The Prime Minister’s Brexit speech was well crafted and delivered. Many Remain voters like the vision that the UK will have strong and positive relationships with the EU once we have left. They like the vision of the UK leading the cause of free trade worldwide, and offering continuing free trade to our former partners. The Commission may still want to find some way of harming the UK at the expense of the EU member states themselves, but the member states are likely on reflection to want to avoid tariffs on their exports and to resist new obstacles in the way of selling into the UK.
One of the most important features of the government position is it narrows the areas for disagreement. By saying we do not want to be in the single market we avoid that planned row over what level of budget contribution and what elements of free movement we need to retain to keep us in the single market. I never thought it would be possible to be in the single market and not be in the EU, and agree with Mrs Merkel on that matter. The UK government has spared the EU that argument.
It means the discussions to leave will be on narrow issues of when the liabilities stop and when we lose the use of the assets. We can move rapidly on from the question of departure to discuss the more important questions of what future trading arrangements we will enjoy and what collaborations and joint programmes we mutually wish to continue.
The EU is under a clear legal obligation from its own Treaty to be friendly and positive in its relations with neighbouring countries. I am sure many of the member states, if not the Commission, will want to obey the Treaty law, as we have always been told we have to do. It is more likely they will because it is commonsense to get on well with the neighbours. It is imperative to get on well with the customers, and the UK is a mighty big customer.
Mrs Merkel has been feted and courted as the de facto leader of the EU for the past decade. Mr Obama was a strong believer in the Euro and EU project, and looked to Mrs Merkel to provide its discipline and to be its voice. Mr Cameron decided Mrs Merkel was the main person he had to win over when he sought to renegotiate the UK’s relationship. She did not offer him much, which led to the decisive vote by the UK electorate to leave. It was another of her damaging misjudgements, to go alongside the mistake she made over migration into Germany.
Today Mrs Merkel’s power is visibly waning. The UK now has a Brexit government. It sees Mrs Merkel as an obstacle when she blocks early resolution of the residency issues, or when she grandstands telling us we have to accept freedom of movement. In the USA President Trump has launched public criticisms of her immigration policy and has said he sees the EU as a “German vehicle”. He speaks up for European countries which want to restore their own identities. Her voting base is also under attack from the anti Euro anti migrant AFD party.
The diminution of Mrs Merkel’s power is helpful to UK as it seeks to negotiate its future relationship with the EU on leaving. Mr Trump will be aware of the huge size of Germany’s balance of payments surplus, which matches part of the large deficits the USA and UK run up. He wishes to alter this, and is busily seeking to repatriate motor car capacity and investment to the USA given the large stake Germany has in the world car industry.
The German electors will have their say on whether she should continue as Chancellor this autumn. They will also be voting on how big a contribution will Germany provide to the new EU absent its UK paymaster. What is clear is that Mrs Merkel, or any replacement to her, can no longer count on the automatic support of the USA to keep Euro and EU together. Nor can they count on UK cash and support in the Council for lower budgets and better discipline.
In his Delphic interview in Germany the Chancellor implied that if the rest of the EU does make try to make life difficult for the UK the UK has plenty of options in response. He did not spell out the detail, but the UK could cut taxes more to make itself a more attractive destination for investment. It could match anything the USA decides to do to switch taxation in ways which promote investment and manufacturing at home and for exports, and penalise imports. Financial regulation could be altered to make the City the most flexible value for money major market, whilst ensuring proper standards and disclosures.
I do not think we need worry. If we have no deal with the EU and operate under the most favoured nation status at the WTO it will be fine. I still think faced with the reality of high tariffs on agricultural products and a 10% tariff on cars which will do them more damage than us they are unlikely to want this. We carry on a good and faster growing trade with the rest of the world than with the EU. That is largely conducted under most favoured nation status with modest tariffs under WTO rules.
The question for the Chancellor is rather, if there are tax changes and regulatory alterations which would boost UK jobs and incomes, shouldn’t we be contemplating those anyway, whether the rest of the EU tries to be nice or nasty to us? There are voices in the City now saying we should aim for the “Financial Centre” model, where we organise a strong but business friendly framework to maximise the attractiveness of London to legal business. It is interesting to see even City UK, a past cheer leader for EU engagement, is no longer demanding we keep the passports. It reminds me that the City made passionate interventions to try to get us to join the Euro, saying the City would be damaged if we did not. They soon discovered the opposite was true. The City grew faster outside the Euro.
Ireland has fought long and hard to maintain a tax advantage over the rest of the EU. Luxembourg does well in investment management along with Dublin out of low taxes. The Chancellor needs to review tax rates with the intent to charge the rate that maximises revenue by attracting more business. This will usually be a lower rate than the one currently charged.
