Downing Street cred

Yesterday’s announcement that Theresa May will, for the first time, countenance the possibility of an extension of the Article 50 deadline came not a moment too soon. To recap, the PM announced: (i) that she will offer a second meaningful vote on the Withdrawal Agreement no later than 12 March; (ii) if parliament rejects it yet again, then the government will table a vote no later than 13 March to ask MPs if they accept leaving without a deal; (iii) if they do not, parliament will be asked to vote on 14 March whether it will vote for an extension of Article 50 beyond 29 March.

Theresa May's credibility dwindles by the day 

I have been pointing out for months that an Article 50 extension was the most sensible outcome given parliament’s failure to agree what it wants, and it is good to see that reason finally appears to have penetrated 10 Downing Street. A bigger question is what took the PM so long to understand the reality of the UK’s position? It is understandable that she wants to get parliament to accept the Withdrawal Agreement negotiated in November, but her strategy of insisting there was a choice only between her deal and no deal was never realistic.

More than anything the decision confirmed the impression of a prime minister whose authority has disappeared like a badly fixed wig in a hurricane. Over the past two years May has promised that the government would decide the timing of Article 50, until the Supreme Court determined that it was a matter for parliament. She gambled on a general election and lost her parliamentary majority. She promised that “we will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice” but is now pushing an Agreement with the EU in which “the UK’s domestic courts and authorities will be required to have due regard to the case law of the Court of Justice of the European Union.” May has also faced down a leadership challenge in which one-third of her party’s MPs failed to support her and when the Withdrawal Agreement was put to the vote it was defeated by the biggest majority inflicted on any government since 1924. Then there is the small matter of the parliamentary rebellion two weeks ago by members of her own party, which failed to offer support for the negotiating position with the EU that they had instructed her to take. And now, the prime minister who has promised parliament more than 100 times previously that the UK will leave the EU on 29 March is prepared to renege on that commitment as well.

This lack of credibility matters for what happens next. A three-month postponement of the Article 50 deadline will nominally give the PM more time to renegotiate with Brussels. But the EU has already stated that it will not renegotiate the Irish backstop arrangement, which is such a sticking point for Brexit-supporting MPs. Nor is it likely to grant major concessions to a leader who cannot guarantee that they will be passed by parliament. In addition, May cannot simply replay the trick of telling MPs that if they do not pass her Withdrawal Agreement the UK will crash out of the EU at the end of June without a deal, given that she has already blinked in the face of reality.

Nor is the economics credible

As if we needed reminding of the damage that a no-deal Brexit could cause, DExEU yesterday published a summary document outlining the difficulties that the economy would face. In short, it highlights the lack of preparedness with government departments reported as “being on track for … just over two thirds of the most critical projects.” The UK has signed trade agreements with only one of its major trading partners (Switzerland which was the 12th largest export market in 2017) though does have arrangements in place with Chile, the Faroe Islands, members of the Eastern and Southern Africa (ESA) Economic Partnership Agreement, Israel and the Palestinian Authority (which makes me wonder what Liam Fox has been doing since autumn 2016). 

In addition, DExEU also speared one of the options put forward by Brexit supporters that Article XXIV of the General Agreement on Tariffs and Trade (GATT) will allow tariff-free trade with the EU for a ten-year period. As DExEU pointed out, “This is a misunderstanding of what the rules are … [since] it would require the agreement of the EU.” And as the Secretary of State for International Trade told the House of Commons on 14 January this year, the “suggestion would not deal with all the regulatory issues—the non-tariff barriers—that are so important to many businesses.”

DExEU also pointed out that “there is little evidence that businesses are preparing in earnest for a no deal scenario, and evidence indicates that readiness of small and medium-sized enterprises in particular is low.” Other gems include the nugget that 30% of the UK’s food supply comes from the EU and “the potential disruption to trade across the Short Channel Crossings would lead to reduced availability and choice of products” with the result that “food prices are likely to increase, and there is a risk that consumer behaviour could exacerbate, or create, shortages in this scenario.” The report goes on to point out that the “service sector (which makes up around 80% of UK GDP) is supported by free movement of people and a range of cross-cutting regulation such as mutual recognition of qualifications. In a no deal scenario … the UK would risk a loss of market access and increase in non-tariff barriers.” It concludes that a no-deal Brexit on 29 March “does not allow Government to unilaterally mitigate the effects of no deal.”

