To Brexit, or not to Brexit, that is the question

Having dutifully laboured to come to a conclusion on this complex and historically momentous event, I lay out what seem to me to be the important facts, probabilities and arguments. The uncertainty of the coming Brexit decision is beginning to spread uncertainty to markets. The outcome will be momentous. We need maximum honesty and objectivity in the debate, not misleading political bravura of the kind displayed before the House of Commons Select Committee this week. In principle, all things being equal, overseas earners should benefit from weaker sterling over the next couple of months, as should banks from fears of higher interest rates. 

We are all now quietly being marinated in the facts and fictions of the advantages and disadvantages of leaving the harbour of the European Economic Community, as we might more romantically call Brexit. It is the judgement of the purest kind of dilemma. I am neither a hater nor lover of the great union of Europe and have found it very difficult to make a well balanced judgment on the merits of staying or going.

Because of that, I have been a ‘euro agnostic’ over many years. On the one hand (sounding a bit like dialogue from ‘Fiddler on the Roof’) I accept that Europe is a constitutional mess with a perceived democratic deficit. On the other hand it is a powerful trading bloc which a generation of UK politicians strove to enter against French opposition.

The democratic argument

Constitutionally, Europe is a representative democracy insofar as the EEC Commission represents elected governments, rather than more directly those who elect those governments. Not so much representative government as what you might call agency democracy: the European Commission being the agent of elected member governments.

Unlike the USA and most nation states, the EEC has no properly thought out constitution with checks and balances to make the EEC work efficiently as an economy and a democracy. That is what lies at the heart of the current and long lasting Euro economic crisis. It is not working economically because it has a common currency but not a shared government constitution. It was designed not by economists, philosophers or constitutional lawyers but by politicians who understandably put the cart of passing political enthusiasm in front of the horse of constitutional coherence. For urgent economic reasons, the Euro bound nation states now have to get on with the job of creating a proper constitutional union, in the style of the Founding Fathers of the United States or break the whole thing up either totally or in compromised bits; the strains of the migrant and refugee problem have not made that task any easier.

As a matter of hard economic fact, the EEC is a huge single market which gives the UK the economic (with its poor productivity and previously high sterling exchange rate) and commercial benefits of being on the inside of the EEC tariff wall. The difficulty has been reconciling my sceptical feelings about it on democratic grounds with and Europhile sentiments on economic grounds.

The benefits of EEC membership

So what do we get for our money? Economically, we get access to a market of more than five hundred million people and a continental size land mass of four million square kilometres, inside a trade and tariff barrier where we now trade with minimum bureaucratic difficulty and economic cost because of our membership of it.

Moreover, our government gets to have a say in how it operates and an influence over changes. In contrast, the UK market is only one eighth the size in terms of population and one sixteenth the size in terms of land mass. In other words, in economic terms the EEC possesses huge scales of economy compared with the UK alone, and for that reason has much greater, indeed huge, clout when negotiating trade deals with its peer markets, the US and China; and of course with vast hardnosed international corporations that are used to buying influence over individual nation states or (if it’s a media group) intimidating national governments.

The UK economy

Moreover, although we are the fourth largest market in terms of total GDP, we are far from being the largest economy in terms of GDP per head. The wealthiest nations above us on that basis in the EEC are Finland, Belgium, Sweden, Germany, Austria, the Netherlands and the Republic of Ireland, whose citizens are twenty five percent wealthier in GDP terms per head than Her Majesty’s subjects in the UK.

The UK is also a lopsided economy with only a tiny manufacturing base after years of flogging off British companies to foreign buyers through the good offices and services of City banks and brokers which, along with insurance and other financial services, now dominate the depleted UK economic landscape, particularly so when compared to other nations. As a result, we lack industrial significance in manufacturing, have limited UK ownership of what remains and a balance of trade deficit which seems unbridgeable – hence the UK’s dependence on ‘hot’ money and ‘hot’ bankers to help balance our external trade and current account with the rest of the world. Italy, by way of contrast, has a much more diversified economy and less dependence on the goodwill and happiness of short-term, hot money trippers into sterling, enabling it to survive as an ‘inefficient’ economy with its own national way of life and culture. Because of our need to attract ‘hot’ money we never seem able to have a currency cheap enough to benefit our exporters. The Germans, by contrast, do: it is called the Euro.

