By Russell Bruce
Leaving the EU is a gigantic miscalculation. Europe shares cultural, social and vital security ties as well as being the largest trading block in the world. And our proximity matters. Bringing European nations together in the wake of WW2 had the objective of building a collaborative Europe to leave behind the wars, disruptions and fragmentation of the past.
Britain stood outside in offshore distance whilst supporting mainland Europe to find a new accord. Britain continued to believe its future remained as a global power. But global influence was slipping away as Empire morphed into Commonwealth with the ties of Empire rotting as newly independent nations found their own place in the world and the capacity to create product from their resources rather than export to Britain, to grab the added value of manufacture and pocket the profit.
The exploited learn from their exploitation and come to believe that the future could be better than the past. Britain in leaving the EU, seeks to reacquire a past that does not exist anymore. The utterings of May and her three Brexiteers, whose rhetoric has the feel of a holding-position to reassure the public of a secure future, now looks increasingly insecure. Sanity must dictate their rose tinted view of global opportunity is an illusion, long in creation but short on imminent collapse.
Brexit costs rising by the day
Until Article 50 is triggered we are in a phoney war period. There is now a lot of valuable information being reported, highlighting the potential dangers of May’s vague strategy based on assumptions of what 27 other countries will agree to be included in talks when the exit process is triggered.
THE FALLING POUND
What we know so far is Sterling devaluation means Euro and Dollar imports and costs have risen against Sterling. On 25th May £1.00 bought €1.32 and yesterday only €1.10. A pound bought $1.49 on 23rd June dropping to $1.22 now. The sharp drop in the value of the pound immediately after the referendum has not been a one-off. Sterling has lost another 6% of its value since August.
The fall against the dollar is likely to get worse as the US Federal Reserve are hinting at an interest rate increase at their December meeting. This will result in an inflow of cash into the dollar and an outflow from weak currencies like sterling. The wild card is a guy called Trump. Then everything slumps.
Meanwhile, due to the hit on the value of sterling, inflation is on the rise. Consumer Price Index (CPI) was just 0.5% in the year to March 2016. The latest report shows CPI touching 1%. The National Institute of Economic and Social Research (NIESR) is predicting CPI to rise to 3.8% by the end of 2017 and the Retail Price Index (RPI) to rise to 4.3%. The BoE has also raised its forecast of inflation.
GROWTH FORECASTS DOWN 70%
The Bank of England has also revised its forecast for economic growth, downwards by 1.5%, predicting 0.8% growth in 2017 instead of 2.8% previously. The IMF predicted lower growth at 2.2% but has been generous in downgrading the latest revision to 1.3% growth. NIESR is predicting Real GDP growth at 1.4% and Bloomberg’s survey of economists reduced UK estimate of growth in 2017 downwards from 2.1% to just 0.6%. Take you pick of who you believe but they are all pointing on the same downward trajectory.
BUSINESS CONFIDENCE SLIPS
UK Business confidence had been slipping, even before the referendum, with a slide into negative territory from the end of 2015 and into 2016. Confidence walloped to a minus 47 reading in July. Although business confidence has recovered somewhat in Quarter 4 it remains negative and suggestive of a longer-term trend on the back of Brexit uncertainty.
Then there is the bill to pay at the end as Britain leaves the EU. After settling outstanding debts and subtracting UK share of EU joint assets, the estimate is £20 billion. Nobody put that on the side of a bus.
If, as increasingly considered likely, Scotland remains in the EU when England and Wales leave, the Brexit bill will be higher because Scotland would retain its share of EU assets that could not be remitted back to Westminster.
Inflation will hit struggling families
The Bank of England has failed to create any inflation through its unconventional monetary policies of hitting the print button to create more money to buy assets from the banks. The banks sit on the money because they have capital ratios to get in a semblance of order and there is a reluctance to borrow when market conditions are unfavourable for business investment.
Hey presto – the drop in the value of the pound does the trick and the BoE is minded to let inflation run above the 2% target it is supposed to adhere to. Inflation eats debt, of which the UK has a lot, both public and private. It also eats savings, hurting pensioners and those saving for retirement. What happens to the triple lock on pensions and the freeze on social security payments? Will Chancellor of the Exchequer, Philip Hammond, open his purse, as he has for Nissan?
NIESR is predicting a 0.5% fall in real income in 2017. This means less money circulating in the economy. For those on social security and low incomes the impact of the inflation squeeze will be greater.
We know May is keeping her cards close to her chest. I can exclusively reveal what cards she is holding. Not a normal pack of cards because she has dealt herself a straight flush of jokers. The Nissan promise indicates the direction of thinking. To work through a list of key sectors: cars, finance, pharmaceuticals and negotiate a favourable deal for access to the single market by staying in the customs union. The joker plan is to negotiate a Free Trade Agreement (FTA). Promises will be made to key sectors. How many sectors will get these promises? If you are in farming don’t expect too much. Agriculture and fisheries account for just 1% of UK GDP and CAP payments run out when the UK leaves by the back door.
By all accounts May’s government has ruled out a Norway or Swiss style deal. It would need a rather special deal then to ensure passporting rights for financial services and access to the single market for services. Norway and Switzerland have limited access for services yet they both pay into the EU budget and accept free movement.
The FT is reporting Politeia, a right-wing think-tank to which Johnson, Fox and Gove have contributed, is proposing a bright future by escaping ‘excessive EU rules’. The FT quotes Barney Reynolds of Shearman & Sterling, an international corporate legal firm headquartered in New York, who declares the UK would be “Unburdened from the shackles of European social policy”.
The report envisages deregulation mark 2 and that should worry even the sane in London’s financial sector.
UK has completely lost control
The Brexiteers were strong on taking back control. It was not just a meaningless sound bite it was a total contradiction to what the UK faces in the years ahead. Having signed the Treaty of Lisbon, the UK must follow the procedures set out in order to leave the EU. Just negotiating the exit will take up the two years to Armageddon. A Free Trade Agreement will take another 5 to 10 years to negotiate. It then has to be agreed by 38 EU national and regional parliaments. There is no requirement on the EU to begin negotiations on an FTA before the UK has walked out the door. So much for taking back control. If anyone has a real straight flush it is the EU.
An FTA involves working through every sector of the economy and agreeing tariffs or the absence of them. That then involves areas of quotas. So much at a certain level of tariff and above that a higher rate, or a cut off.
On the UK front, the only politician with a real plan and who is clearly in control of a complex process to keep Scotland in the EU is Nicola Sturgeon. An irony not lost on the serious media.