Jim Mellon’s Brexit Playbook

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Jim Mellon’s Brexit Playbook

This is a piece written by Jim for our friends at the Milken Institute, who were generous enough to allow us to reproduce it here. 

Two weeks ago, I pulled my first all-nighter since I was 18. The news that the side I supported—those urging the United Kingdom to leave the European Union—had won the referendum was a shock to most observers, including myself. I had a variety of bets on the outcome that paid off, but I had placed them more out of emotion than rational analysis.

Immediately after the vote, a movement among disappointed Remainers began to question its validity, with demonstrations in London, vitriol on the Internet, and mooted legal challenges. The liberal, metropolitan elite couldn’t believe that it had lost, particularly since all the runes had indicated a successful outcome for Remain.

They still can’t believe it, but the predictions of doom haven’t come true (the stock market is now up by some measures, and the pound has fallen to what I think is a reasonable rate). In the absence of anything other than threats of retaliation by the Eurocracy, the world goes on and it doesn’t look such a bad place.

Sure, there is turmoil in the political parties, but, at least on the Conservative side, that is likely to be resolved soon. The Labour Party is fracturing, and of that, more later.

Overall, things aren’t looking desperate. I still think the economy will grow well this year, and indeed next. Nine countries (including the United States) have already made overtures about trade agreements with the UK, and it’s much easier to deal with one country than the perpetual catfight that is the 28-member EU bloc.

Interest rates have fallen, not gone up. And the housing market, which was already falling due to its fundamental overvaluation and the imposition of hefty transaction taxes, will probably continue to drift—but gently.

Threats by banks and other financial institutions to move to dull Frankfurt or strike-riven Paris seem to be wafting away in the summer breeze, and I have no doubt that London will remain the world’s preeminent place for many types of finance.

The British government has sensibly not triggered the Lisbon Treaty’s Article 50 clause, which starts the process of a two-year exit from the EU.  It wants to force Europe to come to some sort of agreement in principle before the final countdown begins. This is a good strategy. The EU has no mechanism for forcing a member to leave, and in the next few months or maybe even year, the UK has the whip hand. It can block a huge amount of EU business should the EU Commission turn its post-Brexit words into action, and any future prime minister should be in no hurry to serve the divorce papers until an outline financial and logistical agreement is settled.

For myself, I proposed straightaway after the referendum that the UK should do the following:

  1. Offer to pay into the EU budget for 10 years, but at a reduced rate. Say, 5 billion pounds a year, which is 60 percent of the current net amount.
  2. Remain part of the free market in everything except people. But be able to negotiate bilateral free-trade agreements elsewhere, which would significantly enhance the UK’s growth potential.
  3. Strike a deal that allows all 3 million EU citizens currently in the UK to remain, and the 1.2 million UK citizens in the EU the same privileges.
  4. Impose a brake on EU immigration into the UK of say, 100,000 a year (one-third the current level), and vice versa. This to apply for 10 years, then be reviewed.
  5. Cut the corporate tax to 10 percent straightaway. Thus will spike the guns of Luxembourg and Ireland, which are notorious for tax shuffling transfer pricers such as Amazon.com, Facebook, and Google.
  6. Create a new form of associate EU membership, which other potential exiteers might usefully adopt. These include the Danes, the Dutch, and possibly the French.

The days of Jean-Claude Juncker, the president of the European Commission, appear numbered, with German Chancellor Angela Merkel regarding him as an impediment to doing a sensible deal with Britain, Germany’s biggest export market, and the nation likely to overtake Germany as Europe’s largest economy by 2030.

Post-referendum posturing by Scotland’s first minister, Nicola Sturgeon, is likely to come to naught. Spain will never let Scotland into the EU, Scotland’s appalling fiscal position makes its adoption of the euro untenable, and its poorly diversified, heavily subsidized economy makes it more than likely that Scots would vote no in a second referendum.

As far as politics is concerned, I believe that the Conservatives’ Theresa May or Andrea Leadsom will be the new prime minister, and both would be good. Labour is going to split, and in the next Parliament (not likely till 2020), the UK Independence Party will pick up swaths of Labour seats. This might necessitate a coalition government, which would be no bad thing.

Brexit will happen, but it will be ultimately amicable with little change to practical arrangements. The UK will grow faster as a result. It is notable that since the referendum, the weather has improved markedly. So will the mood of the nation.

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