwegian or Swiss style deal with the EU. The two biggest wins from leaving will be getting our money back to spend as we wish, and ending our obligation to freedom of movement with the rest of the EU. The Leave campaign has no wish to throw part of these gains away by entering an EU lite arrangement which makes us pay some money in and requires us to be part of the free movement zone.

The only reason the Stay in campaign wish to imply we want to be Norway is to be able to claim that we will then not get the two big wins we want from exit! When will the media get this point and start asking the Stay in campaign what the future looks like inside as the EU rushes on to political union.

The day after we decide to leave – assuming we do – nothing changes. We would say that trade and other contacts continue as at present, and we will then go to Brussels to discuss what we need to change and to hear what they would like to change in our relationship. We would tell them that contributions will cease and that we will taking charge of our own borders. All EU citizens currently in the UK would be welcome to stay, and we would expect all UK citizens in EU countries to be free to stay. Future EU citizens wishing to come to the UK would need to comply with UK migration rules, which would have common principles for the whole world and would no longer discriminate against non EU nationals. The EU is not going to evict UK nationals legally settled elsewhere in the EU, and may or may not want to impose restrictions in future over migrants from the UK. Neither side is going to want to restrict people with good qualifications or with money to support themselves from changing residence as they see fit.

The UK would not wish to impose any new barriers on trade with the EU, despite being in heavy deficit. It is unlikely the rest of the EU will wish to impose any new tariffs or barriers on their trade with us. Were they to seek to do so, they would be unable to exceed World Trade Organisation tariff levels as both the other EU states and the UK will be members of the WTO. To clarify the current position, the UK and the other EU states are members of the WTO in their own right, so WTO arrangements can remain in place when we leave the EU. All that should change is the UK will regain her voice and vote at the WTO and no longer have the EU representing her. The EU has very few trade agreements outside the WTO arrangements.

Western democracies have traditionally produced two main parties, one centre left and one centre right, who compete for power. In sovereign states the party out of power can offer an alternative in big matters like how to run the economy. Those who dislike or disagree with the government can rally round, hope to win the next election and then see the major policy change they want if they win. Sometimes centre left parties adopt more of the centre right agenda to win as with New Labour. Sometimes centre right parties adopt some of the policies of their rivals to win.The important things are they must offer genuine choice and can change things when elected. Sometimes it is because they sell a convincing message of change that they win.

Belonging to the Euro and the EU alters all that. Belonging to the EU without joining the Euro has changed quite a bit of that. As we have seen in Greece, it does not matter what economic policy the voters or the winning parties want, they end up with EU policy which does not change. Greek voters used recent elections to issue a strong protest, but ended up with the same EU austerity policies they rejected. In the EU, now there are large areas including energy, fishing, agriculture and the EU budget and tax requirements that cannot be changed by a change of UK government.

As a result we are seeing in the Euro area the collapse of the traditional parties as frustrated electors seek a change which will still be denied them. Ireland has now followed Spain in producing an election result that does not produce a stable government owing to the decline of the two main parties. Even Germany has the two main parties governing in coalition with each other. In Greece the two old main parties have been hugely damaged by events.

In the most recent results in their respective countries the two main traditional parties managed to poll just 34.4% together in Greece, 40.7% combined in Spain and 49.8% in Ireland. Such is the impact of recent events and of EU policy and the Euro on their economies that now more than half of all voters in each of these three countries rejects both traditional alternating governing parties of the last century and the previous decade. In the UK where the absence of the Euro has allowed a better economic recovery from the crash, the two main parties received the votes of 67.3% of voters, well down on the much higher proportions in past decades. In Germany too, despite being relatively well served by the Euro compared to the badly damaged countries of the south and west, the two main parties only managed to get the votes of 67.2% of those voting in the last election.

The two main parties look hard in each country at seeking to prop up the EU/Euro establishment by entering coalition together,to keep the challenger parties who want a change of policy out of government. Junior partner parties in coalitions often do badly in subsequent elections, so not every country goes this route. It will be interesting to see what the two traditional lead parties in Ireland do now they are faced with this dilemma. Although the UK has not yet needed or wanted a grand coalition, in practice we have experienced a grand coalition of Labour, Lib Dem, Conservative front bench and SNP to drive through many EU measures which Conservative Eurosceptic MPs have fought against. Labour is usually keen to avoid all discussion of the EU, and in office refused to set out just how much power it was surrendering.

What the voters seem to be saying in many Euro and EU countries is they want changes to policy which the EU will not allow. Only the UK so far has tried to get changes to the EU following a General Election result producing a win for a party that represents the UK voters worry about EU policies on welfare and borders. The lack of success in negotiating proper change will confirm many people’s views that the EU cannot be made democratic. The UK model is also one which other countries will not be allowed to follow. The EU as it stands cannot face a renegotiation of membership terms with each country following a General election. However, unless it does so and allows proper changes, the wishes and views of electorates from Greece to Portugal and from Cyprus to the UK will be ignored.