I am surprised how long it is taking some in the media and politics to grasp that the UK will leave the single market and customs union. It should not be news. Both the official Leave and Remain campaigns made this clear in the referendum. It was one of the few things they agreed about. Staying in the single market whilst leaving the EU is not offer. There is no legal structure that allows that.
Nor should the UK apply to join the European Economic Area, a body we belong to only by virtue of being an EU member. Again, the official Leave campaign made clear we did not want to apply to belong, and Remain explained it could be difficult and would come with budget contributions and freedom of movement attached.
I came to the conclusion a long time ago that we needed to leave the single market. I did so because I saw the single market close up. As a senior businessman working in a large industrial group I saw how it did not work for the UK or for innovative companies. As the UK’s single market Minister helping construct it I saw how anti innovation and enterprise the whole structure was designed to be.
In the 1980s I was chairman of a large international industrial group. We had successful businesses in the UK, USA, Australia, Malaysia, South Africa and various other Asian countries. The only European country where we had a business was Greece. We found it difficult to sell into the EEC’s single market. During the Conservative opposition years this century again I was involved international business. Again it was difficult to do business on the continent despite putting in effort to do so with local people working in the relevant languages. We flourished outside the EU as well as in the UK.
As single market Minister the whole scheme seemed to me to be wrongly constructed. It was a con. It was not about free trade or free access. It was all about piling more and more laws and rules onto business and citizens in the name of the single market. It ended up favouring large companies already dominant in a market, and the status quo. The danger was it could make exciting innovation illegal. The definition of a single market measure could range from employment and welfare policy through environmental policy to transport and taxation.
Yesterday during one of my sessions knocking on doors and listening to views, I was struck by the force and regularity of the view on a single issue – traffic congestion. I just ask people to tell me what is on their mind without prompting. In so many cases people said they thought the traffic jams in the Wokingham area are too great. They recognised the need for additional housing and understood the new building going on, but were keen to say more has to be done to provide capacity for people to get to work, to take their children to school and to go to the shops.
I agree. I was able to report that both the Council and the government agree, and are making more cash available for road improvement. In the Wokingham/Reading area we see major investment underway. On the A 327 to Reading there is the Shinfield by-pass (nearing completion), the new bridge over the M4 (completed), and the planned Arborfield by pass. On the A 329 work is in hand on the Winnersh by pass. In the town of Wokingham the new station link is open. There are plans for the new southern and northern distributor roads to the east of Wokingham, with a planned new bridge over the railway. There is also a proposal to widen the road under the railway bridge on the Finchampstead Road.
I have asked the Council to look again at smaller schemes and traffic management issues. There are criticisms of the phasing of lights at the Station approach from Wellington Road, with red phases when the level crossing gates are already down, and at Winnersh crossroads. There are a number of places where traffic sensitive lights would be better, or where lights could be withdrawn from roundabouts or made part time. There are various junctions where segregation of left and right turning traffic, different phasing of lights, and more carriageway capacity at and near the junction would help. Bracknell has recently upgraded capacity at the Coral Reef junction of the B3430 with the A 322.
The UK is the EU’s Treasure Island. We run a £92bn current account deficit with them ( year to Q3 2016). That includes a huge deficit on trade in goods which come in tariff free to their advantage. It includes £7bn of annual remittances by EU citizens living in the UK but sending money back to their home countries from good jobs here.
The UK has lent the rest of the EU £1.4 trillion through the London banking system. We pay around £700 million more to them each year for UK citizens to use their health services than they pay to use the NHS here.
We pay a gross budget contribution of £17.7 bn or £10.8 bn after rebate and payments back to the UK state.
I will be looking in more detail at the financial flows going from the UK to the rest of the EU in later blogs. The overall magnitude of our financing of the EU is the main reason they do not want us to leave without first demanding we carry on paying as if we were staying.
If they decided to be decent and sensible they would of course find it easier to keep hold of much of this money. London banks will be very willing to lend more if they can trade sensibly with the continent. If the Commission and Germany agree with the UK proposal that all EU nationals located in each others countries can stay the remittances will continue. If they want tariff free trade they will doubtless continue to sell us more than we sell them.
Meanwhile leaving must mean ending our budget contributions. That should not be part of any negotiations.
Donald Trump has promised – or threatened – to cancel the Trans Pacific Partnership Agreement, to pull out of Nafta, to take action against Mexico and to name China as a currency manipulator. Markets and governments are now waiting to see how many of these he does in his first hundred days.
He will be told that he has to work within US and international law, and abide by the rules of the World Trade Organisation. He can pull out of the Pacific trade agreement. . He can give notice to quit Nafta, but will need subsequent legislative change from Congress and the Senate. He can open new proceedings against Mexico if he has evidence of trade violations. He does not appear to have the evidence to claim that China has been a currency manipulator under international trade law. There are no signs that China has been consistently intervening to get its currency down in recent months.
