RexN Euroblog

RexN Euroblog

RexN's euroblog

This has been set up with a view to the EU referendum.

My own interest derives from teaching Economics, making lessons relevant by using the various treaties to add relevance to theory.

Views expressed are my own and hopefully contribute to debate.

What does out look like 2 (short run)

EuroblogPosted by RexN Fri, June 03, 2016 22:41:08

Following on from part 1, a look at some of the evidence leads naturally to part 2. What are the realistic expectations in Britain votes to leave. There are of course alternative scenarios.

Much of the debate so far has been shaped by the Prime Minister. A large part of the focus has been in international trade and trade deals. He has highlighted the drawbacks of different models such as Norway and Switzerland, according to the IMF 6th and 9th globally in per capita income, 2nd and 4th in the continent of Europe (sandwiching non EU San Marino) behind Luxembourg.

According to Cameron, trade deals are a problem. Canada provides an example, 20th on the same IMF list. Britain is 25th on per capita income. He also teases us with Albania in 97th place.

A question mark has been raised over Cameron’s assertions that trade deals with the rest of the world will take years to negotiate. Lawyers for Britain identify that existing deals, made on behalf of the EU and its member states will continue.

Brexit means that the EU loses its majority on G7. Britain is no longer bound to support EU policies on the global stage. There is an element of bargaining power that goes with being the 5th largest economy in the world.


Scenario 1
Britain votes Leave, Cameron is still in charge with his sidekick Osborne beside him. Cameron decides he wants to cling on so that he can chair the council of Ministers.

Based on his manifesto commitments, the Prime Minister and his team failed to negotiate his promises to the British people. In a fit of pique, he immediately files for Article 50.

Having painted a picture of doom and gloom, Cameron gives in again. He and Osborne prove themselves right by accepting free movement of people, a contribution to the EU budget. Little change on the trade front, Cameron and Osborne step aside at the next election, taking up positions with a European bank and the IMF respectively.

Scenario 2

A leader steps forward in the Conservative party. Motions are put before Parliament, the first a vote of no confidence in the Prime Minister after his running down the UK economy, the second postponing debate about Article 50 until Parliament resumes.

The summer recess is used for lobbying with other groups, stressing that the will of the British people is to take a plunge from the fish in a small pond into an ocean that allows for growth, subject of course to not being caught by the Dutch or Spanish.

During the recess, a position is agreed across parties. A proposal is formulated along with an agreement to have a transparent debate in the House of Commons. MPs are encouraged to speak openly, a free vote resulting in a desire to seek a trade agreement with the EU.

The agreed position is that the preference is for an outline deal to be put forward during Britain’s Presidency of the EU in July 2017. The aim will be to file under with a view to negotiations being complete in 2019, before an election in 2020.

The outline of that negotiation stresses that we wish to retain a neighbourly relationship with the EU, as both parties are required under Article 8. There is a default position of reverting to WTO status. That would involve tariffs on EU manufactured goods from washing machines to cars and agriculture making EU goods relatively more expensive as compared to world prices.

Spanish, Portuguese and Greek holidays may take a back seat compared with other destinations. American and Japanese cars will become relatively cheaper. A Mercedes Benz might be cheaper to import from Brazil rather than Germany. In all, yes, the EU can block a sensible deal if it wishes to push its marginal countries to the edge.

It may be that British companies have to look at other markets. The EU may insist on freedom of movement, Britain does not have to deal on that basis. So be it. The USA is a bigger market by value. The Commonwealth is growing faster and accounts for 1/6th of global economic activity with 1/3rd of the world population.

Britain has bigger fish to fry, particularly from reclaimed fishing rights around the British coast. The EU has a chance to preserve its preferential status. Certainly the EU can expand where it likes, Britain however has her red lines, no to freedom of movement, yes to freedom for financial services.

Over to you EU, do you want our £80 billion trade deficit or would you rather risking your workers losing jobs?

In case we didn’t mention it, Britain is the 4th largest global military power and we wish to use our nuclear deterrent to protect your interests under the maintained umbrella of NATO. We are now an independent voice on the WTO, IMF and in the UN. You may lose the majority on G7 but you can count on our support in times of need and rational argument. We are friends and will act as friends unless you choose otherwise.

In the meantime, there are other decisions for a government to make. How should fishing grounds be licensed, agricultural support, allocating funds to research, reform of VAT, not least immigration policy, potentially reform of labour markets and thousands of pieces of EU law to select from. Infrastructure projects can guarantee British resource use.

Of course in the short term there may be an inflationary shock that could accompany a potential devaluation. This is something for the government and Bank of England to manage. Evidence given to the Treasury Select committee suggests that interest rate rises would be delayed. The Foreign Select Committee heard that world prices might lead to an 8% decrease in the cost of living.

It could be that exchange rates have already been discounted due to uncertainty. Inflationary effects are mitigated by cheaper imports from elsewhere in the world.

It could be that the lower relative cost base which follows a devaluation promotes inward investment and export led growth, as it did following ERM exit in 1992. As for government borrowing, Britain looks safer than big borrowers in the EU.

It is up to the government of the day to present a positive message about the economy.

The EU perspective

EU budgets will have to change, after all, there will be a net loss of around £10bn from the second largest net contributor. Will that amount be cut or will it be raised elsewhere? Will some be reclaimed in a trade deal?