What is the true cost of EEC membership?

The next question: how much to we actually pay for membership? Is it truly enormous? In contractual terms, it is most recently calculated at £18 billion. Only this week I heard a Brexit protagonist on the BBC Radio 4, informing us that we would get that as a Brexit ‘dividend’ of £18 billion.  I have checked the situation and find that he was wrong – appallingly so for a man billed as a minister of agriculture.

For those who want to know, these seem to be the true facts. For some reason or another we get an automatic, up front annual discount £5 billion bringing the cost down to £13 billion per annum. We then get back something like £4.5 billion of that in grants for infrastructure projects and UK university research, leaving a net contribution of £8.5 billion which seems to work out at £2.71p per week per UK citizen if I have got the arithmetic correct. For that, we gain tariff free access to a market of some 440 million people – which is something we need, given the nation’s poor productivity and traditional strength of sterling (though that is weaker now because of Brexit uncertainty) which has made exporting from the UK difficult. As well as economic advantages we also get certain fringe benefits.

Membership fringe benefits

Amongst the other fringe benefits of membership we also get the opportunity to retire to any part of the four million square kilometres of a continent stretching from Scandinavia to the Mediterranean. The fact that traditional European nation-states are unlikely to invade each other these days (the thing that it is meant to prevent another Thirty Years War, Seven Years War, WWI or WWII) makes retirement to somewhere quite along the Danube or indeed anywhere in continental Europe more attractive. We can also holiday there with access to local government supplied medical services as of right. We also benefit from trade deals negotiated internationally by the influential EEC with other nations who want access to its market of 500 million consumers. Because of its size and complexity, the EEC is no push over in such negotiations as the long and arduous negotiations on a Trans Atlantic Trade Pact have demonstrated.

The Brexit Prospectus

The Brexit protagonists cannot describe what life will be like, or for how long, after leaving the EEC, because it would be a novel situation in the future. That makes it a matter of guesswork. Consequently, they are obliged to present their views like a stock market new issue prospectus. And that will prove as reliable as the assumptions made in support of it.

Brexit assumptions

As far as I understand the Brexit case, it seems to make the following assumptions: first, that the UK will have no difficulty in negotiating a tariff-free deal with the EEC on the grounds that they export more to us than we do to them; second, that we will have the national ‘membership’ fee of £18 billion for national spending in the UK; third, that the world will be our oyster and that we will be free to easily negotiate good deals with our chums in the rest of the world, particularly in the Commonwealth.

Testing the assumptions

One has to be candid enough to admit that, at first sight, the assumptions being made in favour of Brexit seem to dashingly represent the best of all possible worlds. It is a little like a stock exchange IPO prospectus that contains only the best possible operating margins in support of its buy case along with no stated barriers to entry.

The assumption that there will be no cost for entry

One needs to give due weight to the counter consideration that non-members like Norway and Switzerland have as a matter of established fact to pay a fee for tariff-free access to the market of 500 million consumers; it does not seem so much a question about the size of the Swiss or Norwegian economies (incidentally much richer than the UK in GPD per head terms) but more a question of the value of unique size, wealth and scarcity value of the EEC market place. Why would those managing it wish to establish a brand new precedent by selling something valuable at too low a price?

The assumption that we shall get what we need quickly

Canada is cited as an example, although the negotiations appear to have dragged on for years and do not include financial services – the very area where we have comparative advantage as an exporter and on which we will be crucially dependent for foreign currency earnings.

The assumption that we are too important an export market for the EEC not to be granted immediate free and unfettered re-admission after leaving

Anecdotally, it is mainly Germany and the Netherlands – Europe’s great entrepot – that sell manufactures to the UK. Why should the rest of the EEC (the Poles, Greeks, Romanian, Portuguese etc.) wish to co-operate in voting the UK an easy ride back into the biggest trading bloc in the world at little or no direct advantage to themselves as individual nations and presumably at some greater cost to themselves as individual nations? Once the UK membership contribution has gone it will have to be picked up by the remaining members. Would it not be in their self interest – including that of big exporter Germany – to seek compensation from a recently exited UK, so as to defray an implied higher cost for themselves? Germany would logically share that sentiment as the biggest contributor to a budget. It would not willingly wish to pick up the UK share as well and nor would any of the others. Would they not simply ask why, if they have to pay for it as members, the UK should be exempt as a non-member? Does the assumption resemble a horse that will not run?