None of this comes as any surprise to the economics profession, which has been warning of these issues for more than three years. Given the complexity of the issues outlined in the report, matters will be no different on 30 June. Of course much of this can be avoided if the UK signs the Withdrawal Agreement. But this would make the UK an EU rule taker, which is (i) a much worse position than the one we enjoy today as an EU member and (ii) not a position the Brexiteers have shown any willingness to sign up to. That said, in an interview this morning in the Financial Times, Jacob-Rees Mogg, the keeper of the Brexit flame, suggested he was prepared to back down from his hardline position on the Irish backstop. Perhaps he now realises that if he blocks the Withdrawal Agreement, the bad Brexit that would result may be the only one he will get given that the Labour Party has moved towards backing a second referendum which may reverse the 2016 result.

Those suggesting we should just “get on with it” because “that’s what the people voted for” are wrong. There are no good outcomes – only less bad ones. But it would help if certain politicians, starting with the prime minister, were more honest about the trade-offs that Brexit entails. That way, voters might be able to make less ill-informed choices rather than relying on slogans painted on buses.

May's day turns out OK

 

To say that this has been a tumultuous week in UK politics is like saying you can get a good suntan in the Sahara. It is a statement of fact that simply does not do justice to the magnitude of events. At least we did get one meaningful vote – just not the one planned. Following the postponement of the parliamentary vote on the Withdrawal Agreement, we were treated to the spectacle of the civil war within the Conservative Party being fought in the open as rebellious Tory MPs tabled a motion of no confidence in Theresa May. Although her margin of victory was widely viewed as insufficient (200-117), she obtained 63.1% of the vote which is a larger share than in any of the 8 contested ballots in the past 43 years, bar John Major’s 66.3% when he challenged backbench rebels to unseat him in 1995 (chart).

Nonetheless, the impression remains of a prime minister who is in office but not in power. But Brexit is quite simply an undeliverable policy. Worse still, it has been hijacked by various interest groups seeking to further their own interests, all of whom have irreconcilable positions. Brexiteers simply refuse to accept that it is impossible to leave the EU on the terms that they desire, despite all the evidence to the contrary (see here for the journalist James O’Brien’s coruscating denunciation of their views). Remainers don’t always give the impression that they fully took on board the message of the 2016 referendum. Then there are the opportunists in the Labour Party who are simply using the chaos of the current situation to push their call for a general election.

Meanwhile, the world looks on aghast as the extraordinary events in UK politics continue to unfold. It has not been an edifying experience for a nation which prides itself on its constitutional stability and I have lost count of the number of times I have been asked what is going on in your country. I cannot explain it, but it was perhaps best summed up in a letter to The Times yesterday by Robert Blackburn QC, Professor of Constitutional Law at Kings College London, who wrote: “The political class has brought the present crisis over Brexit on itself by continuing to ignore the now urgent need to repair the creaking Victorian infrastructure through which our rulers continue to govern the country ... The use of an ad hoc referendum on a constitutional policy question of immense complexity, with no detailed prior examination and public dissemination of its implications across UK public life … and no parliamentary process for its approval, has exposed to the world the curiosity and embarrassment of a post-imperial unwritten political and governmental structure in turmoil.” In other words, a governmental system that is not fit for purpose.

He concludes that we need to enact the recommendations of a House of Commons Committee which “set out the case for a written codified constitution, one fit for the modern democratic era with a process through which popular deliberation and constitutional change should take place.” At the very least such an approach might act as a pressure vessel to contain the worst instincts of anti-EU populists who have infected the Conservative Party.