There is an uncertainty factor for the EU too, on top of having to deal with weaker Mediterranean countries. Is the political climate right for further integration? Can the Euro survive without further political integration or at least co-operation over fiscal policies?

Initially, EU members might expect a soft approach to negotiations, after all, the EU is used to being dominant. What have been red lines over free movement have to be decided upon. Are the EU capable of compromise, will red lines be erased?

Britain gradually confirms exiting trade agreements with countries around the world. Early signs of growth in American and Korean car sales, Chilean and Australian wines start to show a trend. EU voters who sell to the UK become restless. EU negotiators feel pressure as Southern Europe suffers high unemployment with further austerity.

Pressure increases as Japanese car makers invest more in the UK to satisfy the ever buoyant demand. Perhaps even one of the American giants returns production to the UK, maybe even Transit van production relocated back from Turkey as a Middle East solution appears increasingly remote.

Market forces dictate that far from being a messy divorce, an amicable alimony settlement of the trade deficit is a welcome relief which at least gives us access to the kids. Article 50 does not need to be extended. Germany has to contribute more, perhaps even France but it is a necessary step to keep their economies alive.

Non-Eurozone EU members will be watching with interest with their own decisions to make.

Summary

Of course, we do not know for certain what the outcomes will be. Neither do we have any idea who will be Prime Minister. Cameron will have a hard time to stay in position. The nature of debate has eroded trust in him. What we do know is that the electorate will have sent an instruction.

For those who believe the Treasury, IMF and other intertwined bodies, a hit on the scale that they predict might be balanced against evidence given to the Defence Select Committee, that “successful” sanctions against Russia over Crimea amounted to a 1-1.5% reduction in Russia’s GDP.

Of course, there may be a scenario 3, 4 5 or 6. It is up to voters to judge which is most probable.





The language of the EU referendum

EuroblogPosted by RexN Thu, June 02, 2016 20:00:36

The idea behind this piece is to clarify use of language, the sort that is used in the referendum debate.

A quick literature search has identified some highly used words or phrases. There are certainly more. This is intended to be a ‘live’ document so please feel free to send in others for definition.

Harmonisation
Harmonisation is a lovely word which has its roots in music. A harmony is defined as “the combination of simultaneously sounded musical notes to produce a pleasing effect”. The process of harmonisation in the EU is “the process of creating common standards across the internal market”.

Whether the effect is pleasing or not depends on being able to put together a choir of people who can sing. Some might argue that the EU is 28 piece punk rock band.

Single market
Families often have pet names. Single market is a pet name for a collection of states that have come together. As a single market, it tries not to operate with other markets. As with some families, they try to stick together to keep other markets out. That’s why it is called a single market rather than a single and dating market.

Families live in a house, the bigger the family, the bigger the house. A group of families might live in a big enough house to be a castle or fortress Outsiders call it a customs union or Fortress Europe. A fortress can be a very cold place to live in and may contain prisoners.

Integration
This is a word with many meanings. In a social sense, it means the intermixing of people who were previously segregated. In Psychology, it means the coordination of processes in the nervous system. A parallel can be drawn with government whose nervous system is effectively the bureaucracy, giving the same requirements to each member state.

In Mathematics, integration is a process, the opposite of differentiation. In Biology, it is the process where cells become more specialised. In commerce, product differentiation gives consumers choice, therefore value. The EU does not do differentiation.

Shock
The strict definition of a shock is an upsetting or surprising experience. In medical terms, a shock can emergency situation. It is also something can be harnessed positively such a defibrillator delivering and electric shock to restart the heart. A shock can also be delivered in eclectroconvulsive therapy (ECT), as a means to alleviate severe depression.

It can be a shock when a daughter or wife declares that she is pregnant, going to bring new life.

In EU referendum terms, a shock is none of the above, it is predictable, will not bring new life, will be a blow to the heart and will depress GDP by 10%.

Uncertainty
This is a state where outcomes are not predictable. Some have turned this into a science, identifying possible outcomes, adding an element of predictability, speculating on a probability for each of those outcomes and in some areas, providing policies to deal with those outcomes.

That may seem complicated so let’s use an example. Your Lotto ticket is in your hand. As the Lotto is drawn, the first 3 numbers match yours. You know you have a win but until the next 3 numbers come out (4 with the bonus ball) you do not know how much you are going to win but you can plan on how to spend your winnings.

As with economic forecasts, you still do not know how much you are going to win until the numbers have been crunched to split up the pot. In the Lotto, those numbers come out within minutes. Compiling economic data takes longer.

The difference with EU uncertainty, as measured by government funded bodies, is that is uncertainty is predictable and always bad. The direction of EU reform is also uncertain.



Treasury Select Committee reviewed

EuroblogPosted by RexN Wed, June 01, 2016 11:34:23

The Treasury Select Committee (TSC) has delivered its report on Brexit, or to give the full title, “The economic and financial costs and benefits of the UK’s EU membership”. The result is far reaching, leaving a few questions unanswered.

At times, observers might feel that the committee has been uneven in the level of zeal applied in forensic questioning of witnesses. The final report provides a balanced analysis of competing claims. In effect, it becomes a usable reference document for those who seek clarity in EU finances.

The committee is made up of 11 parliamentarians, broadly reflecting a balance of the political parties in the House of Commons though not necessarily the range of opinions within each party. The report is presented as unanimous which is a credit to all members in addressing the outcomes impartially.