Moreover, if it came to a stand-off, I guess that Germany as an international exporter could last it out longer than the UK. Our situation would be desperate. We simply could not divert our European exports to other markets in the short term. In that case we could be ‘starved’ into submission. Think what would happen to sterling and that hot money. UK interest rates would arguably go through that roof.

The assumption that accessing new world markets would be easy    

The world is now made up of big trading areas which, like the EEC, may wish to charge the going rate for entry to a large market in the shape of a decent tariff or even worse – as in the case of the proposed Trans Atlantic Trade Pact – possible curtailment of normal legal and democratic processes in the UK in favour of extreme advantage to international corporations.

Which would be a greater surrender of sovereign democracy and the common law: 1) a possible Trans Atlantic Trade Treaty in which a UK government could be sued by large international corporations in private courts when, in responding to the democratic will, allegedly damaging a corporation’s profits; or 2) our treaties with the EEC?

Is it not also too sentimental and romantic to suppose that our Commonwealth cousins would not seek to deal with us other than for purely maximum advantage and commercial terms best suited to their own constituents and national interest? India under Modi is a case in point. Will India really be delighted to take more British-made Japanese cars and UK accounting and financial services? I merely ask the question in the face of utter, wide eyed, close-minded hopefulness. Sentiment did not help BAE Systems in competition with France’s Dassault for Indian military aircraft orders a year or so ago. Indeed, we were made to look sentimental fools over the matter. And I doubt that the Australians would get too sentimental about pommie trade ambitions. I think it unduly heroic and self deceiving to assume otherwise. Yet that would appear to be the general assumption underling this aspect of the Brexit case.

Moreover, one asks if the great movement for international trade may not possibly have run its course. A President Trump (and who could rule that out absolutely?) might usher in an era of new US protectionism as part of a populist blue collar election campaign. It is an uncertainty that deserves some weight on the Brexit side. Nations seem to be in a mood to turn in on themselves just now. Globalisation has proved rather jarring for numerous reasons. An inward looking US would be influential and worrisome.

I include Europe in that generalisation. The UK quitting Europe could play in a number of ways, one of which might be a greater impetus towards a final constitutional union as perhaps an inward looking, near nation state of Europe, concerned and fascinated by itself and its own future. If we cannot obtain zero-tariff trade with Europe – and that cannot be ruled out for the reasons given above – then it is arguable that international investment into the UK will almost certainly dwindle in the long run as more and more international companies with manufacturing here decide to increasingly move capital formation to the other side of the European tariff wall. In a competitive world, all marginal cost savings are significant, including motor vehicle production and sales. Am I not right in thinking that the Indian owners of Land Rover last year announced some new production in Poland? Was that an anticipatory decision? One may rely upon a new, smaller, but still powerful, European market economy to do a bit of poaching as well.

Conclusion      

The Brexit is presented as one of zero risk and sky high opportunity. I have been around long enough to know that such talk is always a trap. Brexit is not without serious long lasting risk, which finds no acknowledgment in its supporters’ campaigning. That seems unduly overconfident about a changing and highly competitive world where the size of economies does matter and notions of what constitutes optimum size is now well above the scale of a single nation state like the UK. That of course references another risk: that of Scotland finally going its own way to national independence and the UK becoming smaller and less compelling.

The advantages of staying would seem to include the opt out from participating in the European nation state building project whilst remaining a trading partner on the right side of the tariff wall and retaining a seat at the table in a turbulent time when a more objective British point of view could be helpful and, by the sound of things, appreciated.

Is it really probable that the UK could successfully resist right of entry to EEC citizens to a newly independent UK , when such mobility is a matter of fundamental doctrinal importance to the EEC, which has obliged Switzerland and Norway to accept it as part of their deal to gain tariff-free access to its vast continental markets?

There has to be a legitimate fear that the United Kingdom could cease to exist as we have known it for a century or two and that we could easily end up being seen to have traded a loaf for half a loaf. The national humiliation of such an outcome would be insufferable and wholly diminishing to a once influential nation. I believe that the Brexit camp have to acknowledge such a possibility when they ask us to vote for Out.