But now that the genie is out of the bottle it is difficult to see where we go from here. The leadership election has not resolved anything apart from drawing attention to the kindergarten antics of the inaptly named European Research Group which: (i) hates all European political ideas; (ii) clearly does no research and (iii) is a collection of disparate individuals rather than a coherent group. It is thus likely that we will continue with the plan announced by Theresa May on Tuesday in which parliament will be allowed to vote on the Withdrawal Agreement sometime before 21 January 2019. But in the absence of any significant amendments – and there is no sign that the European Commission is in any mood to reopen negotiations – MPs are likely to reject it.

But whilst nothing good will come out of Brexit, nor is there anything to be gained by calling for a second referendum any time soon let alone withdrawing the Article 50 notice. All three policy options will be hugely divisive, which is why I maintain that an extension to the Article 50 period is the least worst option. One complication which gets little airplay is that an extension of the deadline will cut across the European Parliamentary elections, scheduled for May 2019. It has long been assumed that the UK would be out of the EU by this point and will not be required to send MEPs to Brussels. If the UK is technically still a member of the EU this could cause some problems, though I can envisage a scenario in which the EU and UK arrange a fix whereby the UK is assumed to leave before the end of the parliamentary term and would thus not be required to elect MEPs.

Such a policy will buy time. But how much time will the UK need in order to pull itself together? Probably a lot more than the EU27 is likely to grant. However, I recall suggesting some time ago that one option would be to keep EU associate membership without actually leaving until public opinion has changed sufficiently to suggest that a second referendum is clearly winnable either way, thus decisively confirming or rejecting the Brexit decision. It is more than evident that politicians cannot decide what to do and unless Brussels comes to Westminster’s aid I am struggling to see how else this plays out.

Unless the Conservative Party can sort itself out, however, this issue is likely to periodically erupt every few decades. Thirty years ago, when Labour was in thrall to the left wing of the party, a series of leaders embarked on a modernisation programme which resulted in the expulsion of many of those viewed as extremists. The policy was successful in as much as Labour tacked to the centre ground and laid the groundwork for Tony Blair to claim three successive election victories with handsome majorities. Despite the current vogue for extremist policies, elections are largely won by capturing the centre ground. The Conservatives would do well to have a similar root-and-branch reform and rediscover the brio which allowed them to set the political agenda.

A void where the government used to be

Just when you think you have seen it all in the Brexit debate, we always find something interesting around the corner. Brexit Secretary Stephen Barclay said yesterday: "The vote is going ahead and that's because it's a good deal and it's the only deal." This morning, Downing Street was telling us that the “meaningful vote” that parliament had been promised on the terms of the Brexit deal was definitely going ahead. This afternoon, the prime minister informed us: “We will … defer the vote scheduled for tomorrow.”

Obviously, the fact that there was a snowball-in-hell’s chance of the deal being ratified would have put the prime minister in an impossible position and called what is left of her authority into question. On only three occasions in the last 100 years has a government been defeated by more than 100 votes and it is pretty easy to construct a scenario in which the Withdrawal Agreement would have been rejected by a majority of around 125. Recall that the 139 vote defeat suffered by Tony Blair’s government in 2003 on the question of involvement in the Iraq War arguably marked the beginning of the end for the prime minister as his authority began to leach away. Theresa May is in a far weaker position and it is questionable whether she would survive such a crushing blow. May’s future, however, is a subject for another day. At issue is where does the UK go from here? 

The PM has made it clear that she intends to meet with other EU leaders to discuss the concerns surrounding the backstop which threatens to leave the UK permanently tied to the EU. However, it is difficult to imagine any circumstances in which the EU will make any concessions. The Commission’s view is likely to be something along the lines of “we gave you a reasonable deal which you can take or leave as you see fit. In any case, you haven’t voted on it yet. Come back and see us when you have.” So May could be forced to put the Withdrawal Agreement to a parliamentary vote, and of course it will be heavily rejected. In this case the prime minister goes to Brussels to repeat her request and the EU27 merely repeats the first part of its answer.