The first target for clarification comes from the Leave campaign’s assertion that the EU costs the country £350m per week. The TSC identify that this is the gross contribution, not including the abatement or “rebate” and ignoring the expenditure re-allocated by the EU in Britain.

The correct net figure is therefore around £110m per week. Whilst significantly less, this leaves the Leave campaign with a manageable figure to use, an amount equivalent to the annual spend of a small clinical Commissioning Group such as Scarborough and Ryedale for a year or a monthly figure equivalent to the annual spend on health by a larger CCG such as the Vale of York.

The report also highlights that a British government, rather than the campaigners, would have to decide how to re-allocate the £167m per week that is currently decided by the EU.

The last main area of criticism for the Leave camp surrounds the burden of EU rules, the independent Open Europe think tank having calculated the 100 most onerous being £33bn per year according to their original evaluation. A later reviewed estimate is that £12.8bn or so of savings could be achieved with repeal.

The Remain side received criticisms of their own, largely aimed at Treasury claims of being £4,300 worse off. For those who felt that George Osborne had an easy ride at the hearing, the result is stinging.

The Treasury study did not include the potential upsides of Brexit in their modelling. As such to paraphrase, the basic assumptions showed an element of bias.

Given some of the assumptions made, there are uncertainties. The rigour of the model was not tested by sensitivity analysis.

The limitations of the Treasury’s approach are exposed by some counter-intuitive results from their analysis, buried in the appendices.

The final figure of £4,300 should not be used by the Remain campaign. Similarly, the £3,000 figure generated by the CBI does not specify an alternative trade model to be compared with.

The Treasury received further criticism over a later report, that relating to short term effects in the event of a Leave vote. That report was ultimately released a mere couple of hours before ‘purdah’ and not within the time scale that had been advised to the TSC by the Chancellor.

The TSC forcefully conclude by saying “it is to be hoped that scrutiny and transparency have not in this case been subordinated to the imperatives of the Number 10 ‘media grid’.”

Osborne has received further criticism over his evidence on extra demands from the EU and the rebate. The committee found that Osborne’s evidence was “not supported by the facts”.

There are a number of other observations. There are competing claims over prices, whether they would rise or fall industry by industry. Of course, much depends on the policy of the government of the day, whether reciprocal tariffs are imposed or not and to what extent Brexit would affect patterns of trade between countries.

The claim that import costs would rise by £11bn is dependent on assumptions; we would still buy the same good from the EU if tariffs were imposed, we would maintain tariffs on imports from outside the EU and we fail to strike a trade deal with the EU.

By the same token, Common Agricultural Policy (CAP) support may be continued in a different form, therefore it can not necessarily be claimed that food prices will fall by £400m. The OECD suggests CAP food price support costs consumers £10bn.

On jobs, the TSC found that although 3 million jobs may be linked to EU trade, those jobs were not dependent on EU trade. Such claims should be careful over use of language.

As would be expected, the TSC heard evidence from the Bank of England. Efforts were made to explore the effect on exchange rates and interest rates in the event of Brexit. Uncertainty in the markets may be more likely to delay interest rate rises. Sterling might fall, as would the Euro, the effects mutually offsetting each currency with regards to EU trade.

The Bank of England witnesses were also to put risks into some sort of perspective. Brexit may be an internal risk but there are greater risks to economies in a global context. Indeed, there are also further risks that may be associated with a Remain vote. These include bank liquidity in the Eurozone and further EU reform which may undermine the Bank of England’s ability to ensure monetary stability.

The committee were broad in their approach. Several questions were explored in detail. It is acknowledged that there is plenty of uncertainty, both with a vote to Remain and a vote to Leave. These largely extend to the nature, scope and timing of trade deals.

Other avenues, some overlapping trade, related to foreign investment, financial services, global markets and immigration.

There are of course some potential limitations to the report. Whether certain exclusions were made in the interests of unanimity is a question for the committee.

Whilst the TSC has been able to explore and make recommendations from British representatives and institutions, some international organisations were unrepresented. These include the IMF, whose Managing Director, Christine Lagarde, is on record for thanking the Treasury for its help in compiling the IMF report. Other organisations, such as the Institute of Fiscal Studies, were not called.

Notably, a further IMF report has been brought forward to the week before the referendum. During hearings, the TSC have noted the change in timing from previous years.

Perhaps surprisingly, there was no exploration of the funds that might be raised by imposing tariffs on EU imports, new found freedom over being able to set VAT rates with its own implications on price levels and competitiveness. Other policy angles, such as Minford’s free market model were effectively marginalised.

Despite any criticisms of the report and, on occasion, an apparent lack of even-handedness of ferocity of questioning, the TSC have produced a balanced document. Certainly, there are some omissions but the final result is one which has been presented as unanimous.

The range and detail is a tribute to the TSC themselves. The variety of media comment from MPs concerned following publication gives each their own angles to argue, with different weight given to the different components according to their own views.

They have highlighted some of the key statistics in a balanced way, despite the majority being Conservative and a different majority being apparently pro EU. The strongest criticism is for the Chancellor with rebukes for others who have used questionable data.

Those involved on the committee have provided an example of parliamentary democracy of which Britain can be proud – for as long as the Select Committee system lasts.



Brexit - the campaign so far

EuroblogPosted by RexN Fri, May 27, 2016 10:42:35

We are a few weeks into the referendum campaign. Arguably the most important vote for British people in over 40 years, what have we learned? Perhaps more importantly, what are we yet to learn?