Recent reporting of market movements and the EU arguments has been highly selective. Some ascribe falls in sterling to Brexit uncertainty. At the same time UK government bonds have been rising, implying investors have more confidence in UK financial assets and therefore implying that Brexit is seen as strengthening the UK public finances. My view is they are exaggerating the impact of Brexit on the pound, but maybe they have not worked out that saving all those large contributions to the EU will strengthen the UK public finances and of course cut the balance of payments deficit.

We should be more worried about EU finances and their economic outlook if the UK leaves the EU. Which countries and taxpayers will have to replace the £10 billion the UK pays in to the benefit of the other countries? How will a new UK fishing policy affect the Spanish fishing industry? If the UK imports more cheaper food from the rest of the world who will pay the higher prices for CAP food inside the EU? Is any of the EU’s large trade surplus at risk when the UK leaves, as some commentators like to claim the UK’s trade might be? My view is trade is not at risk, but those who think it is at risk need to understand which side has more to lose.

It is true that the U.K’ S departure from the EU will allow the rest of the EU to move more rapidly to political union and to impose more common policies and more regulations without the UK trying to slow it all down. We have learned that pending rules to ban fast kettles and toasters have been delayed until after the UK vote, as it would not look smart to outvote us on those issues just before the referendum. The 5 Presidents Report has been on ice this year, but could be brought out more rapidly if the UK goes.

I see myself as a good European. I like my continent and many of its people. As a good European I do not want my country to hold up plans for more European integration, nor do I want my country to be dragged into that Union.
The UK is an outward looking global country, trading with the five continents, and friends with many countries worldwide. To restore and foster our democracy we need to leave. There will be no additional economic risks for us outside the EU. On the contrary the risks that come from being too close to the Euro, having to pay into an ever rising EU budget and being pillion on their wild ride to political union mean we must leave to cut our risks.

The UK identity is a complex matter these days. Some people want to be Scottish to the exclusion of their UK identity. Northern Ireland has long been divided into a majority proud to belong to the Union, and a minority wishing to join the Republic of Ireland. Many people are happy to be both UK and English, or UK and Welsh and see no conflict.

Yesterday I was speaking to a school sixth form on their chosen topic of British values. At the start I asked them to tell me how they felt about their identity. I asked them to say how they would answer a foreigner who did not know local UK geography where they came from? How did they feel about their own identity?

I offered them four choices. They could say they were European from the EU, British from the UK, British from Great Britain, or English from England. Just four opted for European, and just three opted for British from GB. The large majority opted fairly evenly for UK or England. It demonstrated that English identity is becoming much more prominent and popular. It was inconsistent with those who say young people see themselves as European. I have had similar results over a choice between European and British elsewhere with student audiences.

I find when out and about campaigning there is a growing awareness of the high costs of staying in the EU. We are gradually getting over the point that they spend £10 billion of more money that we could better use at home. We are not yet getting over the equally important point, that we will be able to afford to pay all the monies currently paid to UK people and institutions by the EU on top of the £10bn bonus, as all the money we get back we are sending to Brussels first. Please tell all famers, university people and others you meet the UK can pay every penny to them that the EU pays, because it all comes from us in the first place. As far as the UK is concerned, Brussels has no money. Every penny we get back we first sent to them. Then there is the £10bn we don’t get back which we have to send them as well.

A senior scientist yesterday on the media implied that we would not get grant money for universities out of the EU. Some of the university grants and collaborative programmes are European programmes not organised by the EU, so we would remain eligible. Any so called EU money that was discontinued is our money which we sent them in the first place, so we can simply pay our own universities with that money which no longer has to be sent to Brussels. Our scientists will continue to work with scientists from many other countries including member states of the EU after we have left, as universities are rightly collaborative on a global basis across national frontiers.

Debating against Better Stay in speakers always produces the same attitudes. They spend half their time running down the EU they want to stay in, and the other half scaremongering about coming out! They always say they do not wish the UK to join the Euro. They stress the protections of the UK’s opt out and subsequent negotiations over avoiding the costs and rules the single currency imposes. They usually rejoice that we are not in Schengen, implying that means we are also opted out of freedom of movement which of course still applies.

So the first question to Stay Inners is Why do you wish to belong to this organisation, when you disagree with its two central features, the currency and the common borders? It is like joining a cricket club, only to announce you have no wish to either play or watch cricket, and then to complain that people talk about cricket at the odd social you attend as a member.

They should be asked how does the UK keep itself out of consequences of Schengen, when we have freedom of movement obligations with Schengen members?