Under these circumstances, the UK would have no option but to request an extension to the Article 50 process. The question is how the UK would then use the extra time made available? Probably the first option it would pursue is a Norway Plus arrangement in which the UK joins EFTA and applies to join the EEA (an option only available to EFTA or EU members). Whilst this would minimise the economic costs, the UK would still be subject to the four freedoms of goods, services, capital and labour. In essence it would be a rule-taker. Indeed, as I noted six years ago in response to the FT’s year-ahead 2013 questionnaire “Anyone with notions that we can negotiate a Swiss or Norwegian-style existence on the fringes of the EU is dreaming. Such an existence would still mean that we are subject to large parts of EU legislation but without any power to change it – something which the euro sceptics would like even less than the system they have now.”

What is worrying is that many politicians still don’t understand this point and they have had six whole years to think about it and a whole lot of information put in front of them to demonstrate it. Maybe, just maybe, they will eventually get it in which case the UK would be mad to pursue such a course of action. I suspect that the other alternatives involve either a general election or – and whisper it quietly – a second EU referendum. An election does not do anything to resolve the Brexit question and should be viewed as a side effect of the current political impasse rather than an attempt to resolve it. With regard to a second referendum, I agree with the PM when she says “if you want a second referendum to overturn the result of the first, be honest that this risks dividing the country again” (as I hope I made clear here). But if politicians cannot agree what form of Brexit they want, they may have no choice but to put the question back to the people.

The reason we might end up in this position is primarily due to the fact the government failed to manage the process. The referendum result was never legally binding but May did all she could to make it sound like it was. She was far too late to face down the Brexit ultras who promised unicorns and cakes and indeed pandered to their prejudices (remember “citizens of nowhere” and “queue jumpers”). Perhaps most damningly, the referendum was treated as a winner-take-all outcome in which the near-half of voters who opposed Brexit were completely marginalised. For those who express sympathy with the PM for the near-impossibility of her task, remember that she made it far harder for herself than it needed to be.

I would not like to predict the outcome of a second referendum (I wouldn’t even like to predict the question on the ballot paper). But if it is a choice of “Remain” or “Accept the current deal” the likelihood is that the UK might not even leave the EU (some polling data here, for what it is worth). Further support for this option comes from today’s ECJ ruling that the UK can unilaterally rescind its Article 50 notification, for it suggests that the EU is giving the UK room for manoeuvre if it changes its mind on Brexit.

Nothing that has happened today has helped markets, with sterling falling to its lowest since April 2017. Although markets fear that today’s events have raised the likelihood that the UK will leave the EU without a deal, I don’t buy it. Nonetheless, there is major uncertainty regarding the nature of the UK’s future relationship with the EU which has put sterling under great pressure and 3-month GBP option volatility is on a par with what we saw around the time of the 2016 referendum (chart). Like nature, markets abhor a vacuum and today’s decision to withdraw the parliamentary vote has exposed a major void where the government used to be.

Article 50: One year on

It is now exactly a year since Theresa May stood before UK parliament and announced that she was triggering the Article 50 mechanism that would sweep the UK out of the EU within two years. Halfway through the mandated two year time period, the UK has made more progress with regard to negotiating a deal than I believed possible at the time. Nonetheless many mistakes have been made along the way, and there is still much work to do before UK is able to arrive at a deal which will minimise the damage caused by what I still consider to be an act of economic self-harm. Perhaps more significantly, the country remains as split as ever on Brexit. The ultras still want it at any price whilst there is still a significant core of Remainers who want to prevent it altogether.

Looking back over the past 12 months, there is certainly a lot less gung-ho from the prime minister. The idea that “no deal is better than a bad deal” has been quietly dropped and some of the more strident rhetoric which was designed to keep the pro-Brexit faction of her party onside has been toned down. Of course, this is in large part the result of the ill-judged election call which cost the Conservatives their parliamentary majority last June, and which has weakened the prime minister’s position. More significantly, parliament has exercised a greater of control over the domestic legislation process than was initially envisaged. The government’s original plan was that it would be the prime driver of Brexit legislation but the Withdrawal Bill has been the subject of numerous amendments during its parliamentary passage and may not be the all-encompassing piece of legislation that was envisaged a year ago.