Naturally, the parameters for early debate would be set by the Prime Minister. Beforehand, we were told that we would have the choice about staying in a “reformed” European Union.

Reform amounted to some tinkering around welfare payments with a promise that Britain would be able to opt out of the ‘acquis communautaire’, the drive to ever deepening union. Whatever has been achieved at Council of Ministers level has yet to be ratified by EU member states. Was the promise false?

Cameron’s campaign had a head start. He knew that he would be championing the cause of Remain. Revelations have emerged that in fact he was building up support, the evidence being dated 8th February in a reply, 11 days even before his “reform” negotiations were complete. In practice, he has had 6 years to build up his arsenal of dubious evidence.

It was not until 14th April that the Electoral Commission published its decision, which of 3 alternative groups should lead the Out cause. The decision was to designate Vote Leave, fronted by Boris Johnson who, ostensibly at least, had not made his decision in which way to go until 21st February. At the time, Johnson denied that he would take a leading role.

That Electoral Commission decision effectively threw two Conservative Old Etonians and Oxford graduates against each other. Were we in for a balanced debate representing a broad cross section of British society? The UKIP based Go faction has been marginalised.

So the campaign began, arguably ahead of schedule with £9.3m worth of leaflets outlining the “government” position. With its early start the Remain crowd were able to dictate the content of early exchanges. The lines were drawn on the economy, safety, strength and incomes.

Both the Labour party and Liberals are ostensibly pro Europe but on the whole, are strangely quiet. Perhaps this is a planned tactic with the next election in mind? Certainly, Corbyn in the past has voted against steps to further integration. Farron is clear in his views but has refrained from his repeating his inaugural conference speech, where he branded the Leave camp as “little Englanders”.

So how does the Remain argument translate?

Firstly, the extra time has allowed the Remain side to develop support. This has come from 150 Royal Society members (out of 1,653) felt we should Remain. Of Britain’s economists, 200 say we should Remain. Quite how many economists there are in the UK, perhaps several thousand, the rest did not sign.

From the international stage, Obama made a splash by relegating Britain to the back of the queue for trade deals. He conveniently omitted to mention that he would not expect Britain to be back of the queue for military support in Libya, Iraq and Syria. Neither did he put Britain at the back of the queue for a Trident replacement or the purchase of American fighter aircraft.

The popular view is that Project Fear has begun. If we leave, inflation rises, unemployment rises, exchange rate drops, incomes fall, Putin and Daesh are dancing in the streets, World War 3 will break out. Surely it couldn’t get much worse? Incidentally, EU trade sanctions against Putin are estimated to have hit Russian GDP by 1-1.5% which puts the wilder claims into perspective.

The economic views seem at first sight to be repeated by a variety of supposedly independent bodies. Of those, at least the International Monetary Fund and Institute of Fiscal Studies have quoted a barely credible Treasury report, the Treasury being stripped of its forecasting role by the very same Chancellor who advocates the Treasury model.

There is a sad absence of a positive message. The biggest objection is that we don’t know what Out looks like. That is hardly surprising, the Leave campaign has yet to derive a consensus to decide for sure but there is a serious point, the government of the day can decide.

So what of the Leaves?

There is a view of what Remain looks like. As yet, that particular fight has to be taken to the Remain camp. Strangely, the German white paper on defence, as revealed in the Financial Times, has not been flagged as a significant debating point.

The 5 presidents’ report from the EU has not been capitalised on. The Leave side have not picked up on shaky ground, that the direction of reform in the EU is towards further integration.

The Leave camp has not picked apart the harsh realities that the only currency unions that have provided success are those that include political integration. Given the late start, the Leave’s have been unwilling or unable to take the fight of what Remain looks like with the associated uncertainty that integration brings.

Instead, they have been left with the open goal to miss, that of immigration. It has been an ironic set up, that those who argue to prevent Eastern EU citizens can be dubbed as racist. Ironically, Britain remains able to control immigration by those from the Commonwealth Indian sub continent, from Africa and from the West Indies whose citizens’ sacrifices are strongly represented on the Menin Gate and war graves across Europe.

The Leave campaign as it stands have been unable or unprepared to challenge some basic spin, a classic example being the portrayal of trade figures such as 44% of our exports go to Europe but less than 10% of EU exports come to Britain.

In practice, this is an argument easily refuted. Prior to EEC membership, less than 25% of British exports went to the current EU. In terms of value, British imports make a net injection of, by the latest figures, £8billion per month into EU economies. Percentage and value are different beasts. More EU jobs rely on trade with Britain than vice versa.

There are many arguments left to explore. How would the flow of manufacturing jobs from the UK to the EU core or cheaper fringes change either in or out? Are trade deals with Europe worth more than trade deals with the Commonwealth and new friends in South America, Asia and globally?

Which trade model would suit Britain best? Should we decide our own with a deficit that our EU partners would want to continue?

There are decent arguments on both sides, perhaps the most convincing for Remain being that an extreme British government can be neutralised by Europe, the most convincing for Leave being that British voters can help shape our own future.

Despite the head start, Remain flounder in presenting a positive message. Since one of the arguments is whether it is the EU or NATO and the UN that have kept peace in Europe, please forgive an analogy. Remain are fighting a rearguard action, seeking to minimise casualties, akin to Dunkirk in 1940.