If he adopts the Republican proposal for reform of company taxation, that in itself will provide a substantial tax based boost for US exports and a hit to imports into America. The idea behind the party scheme is to exempt exports from their revised business tax, but to ensure imports carry its full force. Some say it is not compatible with WTO rules. The Republicans disagree, and the USA has more clout in international bodies like the WTO than any other country.
Globalists and free trade enthusiasts are concerned lest Mr trump’s America first agenda prompts retaliatory actions and makes protectionism fashionable. People on both sides of the Atlantic who have seen their jobs go or their wages cut thanks to low cost competition from Asia or Latin America will be egging him on.
I have had a very busy week so far, and have only just caught up with the postings on this site. Delays are created if individuals post often and at great length. Sometimes a long posting with expertise and new information is necessary and helpful but endless long postings saying similar things are not.
I will have to simply delete some long postings from people who have already written in on the topic. I do delete long postings with references to sites I do not know and have not the time to read, and long postings with questionable allegations about people, companies and institutions.
We are awaiting a government White Paper to set out ways to promote the construction of more homes. The government believes the UK build rate needs to be considerably higher than the current one, given the large number of people needing homes.
I agree with those who write in to say that the government should deal with the demand side as well as the supply side. The government itself has pledged to cut inward migration to tens of thousands, but believes it needs to exit the EU first so it can extend migration controls to EU citizens as well as to people coming from the rest of the world. We await a statement of policy from the new Home Secretary on how migration controls will be tightened generally and especially for EU migrants. The indications are that the government wishes to limit work permits for lower paid jobs, but leave free movement for highly qualified and well paid people, and management coming in under intra company transfers.
We need more homes just to deal with pent up demand from people already legally settled here. There are many young people who would like a home of their own, who cannot afford to buy so they stay living with their parents. There are many young people sharing flats and houses with others of their generation, with the cost of housing being one factor that delays establishing their own household. Many more people would like to own a home of their own who are currently living in rented accommodation. There are also elderly people whose children have left home who are put off moving to a smaller and more manageable property by the high costs of moving, including Stamp Duty as a significant deterrent.
I would be interested to hear your ideas on what further measures the government should take in its White Paper and in the budget that follows. I want to see Stamp Duty brought down to lower levels. At the expensive multi million end it has greatly reduced transactions in dear properties, leading to a fall in revenues from the tax. For the rest of us in the normal market it is still an expensive addition to the costs of first purchase or moving.
I support the government’s enthusiasm for more factory manufacture and pre assembly to speed and improve building. We are short of many building trades for on site work. The weather often delays their task. If more components of a kitchen, bathroom, structure of a home, window assemblies and roof can be made in the factory the time taken on site can be reduced and the available skilled labour concentrated on those tasks that can only be done on site.
The main housebuilders are all taking some steps in this direction. More homes will be built around a timber pre-fabricated frame. More sub assemblies will be done in the factory for systems and components going into the home. Progress is however quite slow. Where government itself is the customer it could require faster progress in this direction. The UK housebuilding industry was badly damaged and slimmed down by the Great recession of 2008-9. Most of the companies now are strongly cash generative, but very cautious about expanding their output and their balance sheets too much. That is why demand so outstrips supply.
The rest of the EU clearly has a much bigger problem with Brexit than the UK does. They are the ones who lose our budget contributions, who need to keep access to our very lucrative market, who want full access to our successful jobs market to place more of their people who are unemployed or in lower paid work, who want to keep their surplus on public health payments, and enjoy the remittances from EU workers working in the UK.
There is likely to be strong disagreements between many member states who will want full tariff free access to our markets, and the EU Commission who want to design some kind of punishment settlement. The EU officials seem to want to prove a member state leaving wil be worse off, but would only succeed in proving the rest of the EU will be worse off if they have their way.
The strength of the UK position is its simplicity. Most of the things we want – freedom from paying contributions, control of our own borders and laws – do not require consent from the rest of the EU and are achieved by simply leaving, as we are entitled under the treaties to do. When it comes to trade we know trading under the most favoured nation status at the WTO works just fine, as that is what we do for the rest of the world at the moment. It is the rest of the EU that would suffer from the tariffs WTO allows. All our services and much of our goods exports are tariff free. Cars attract a 10% tariff, and agricultural products, where the rest of the EU sells us a lot, attract some high tariffs.
It will be interesting to see how the differences between the Commission and member states pan out in the forthcoming discussions. If the Commission succeeds in demanding tariffs, we need to know that soon so we can get on with an early exit and establishment of the WTO system to regulate our trade. As Civitas has pointed out this week, because we will collect around double the tariff revenue from them that they will collect from us, the UK can offer tax breaks and grants in compensation so we are no worse off. The pain will be felt instead on the continent, in a futile attempt to make the EU Commission’s nasty political point.