The toning down of domestic rhetoric is also a consequence of the Realpolitik of dealing with the EU27 across the negotiating table. For example, during her speech to parliament in March 2017, the PM promised to “bring an end to the jurisdiction of the European Court of Justice in Britain.” Earlier this month, she was forced to recognise that “even after we have left the jurisdiction of the ECJ, EU law and the decisions of the ECJ will continue to affect us.” That is a very different message to the one she tried to sell a year ago but it is a recognition that the form of close partnership that the UK wants with the EU27 will necessarily involve compromises that will not please everyone in her party. However, it raises the prospect of ongoing domestic political upheaval as it becomes clear that Brexit simply cannot take place on the no-compromise terms envisaged by many Leavers.

It was evident a year ago that the two year timeframe was never going to be long enough to ensure that the final agreement between the UK and EU27 could be ratified. And so it has proven, with the announcement last week that the two sides will implement a transition deal starting in a year’s time which runs to end-2020. The good news is that this will remove the prospect of a cliff-edge Brexit in March 2019 although does not preclude the possibility that the cliff-edge has merely been postponed to December 2020. Nonetheless, this is good news for financial institutions in particular, who until yesterday were unsure whether the arrangements that allow cross-border transactions in financial services would come to an end in March 2019. However, the Bank of England has now opined that it “considers it reasonable for firms currently carrying on regulated activities in the UK by means of passporting rights … to plan that they will be able to continue undertaking these activities during the implementation period in much the same way as now.” In other words, we now have more time to prepare, and hopefully more information on the future of financial services will be forthcoming in the interim.

As regards the three key issues that formed the basis of phase one of the Brexit negotiations, the UK and EU27 are broadly agreed on guaranteeing citizens’ rights and the final exit bill. However, whilst both sides agree in principle on the issue of maintaining an open border between the Irish Republic and Northern Ireland, the UK has not yet come with a solution which will satisfy the requirements of both sides. It is thus notable that whilst the UK and EU27 agree on 75% of the issues outlined in last week’s joint agreement document, the Irish border issue, and the thorny question of how much jurisdiction the ECJ will be allowed to have, remain to be resolved.

Compared to what was expected on the economy twelve months ago, GDP growth has been broadly in line but unemployment has fallen faster and CPI inflation has picked up more than anticipated. The threat of Brexit has clearly not derailed the economy but it has arguably underperformed relative to what might have occurred in its absence. Indeed, the UK remains at the bottom of the G7 growth league and is the only major economy which registered slower growth in 2017 than in 2016. I thus remain to be convinced that Brexit will prove a net benefit for the UK economy, for reasons that I have outlined numerous times before.

But my biggest issue with Brexit remains the way in which the Leave campaign made their case ahead of the referendum (and allegations of funding impropriety which have surfaced in recent days does nothing to assuage these concerns) and the way in which the result was interpreted as a winner-take-all  event. Leave supporters continue to believe that the “will of the people” justifies Brexit at any price and precludes the option of revisiting the decision. But parliamentary democracy in the UK is founded on the principle that no parliament can take a decision that binds its successors. Yet that is precisely what Brexit implies. It is the imposition of a policy that younger generations – and perhaps those not yet born – will have to contend with. It is in many respects a profoundly undemocratic decision.

Of course, the Leave side can reasonably contend that it is undemocratic to be shackled to an institution of which they do not wish to remain part. Thus, one year after triggering Article 50 and almost two years after the referendum, the legal and constitutional implications of the decision are no nearer being resolved. Expect us to be having much the same debate about the (de)merits of Brexit in March 2019 as we did in March 2017 (or even March 2016).