Leave have 4 weeks rather than 4 years, to form the sort of alliance that can provide a vision for victory. Their own D (for democracy) Day is June 23rd. There is time yet for them to come up with a positive vision to capture the imagination of an outward looking nation.

Ultimately, Electoral Commission rules, which supposedly provide for a fair fight, have stifled planning, Leave having to fight a guerrilla war so far. The vote will ultimately be decided by those currently wavering. It seems to be a straight choice between fear and freedom but can either side provide a popular vision?



Another view on the IFS report

EuroblogPosted by RexN Thu, May 26, 2016 10:45:12

A further report of doom and gloom after Brexit has been released, this time from the institute of Fiscal Studies (IFS), claiming the Brexit would bring two more years of austerity. Is the body of evidence from independent analysts really increasing?

The IFS is a charity, based in London specialising in taxation and public policy, claiming to be politically independent. Its formation had its roots in opposition to Labour Party policy in 1964, formalised in 1969 with a cross party Council being established the following year.

Of its funding, 54% comes from the economic and Research Council (ESRC) whose parent body is the Department for Business, innovation and Skills. The bulk of the rest comes from foundations and charities (14%), the EU (11%) and other government departments (8%) with only 1% from corporations.

It is always interesting to look at personnel on any of these bodies, certainly well respected people with august backgrounds. President of the IFS is certainly august, in fact Lord Augustine O’Donnell, better known as Gus O’Donnell. Gus is not unaccustomed to public scrutiny having featured in the delayed Chilcot Inquiry over his decision not to publish correspondence between Blair and Bush.

On a more operational level, it is interesting to see the Director is Paul Johnson. Curiously, Johnson studied at Oxford, Keble College, a short walk along Parks Road from Brasenose College where David Cameron also read PPE at the same time.

It is not unusual to see a flow of personnel from the IFS to the Treasury and back. Another Old Etonian who was also a PPE graduate moved from the IFS to work with the Oxford educated George Osborne, both in opposition and for the Treasury. Nobody would suggest that the Oxford educated Chancellor, godfather to one of Cameron’s children, could be guilty of providing “jobs for the boys”.

Given that obvious total impartiality, it is worth a closer look at the IFS document which can be found here.

As ever, the report starts with an executive summary, which is expected to outline objectively how the study will be carried out. Surprisingly, as early as the first page, we see the pejorative use of the word “absurd” in relation to the commonly used figure of £355 million which is sent on average weekly to the EU.

Certainly, it is fair to question figures using non-emotive language. The language used appears to illustrate a potential bias. They are correct to highlight that part of that is what they call the “rebate”, which in fact should be correctly identify as an “abatement”. They might also point out the resources that are allocated by the EU which might be more efficiently allocated by a UK government.

There is a delicious irony in that having disparaged the total resource that the EU reallocates, the IFS argue that it “is not necessarily inappropriate to describe the deterioration in the government’s finances as making households worse off”.

In short, funds that households do not see are not equivalent to funds that households do not see. There is logic and consistency in there somewhere.

The IFS proceed to well worn arguments and, perhaps unsurprisingly given the movement of personnel between Treasury and the IFS itself, return to use the Treasury’s own figures. These have been widely discredited.

They also refer briefly to the 8 economists’ report, after 2 mentions consigning independent and eminent economists, including those who arguably steered Britain to above average growth rates, to the dustbin of “outliers”.

In essence, the IFS has fallen in, whether consciously or otherwise, to the myopic view induced by the Remain campaign, that there are a limited range of options available but not including those that come from an inspired generation of free thinkers associated with economic success.

Much of the report refers back to other reports, the Treasury and the apparently closely linked OECD report as well as NIESR and CEP. The Norway and WTO models seem to be interpreted as the only ones that are feasible. Unfortunately, the report was written before Bank of England Treasury Select Committee appearances by external members of the Bank of England presented their own views (here), putting the risk and policy in context.

The “shock absorber” effects in an efficient Foreign Exchange market provide stabilisers, as does the potential monetary policy brief of the Bank of England. The Governor does not necessarily speak for those who have direct input into decisions.

The IFS ignores what Bank of England members consider as potentially greater risks to stability within the EU and indeed the global stage.

On a deeper level, in not having been able to consider the TSC questioning of Bank of England members, any contingency planning on how to deal with potential fall outs the IFS report can in no way claim to have been a comprehensive, therefore rigorous, analysis of Brexit.

In summary, the IFS have compiled a variety of reports before supporting the Treasury line. Their integrity is beyond question, despite the various links with the Treasury personnel movements, old school and university contacts. The report is just not sufficiently thorough.

To their credit, later in the text when many readers will be bored, the IFS group take steps to provide reasons that the central assumptions, therefore the outcomes may be wrong. In doing so, in the future, they provide Osborne with excuses for not hitting his own targets and to change policy, which Osborne and his neighbour are doing a lot of at the moment.

That may be a subjective judgement. Look at the documents and the TSC recording, you can decide for yourself. One of the great lessons is how to recycle the same dubious evidence to build a body of opinion.



Osborne 2, the horror movie

EuroblogPosted by RexN Tue, May 24, 2016 10:33:22

George Osborne, as he promised, has released a second dossier on the effects of a no vote on 23rd June. This time, the target of doom and gloom was the first two years after a Brexit vote.

Sadly, Osborne decided not to attend the House of Commons to defend the document, instead delegating to his deputy, David Gauke in a “departure from normal procedure”.