They should be asked if they support the Common Fisheries policy? Do they think it has helped or damaged the UK fishing grounds and industry? Why did it take almost 40 years to get some basic reforms of its damaging policies? Wouldn’t we have better fishing grounds and a stronger industry if we left and controlled our own fish stocks?

They should be asked if they support the Common Agricultural policy, still the biggest cost in the EU? Do we get benefits from subsidising continental farmers? Wouldn’t it be cheaper for UK taxpayers to just subsidise our own farmers? Why did we get less milk quota than we needed? Why did they show such hostility to British beef?

They should be asked if they support the common energy policy? Hasn’t the EU requirements on renewables forced us to construct large numbers of onshore wind turbines which have affected the landscape and left us without reliable power? Isn’t EU energy policy a damaging mixture of supply restrictions and high prices, the very opposite of what we need to tackle fuel poverty and increase industrial investment?

They should be asked if EU policy towards Croatia and more recently Ukraine has helped or hindered stability.

And they should be asked why they think £10 billion of our money should be spent on rich countries on the continent.

Whilst we have been preoccupied by the gripping drama of our referendum on the future of our country, there has been plenty going on elsewhere in the world which has led to stock market declines and worries about the economic future.

Investors and commentators have taken to doubting the power of monetary policy to deliver growth, a bit of inflation and better returns for savers. The large experiments with creating additional money and buying bonds have not succeeded in lifting the inflation rate in either Japan or the Euro area. The growth rates of the US, the Euro area, Japan and China all seem to be slowing. As some Central banks push deeper into negative interest rate territory, some wonder if all this has gone too far. Negative rates make it difficult for banks to make money and therefore to lend more. They also give the impression of panic by the authorities which does not help confidence. Meanwhile plunging oil and commodity prices in recent months have wiped billions off share valuations of those sectors, and have worried people about the state of the banks that has lent the money to those industries.

Some have returned to their beliefs in bigger fiscal stimulus. They are asking governments to go easy on deficit reduction, spend more, and borrow it at cheap rates. Some want the monetary experiments to be taken further, recommending more quantitative easing, further cuts in rates, and even so called helicopter money, where the authorities print money to spend.

To get back to normal the authorities have to do something they clearly do not want to do. They have to allow banks to make reasonable returns, and allow them to lend more on their current capital base. If the authorities persist in preventing the banks from lending to reasonable prospects, or if their fines, taxes and interest rates prevent banks making profits, the banks and the economies they seek to finance will remain crippled. If the European Central Bank wants banks to hold more capital and to take a tougher line on the value of loans it will hold back economic growth. When a Central bank does that, and creates new money at the same time, it is like trying to drive a car with one foot hard down on the accelerator(money creation) and the other hard down on the brake (cash and capital controls). No wonder there is not much growth.

When sterling was at 1.15 Euros in 2011 no-one suggested it was weak because we might leave the EU. It is now 1.27 Euros to the pound, a 10% Euro devaluation compared to 2011, yet we read the pound is falling owing to Brexit fears. In January 2012 there were just 118 yen to the £1. Today there are 160, a yen devaluation of 35%. Against the dollar, which has been rising against most world currencies in recent years, sterling has just hit $1.40 again, a level it has reached several times before. The £1 was also weak against the dollar in July 2013 and in April 2015, when its weakness was not ascribed to Brexit fears.

The reasons people sell a given currency and drive its price down from time to time are varied. Currency volatility has been a big feature of world markets so far this year. At the centre of the action has been the weakness of the Chinese yuan and the strengthening of the yen after a long period of weakness from the Japanese currency. There has also been a period of dollar weakness against the yen and Euro, as people revised their expectations of further US interest rate rises downwards. Sterling has been caught in some of the cross winds from these global currency moves.

Recent falls in sterling against the dollar may be related to perceptions that the Bank of England is now going to delay any interest rate rise this side of the Atlantic for many months. They may be related to continuing weak balance of payments figures, and less hot money flowing in from Russia, the Middle East and other commodity producing areas. There have been people out to talk the pound down as they think it had reached uncompetitive levels. It is difficult to see why the possibility that Brexit might win the referendum should have a great lasting negative impact on our currency. After all, the first round effect is to improve the balance of payments by on fifth as we cancel the payments we have to make to the rest of the EU which we do not get back.

It is difficult to know whether the 2011 rate against the Euro meant the pound was too cheap or the current rate if still too dear. Markets change their minds on these matters, and often overshoot when correcting what they see as an anomaly. The pound did not suddenly fall the first time someone published a poll showing Brexit was likely after all.
Yesterday the Bank of England testimony to Parliament mattered more. Hints that interest rates could be cut again and more money could be created showed the Bank doesn’t mind more currency depreciation. The Bank was far more worried about low inflation and weaker growth than about devaluation.