U-turn if you want to: Part 1

The disastrous performance of the Conservative Party in last week's election has prompted a rethink of policy on both Brexit and fiscal austerity. This is recognition of the fact that the government has been spectacularly wrong on both – as I have long pointed out – and the scale of the U-turn reflects a certain degree of chutzpah. In this post I will focus on Brexit-related issues and leave the fiscal issues for my next post.

Whilst hopes have been awakened that we will see a softening of the terms on which the UK seeks to leave the EU, it is just as likely that we will end up instead with a chaotic Brexit which would be the worst of all worlds. I have always maintained that the Brexit referendum was an unjustified gamble with the national interest and it feels even more like that today.  Those politicians who advocated this course of action deserve all the opprobrium that is heaped upon them, and in order to highlight why Theresa May’s government is not fit to negotiate the exit, it is worthwhile recalling the series of miscalculations which has characterised Conservative policy in recent years.

First, the decision to hold the referendum at all was reckless. This was compounded by the failure to specify the terms which would make it easy for David Cameron to achieve his objective of winning. For example, the 1979 Scottish devolution referendum required that a winning margin be obtained from 40% of all eligible voters. In an uncanny echo of the Brexit result, whilst 51.6% of those who turned out voted in favour of devolution, only 32.9% of all eligible voters did so (the corresponding figure in last year’s referendum was 37%). Then there was the failure to set out ahead of the event the terms on which the UK would leave. Had voters known exactly what a hard Brexit entails, some may have thought twice. To cap it all, Theresa May gambled that the electorate would back her view of a hard Brexit. This proved to be a second successive failed gamble by a Conservative prime minister which has made the process of trying to find a Brexit deal far more complicated. Given this litany of errors, you will forgive my scepticism that the government is best placed to resolve the difficulties we now face.

Theresa May, described by George Osborne at the weekend as a dead woman walking, has to find a balance between those MPs in her party who wish to push for hard Brexit and the large number of MPs who wish to see it take place on much softer terms, if at all. I was thus somewhat gratified to see that my idea of a cross-party approach to Brexit now appears to have become a mainstream idea (you heard it here first).

But we simply should not even be having this debate. A hard Brexit is a ruinously stupid economic idea. And to compound the negotiating difficulties by calling an election AFTER the Article 50 process was triggered, thereby eating up valuable preparation time, tells us all we need to know about the Conservatives preoccupation with domestic politics rather than the wider interest. Although the government says it is ready to go ahead with the start of Brexit talks with the EC next week, it's not clear to me that this can credibly happen. Technically we do not yet have a government. Nor is it clear what the UK's negotiating position is, yet they will be facing a European Commission team which has had months to prepare its case. And just to make life even more difficult, two of the four ministers on the UK’s negotiating team have departed just days before talks are due to begin. This raises the chances that the disorganised shambles which passes for government may well crash out of the EU without any deal. The Conservative manifesto might have said no deal is better than a bad deal, but that is a level of economic illiteracy which suggests whoever wrote it has no idea how to conduct international trade negotiations.

Now you may have spotted from the tone of the post that I am a tad annoyed. Damn right! Pretty much every key decision that has been taken on Brexit has been wrong. There is no sense that those responsible for making decisions are capable of thinking strategically about how to get a deal which maximises British interests. We should be in no doubt that failure to do so will make everyone poorer and despite the talk which suggests that immigration is the biggest single issue, in the long run what people care about is their wallet. We are now hearing indications that business is becoming much more vocal about their needs post-Brexit. So it should. And If the government does not know what it wants from Brexit, it should not be entering talks with the EU. Instead it should rescind the Article 50 notice until such times as it does.

This may annoy the Brexit nutters such as Nigel Farage, who has threatened a comeback in the event that the government backslides. I say let him. Farage was a useful dupe for those who wanted something to protest against in 2016 but he would require the powers of Lazarus to restore UKIP to the position they were in last year. I also sense that some of last year’s anger has dissipated somewhat and he would find it difficult to whip up an anti-EU frenzy in the same way. I do not want Brexit to happen and nothing would please me more than if the government were to back down. But in the spirit of accepting the will of the people (even if the referendum is not legally binding) I accept this is unlikely to happen. But if it has to, then let us work out what we want first rather than trying to make it up as we go along.  That is the path to disaster.