In short, the dossier predicted the shorter term effects to the economy. On a macroeconomic level, 500,000 job losses (a lovely round number), GDP would be 3.6% lower and inflation would increase to 2.3% higher. Sterling would be weaker by 12% while house prices would fall by 10% and public borrowing would rise.

It is worth remembering that this is the Chancellor who, when announcing the Office of Budget Responsibility said “I am the first Chancellor to remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast”. Sometimes, temptation is hard for a Chancellor to resist.

The report identified 3 impacts. The first of these was “transitional effect” i.e. “the UK becoming less open to trade and investment under any alternative to EU membership”. The second was “uncertainty” the final impact being “financial conditions effect”, i.e. the extent of financial market volatility.

As with the report covering the longer term, a narrow range of assumptions were made. The language used was persistently negative. No consideration was given to any upside potential. Once again, there were a number of own goals.

The cycle of doom starts with consumers not consuming due to uncertainty. Producers will not produce through uncertainty, investors will not invest due to uncertainty. The same sort of vicious cycle is the sort that the Treasury predicted when the UK opted out of the Exchange Rate Mechanism (ERM) in 1992, before a decade of growth ahead of the rest of the EU.

Much of the negativity is based on a potential fall in the exchange rate. The inflationary effect comes from increased input prices. There is a certain logic if, but only if, the exchange rate were to fall to the extent predicted. Osborne’s 12% reduction would nullify the suggested 10% tariff on British car exports to the EU. The Treasury also suggests that overseas investors will divert investment to other EU bases.

As an indication of selected bias, the report ignores any extra incentive provided for British producers to sell into an export market with potentially higher revenues.

Unfortunately, once again, Osborne’s Treasury do not explore the options in the sort of detail that a truly “rigorous” report should, particularly the opportunity costs, that is to say if investors do not invest here, where would they invest?

A lower exchange rate has converse benefits. Any company producing in the UK would experience a lower level of costs relative to their own currency. If Sterling were to drop against the Euro, the relative cost of producing in the European Union, such as Germany, becomes higher.

It is conceivable that the withdrawal of production facilities from the UK by some of Osborne’s famous examples, the motor industry including General Motors and Ford, will have damaged their own cost base.

There is a good argument that in recent years, the Euro currency was undervalued for Germany, even if Germany’s exports made the Euro overvalued for the Southern EU countries. German exports were thus more attractively priced in the UK, hence the significant trade deficit that Britain has with the EU and Germany in particular.

Extending Osborne’s logic, whether a trade agreement were to exist with the EU or not, there is at least a positive reason to consider maintenance of investment in the UK, at least for the duration of the next two years. Afterwards, there may be more motivation for companies like Ford and GM to return production to the UK, lost whilst members of the EU.

It is also worth considering the opportunity cost of other investment, particularly in securities markets and government stock. The implicit assumption behind Osborne’s Treasury model is that the Euro provides a secure investment.

It is well publicised that Eurozone banks provide a source of insecurity. The economic troubles of Greece, Italy, Spain and Portugal are well documented. The Euro is by no means a solid alternative currency in which to invest. Osborne’s pessimism may have been misplaced.

Interestingly, the Treasury report mentions the IMF 25 times. It will be remembered that the head of the IMF, Christine Lagarde, thanks Osborne for the Treasury’s help in compiling their pessimistic forecast (here at 9.09). Lagarde herself awaits the outcome of corruption charges.

Curiously, the IMF’s warning over £715billion of non-performing loans (NPLs) among Eurozone banks was not included in the Treasury report.

Further negativity is based on the assumption that trade deals will be hard to come by. The UK has to agree its own trading relationships with the EU. The point is made that the EU might be a priority for the 50 nations looking for trade deals. By definition, at least, at least at least 44 of those have smaller economies than the UK as a G7 member.

One thing that Osborne has got right is the uncertainty of being able to negotiate any sort of trade deal with the EU. His leader, David Cameron was unable to negotiate a successful outcome for reform, even with the backing of a near £10billion net budget contribution and imports from the EU running at £8billion per month.

The comedy value of this report was highlighted by some case studies selected.

The first of these was agriculture, where the report highlighted where DEFRA has seen agricultural support cut in the last 3 settlement rounds – whilst a member of the EU. The second inadvertently highlights how some companies are relocating out of Britain into the central EU area, even whilst members. The third reinforces this by referring to the Society of Motor Manufacturers and Traders (SMMT), an organisation largely dependent on revenues from importing over 2million cars last year.

In short, Osborne’s illusion is easily dismantled. He exhibits no faith in his government to secure trade deals from a position of strength. In running down Britain’s ability to respond to a “shock”, the british Chancellor would risk creating a self fulfilling prophecy, wee he to retain any credibility at all.

On the plus side at least, should Lagarde be found guilty, he has a job to apply for where inaccurate forecasts appear welcome.







George Osborne's defence and own goals

EuroblogPosted by RexN Wed, May 11, 2016 19:51:15

The Treasury Select Committee (TSC) met on the afternoon of 11th May to question George Osborne and Treasury official, Mark Bowman over the EU Referendum campaign. The session can be seen here.

For those who are unaware, select committees are broadly organised to reflect government departments. Naturally, the TSC reflects the Treasury. The committee is made up of 11 MPs from across the parliamentary spectrum, at least as far as party representation is concerned.

In practice, the significant majority of the committee are currently on the IN side as far as the referendum is concerned. Seasoned observers of the TSC, that Jacob Rees-Mogg usually cuts a lonely figure, sitting at one end of the horseshoe of tables. For once, he had two other Conservatives positioned adjacently.

Those who have seen other recent TSC meetings might have expected a forensic examination of Osborne’s figures. When figures from Leave campaigners, Arron Banks, Richard Tice and Matthew Elliott had appeared, questioning was penetrative. TSC made recommendations to change figures on their web site. Could we expect the same?

The Chair, Andrew Tyrie, opened proceedings revealing that a further document will be produced by the Treasury, concerning the short term impact of a Leave vote.

The first challenge, from the Chair, came from a Cabinet paper, the Best of Both Worlds. The question was whether Britain can unilaterally enforce access to the European Council over management of the economy, as outlined in the document, if principles are not being respected.

Osborne showed what he does well, obfuscated the process with a long winded tangent of his own agenda, of the type he was to repeat for much of the afternoon. What appears to be the case would be met based on the balance of probabilities rather than legally enforceable.

Stephen Hammond started to probe on two points, whether sensitivity analysis was conducted. Bowman and how the famous figure of being £4,300 worse off was arrived at. The sensitivity analysis question was asked several times, to which Bowman replied not fewer than 6 times that the Treasury used “cautious neutral assumptions”.

So what is sensitivity analysis and what is the point? This is a method of accounting for uncertainty, using alternative assumptions to test how robust a model is, sometimes removing some variables. The fact that it was not carried out can suggest that a model is not “robust” as we were told when the document was released. In short,l the Treasury did not challenge its own assumptions.

The question set up Osborne to return to the increasingly hackneyed phrase that “we don’t know what leave looks like”. At this point nobody challenged as to how this government would seek to shape what leave looks like whilst they are in power.

Rees-Mogg took his turn to question. The early part of his questioning concerned productivity growth, highlighting that European productivity growth has indeed been a problem since 1992, at least compared with international competitors. Osborne chose an alternative time frame to disagree.

The Chair intervened to suggest that the £4,300 figure was “the product of imprecise modelling, ranges”. Osborne had been given a lifeline of an alternative position to defend.

To his credit, Rees-Mogg persisted to attempt to identify what other reasonable assumptions had not been included by the Treasury. In his 4th apparent attempt to cut Rees-Mogg off, the Chair shifted the discussion to Foreign Direct Investment (FDI) and an admission that statistical significance was not established.

Attention shifted to Labour MP Rachel Reeves, Osborne’s “new very close friend” which was perhaps reflected by her approach, including Tweeting from inside the committee. Unsurprisingly they agreed that all was doom and gloom outside the EU. Osborne let himself off the hook by shifting policy measures to the Bank of England.

One curiosity out of the Reeves/Osborne love in was that house prices would fall but would not stop foreign investors buying UK property due to a falling exchange rate? Unfortunately, there was nobody left who was allowed to challenge his economic literacy as to why foreign buyers would want to invest in a falling market with weak exchange rates and nobody able to want to buy their failing investments.

Some tests came from Steve Baker who asked why Osborne made “the assumption of no confidence as to what the British government can achieve”. He received the response that it would take 15 years to get a trade deal with the EU. Apparently, existing templates would not provide a basis for other trade deals.

Chris Phelps briefly highlighted foreign trade, growth in trade deficit with the EU, the 61% growth in trade with the USA (with who we don’t have a trade agreement) compared with 44% growth in the EU over the last 10 years. According to Osborne, the EU is the only area to have had a hard time over that period. There was no challenge as to why the EU is stagnant.

The soft questions secured the potential for an own goal by Osborne in admitting that the German and French would beat us in any negotiation over freedom of movement. Unfortunately, the defence had gone missing so nobody was there to knock in the winner over the extent of our trade deficit with Europe.

The last real challenge came from the Chair, with what turned out to be around an hour before the Monty Python like inquisition. This was over deregulation should the nation choose to remain. Even though new regulation has shrunk by 80%, no existing costly regulation was to be repealed.

Further questions resembled the comfy chair, soft cushions, coffee and glass of milk coming from Anne Goodman, George Kerevan, John Mann, Wes Streeting and the particularly helpful Andrew Garnier.

More potential own goal emerged. This government has no contingency plan. We can not project public expenditure savings. We are apparently in a position from inside to clean up the EU, despite being unable to pressure them into producing signed off accounts for a quarter of a century.

Strikingly, there was no challenge as to the EU’s ability to remain protectionist, reducing the scope and impact of WTO deals over decades.

The Chair summarised with an attack on the Leave camp, glossed over the lack of contingency planning and set Osborne up for the potential winner. Osborne was invited to reiterate his slogans.

The questions that were not asked were glaring. What if we were to reciprocate with tariffs on the EU? How would we spend the receipts? Would the EU want to protect their biggest export market? Would the EU really be stronger with Britain out? What did the report cost? Is it moral to use Treasury resource to scare the public?

Sadly, the forensic questioning that we have seen of late was not forthcoming. There is no requirement for the deeply flawed Treasury document to be edited. We can see that in our parliamentary democracy, some are more equal than others.

You are invited to judge for yourself, based on the links provided in the text. To finish on a positive note, congratulations to those on the TSC on their stamina. Listening to George Osborne for two and a half hours demonstrates certain qualities.