Now what?

Today’s delivery of the letter triggering Article 50 has set the UK on a road to a far less certain future. I have been through the economic arguments countless times as to why Brexit is a thoroughly bad idea – indeed I have been making them since January 2013 – but that is an argument which has been lost and there is no point in raking over old coals. Theresa May’s speech to parliament tried to sound convincing but I suspect it fell flat on the near half of voters who do not share this government’s vision.

All the challenges it faces were contained in one sentence from the prime minister: “I want this United Kingdom to emerge from this period of change stronger, fairer, more united and more outward-looking than ever before.” It’s hard to see how we will emerge stronger given that most of the evidence suggests that there will be significant economic costs. Unless, of course, any trade deal with the EU offers most of what we have already, in which case what is the point? More outward-looking? We have just announced a withdrawal from the largest, and arguably most successful, single market in the world. I am not sure how that is consistent with the outward-looking vision she espouses. As for being united, that is a bitter irony. Almost half those who voted do not want this policy at all, and the Scots want to secede altogether. The UK will have to negotiate a hell of a deal with the EU to persuade the disaffected minority that Brexit is a risk worth taking.

The biggest problem that the government will face in the long-run is how to take back control in an increasingly globalised world. One of the great ironies of the post-Brexit world is that sterling is around 10% weaker than it was pre-referendum. Aside from the fact that this impacts upon the living standards of ordinary citizens by raising the costs of imported goods, it also makes British companies more attractive takeover targets by reducing their price in foreign currency terms. An article in The Economist noted three weeks ago that although the UK accounts for 3% of world GDP and its companies account for just 5% of global market cap, UK corporates have accounted for a quarter of all cross-border M&A activity since 1997.

This is a result of the laissez-faire approach of successive British governments towards market intervention. Moreover, over the last 10 years, foreign companies have bought significantly more UK companies than the other way around. The most high profile of these cases was the purchase of Cadbury’s plc by Kraft Inc in 2010. Just a week after promising to keep one of Cadbury's local plants open, Kraft backtracked and said it would close it. Although this resulted in a major revamp of the takeover code in 2011, it came too late for Cadbury’s workers and prompted howls of popular outrage. But here’s the rub: The UK is running out of attractive takeover targets. Admittedly, it still has attractive companies such as AstraZeneca, which beat off a bid from Pfizer in 2014, or the London Stock Exchange, whose proposed merger with Deutsche Börse was today blocked by the EU competition commissioner (of all people).

All this is a prelude to the question of what will attract global capital to the UK in future? It has fewer takeover targets and it is about to leave the EU, which will make it less attractive to firms which want a European base when they can go elsewhere. The attractiveness of London as a business location will not diminish easily: It is still a world-class city with all the amenities that the global community requires. The attractiveness of the legal system and use of the global lingua franca are added bonuses.  But depending on the nature of the deal with the EU, the London financial services industry may be in for a torrid time which will impact on the ancillary services that depend on it. Only time will tell how the likes of the Japanese and Americans will react to the prospect of having their European headquarters located outside the EU. Tax competition would certainly be one option to enhance the attractiveness of the UK but that is a race to the bottom which could put even bigger holes in the public finances.

The Economist notes that “even the free-market wing of the ruling Conservative Party … backs a change [to the takeover code] ... Britain’s 30-year experiment with a free market for takeovers is quietly coming to an end.” But the real irony is that if Brexit is at least in part a backlash against globalisation, this policy change could have been implemented years ago and saved us a lot of grief. And to double the irony, making it more difficult for foreign investors to buy UK companies is now precisely the wrong policy response when (a) most of the assets have already been sold and (b) the UK needs the capital inflows. You almost couldn’t make it up. Unfortunately that is the result of 30 years of short-sighted policy.