House of card tricks

EuroblogPosted by RexN Mon, May 09, 2016 18:59:35

The debate surrounding Britain’s referendum on the EU is well under way. After making some surprising statements at the end of February and start of March, Foreign Secretary, Philip Hammond, has been surprisingly quiet.

Hammond’s reputation was once that of being something of a Euroscpetic. As recently as 2013, in an interview with the BBC, he suggested that he would vote to leave the EU.

On appointment to his current position, with a general election in sight, he insisted that his position was to renegotiate for a reformed EU. This general thrust of policy was enshrined in his party manifesto (page72 et seq).

After an election win, the position changed within a couple of months. In further interviews, his line was distinctly middle of the road. Mr Hammond also said the government wanted to engage in the debate "in a fair way" and would ensure public money was not allowed to be "inappropriately spent".

By 26th February this year, he boasted on Twitter “I lead a robust #EU debate in Parliament today. The UK is safer, stronger & better off inside a reformed #EU. #EUreferendum”.

In an interview with Andrew Marr, Hammond sidestepped the issues of what would be achieved relative to manifesto commitments. Effectively, he did not deny that manifesto commitments had not been realised. His suggestion, a repeat of what he told Parliament, was that voters would see the outcomes “in the round”.

The phrase “in the round” is an interesting one. Apparently its roots are in the theatre where a performance can be seen from all sides. One interpretation is that the performance can be exposed. Another is akin to a firing squad forming a circle.

Since his comments after the announcement of a referendum, Hammond might be seen as a weak link. His promises about fair debate and public funds appear to have been contradicted by the notorious £9.3m pamphlet and Osborne’s Treasury dossier.

He does seem to have been strangely quiet on EU affairs since February. What has he been up to?

A trawl of Foreign and Commonwealth Office press releases, combined with his Twitter account give us some answers. He has been incredibly busy on the world stage.

Leading up to the Easter period, Hammond was seen in Afghanistan, Pakistan, Paris, Baghdad, Georgia and Lebanon. Since then, his travels have taken him to Hong Kong, Beijing, Vietnam, Tripoli and Colombia.

His latest overseas appearance was in Mexico, discussing economic reform and investment opportunities for UK investment in energy and infrastructure. His previous stop was in Cuba where he was able to declare a bilateral agreement arguably to the embarrassment of the IN campaign who tell us how long it takes to strike a deal.

He has certainly been a busy bunny. During those trips, his absence from Foreign and Commonwealth question times received criticisms from both sides of the House.

Some cynics might suggest that it has been decreed as a potential liability in the campaign, Hammond is being kept out of domestic view. Certainly, some of the unease of Conservative colleagues about taxpayer funded information might be traced back to Hammond’s own comments in June 2015.

Others, arguably more cynical, might liken his disappearing act from the domestic scene to John Major’s wisdom teeth at the time of Thatcher’s toppling.

Of course, a return to the firing line would be welcome. If Britain is a democracy, it is entirely appropriate the Foreign Secretary shares his views on the most pressing foreign policy question for over 40 years. He should not miss another question time and his achievements or otherwise should be open to public scrutiny.

It will have been noted that Hammond took his front bench seat for PMQs on 4th May. The following day, he met with the delegation from Japan accompanying Prime Minister Shinzo Abe. He has been silent on the outcomes.

Therefore, the question remains, has Hammond been gagged, has he gagged himself or is the flurry of meetings with representatives from around the world merely coincidence?

Victory for IN means he can claim to have won all the reforms achievable, victory for OUT presents him as a candidate who has credibility around the globe, even if his earlier slashing of defence budgets leaves him without the military power to back up support for some of the regimes he has visited.

According to opinion polls, the debate is a close run thing. Cameron has already stated that he will not stand for another term. Politicians from both sides have suggested that in the event of a LEAVE vote, his position becomes immediately untenable. Either way, there are fractures to repair in the Conservative Party.

Who is most likely to succeed him? The majority of Conservative MPs identify with the Remain camp. The decision is ultimately theirs. Even in the event of a Leave vote, internal disputes will be a challenge for those most ardent supporters to Remain. The most ardent in the Leave camp face a challenge to gain a majority.

Hammond can claim to be a suitable compromise candidate. The longer he stays quiet, the more he can be regarded as one not to have offended either side.

Perhaps more critically, he can realistically claim to have a presence on the world stage, a potential Prime Minister who can bridge gaps with those outside Fortress Europe, one with a history of bilateral agreements.

If the outcome is to remain, he might expect to be regarded as instrumental in securing the “reform” necessary to secure the vote. If the outcome is to leave, he is the man who can negotiate deals with the EU in a timely manner. In either event, he was the man to present the referendum bill.

As Iain Duncan Smith, himself a compromise candidate, famously stated at the 2002 Conservative party conference "do not underestimate the determination of a quiet man", but why is Hammond so quiet?

Obviously, there are several weeks for Hammond to make a public contribution to the greatest debate on policy from the Foreign and Commonwealth Office for over 40 years. Whilst he is waiting in the wings, his views will not be seen “in the round”. Until he does, there will inevitably be conjecture that he sees his real place as centre stage.

It is said that history repeats itself. After the 1975 referendum, when the Prime minister of the day stood down, he was succeeded by the Foreign Secretary. Just as Callaghan followed Wilson, Would anyone really bet against Hammond following Cameron?



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