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.

The day after

A day after the EU referendum and I am still struggling to take it in. It is one of the most shattering political and professional experiences I have ever experienced. As an economist, I have made the economic case for EU membership hundreds of times over recent years, but the electorate was clearly indifferent to these benefits. It is, as Boris Johnson said, a vote for independence. But from what? The notion that Brussels dominates our lives is a pure fabrication. It sets standards to which all members must adhere, and there may indeed be some gold plating, but the basic rules are the same for everyone. It is not a massive conspiracy to defraud the British. According to the OECD, the UK already has the second lowest degree of product market regulation across the EU (after the Netherlands) and the lowest level of labour market regulation. Many of our economic problems are home made. 

Indeed, as TUC General Secretary Frances O’Grady pointed out in the final Brexit debate on Tuesday, these problems are the result of deliberate government policy. Austerity was not imposed by Brussels. Our libraries and community centres are not being closed by EU mandate. Our student fees are not shooting through the roof thanks to some shady deals done in Strasbourg. This policy of austerity emanated from Downing Street, and it is therefore hardly a surprise that David Cameron and George Osborne barely showed their face during the latter stages of the campaign because they had become electoral liabilities. Cameron at least has done the decent thing and resigned. Shame he did not do so before promising the referendum! Cameron has shamelessly played domestic politics with the national interest, and lost. The EU has many faults and who knows, it may indeed shake itself apart. But far better not to be the first to leave. In game theoretic terms, this is a game where there is no first mover advantage since we will bear all the costs for an uncertain reward. 

I won’t even bother to discuss the shortcomings of the Labour Party’s pathetic efforts. Suffice to say that Jeremy Corbyn has let down all those who have put efforts into building better relationships with the EU. He is a relic of 1970s Labour thinking, whose ideas are 40 years out of date (they were wrongheaded then as well) and who actually campaigned against EEC membership back in 1975.

But I will reserve special ire for the likes of Nigel Lawson, who talks like a backbench 1990s Tory on Europe. Lawson is never encumbered by the knowledge he might be wrong. The man is so self-absorbed that the irony of the fact he lives in France never once troubled him. But to hear an 84 year-old man tell us about the future we can enjoy outside of Europe makes me downright angry. He won’t be around to see the consequences of his actions and clearly the generation of 18-24 year olds, 75% of whom voted for Remain, don’t buy his view either. 

In many ways, the Brexit vote is the last revenge of the baby boomers. They enjoyed free love in the 1960s which ended with the AIDS scares of the 1980s; they consumed like no generation before and left us with global warming; they secured their pensions and free education and left their kids to pick up the tab. And now they want to take us out of the largest, most prosperous economic block in the world and it is their children who will have to figure out how to make it work. Generational politics may well become the biggest single issue of the next decade – and no wonder.

If all this sounds like a metropolitan view, then I make no apologies. I have spent most of my working life in an international environment, working with and getting to know foreigners and how they think. And I know that many of them share the same frustrations as the British. There are many things wrong with the EU and the single currency is an economic disaster which has done more to damage the prosperity of its members than they care to admit. 

But the UK had a sweet deal. Not in the single currency nor party to the Schengen Agreement, it broadly worked for us. And whilst some crazy numbers were bandied about, the IFS reckons that in 2014 the UK made a net contribution of £5.7bn, which sounds like a lot but it is in fact around £88 per person per year, or £124 per voter. Even if we take this upper figure, it is less than £2.50 per week. No-one thought to mention that in the debates. Instead, the Remainers argued about the lies being spun by the Leavers about what the true figure was. They should have said instead, “yes it costs, but it is less than the price of a pint per week and in return we get all the network benefits of membership.” And if anyone asks what a network effect is, tell them to imagine the invention of the smart phone. Just an overpriced piece of kit until someone works out how to put games and other useful apps on it. Then tell them to imagine how they will manage to use these apps if someone takes their phone away. 

But they didn’t do that. So what we have now is a dissatisfied half of the electorate which wanted to stay, and the other half not really sure what they have won. Meanwhile the Scots are thinking about how to maintain their ties with the EU. But according to one of my Scottish colleagues, they won’t push for a referendum because it’s not in their interest. There again, the same guy told me in 2014 that no-one was talking about independence north of the border. Go figure! Now the rest of the EU is making noises about how they want the corpse of our membership out of Brussels before it starts to stink the place out. And should anyone be surprised? 

As an exercise in healing divisions, the referendum has achieved pretty much the opposite on all counts. Way to go, Dave. Oh, but you are, aren’t you?

EU debate: Depressingly familiar

The EU referendum campaign rolls inexorably on but we are none the wiser after the big TV debate last night which was very much a classic case of much heat but little light. Indeed, this summed up the whole campaign. Claim and counter claim, met with spin and counter spin. As an economist, I am totally unpersuaded of the case made by the Leavers. They appear to be adopting a naive belief that in the event we leave, our erstwhile EU partners will be only too willing to do a deal with us. It would be foolish in the extreme to assume this, since one of the motivating factors in their dealings with the UK will be to persuade other countries not to go down the same route and will be in no mood to offer any concessions. 

When it comes to immigration, the Leavers have been somewhat disingenuous. It is true that the number of net immigrants into the UK hit record levels last year but less than half of them were from the EU. If we have an immigration problem it is that the UK, in common with other EU countries, has failed to control its borders with countries outside the region. The bigger irony is that a large proportion of non-EU immigrants come to the UK to study. To the extent that these students pay much higher tuition fees than EU students, they contribute significantly to the finances of the higher education sector at a time when the government has been cutting its own university funding. As an aside, I am struck by the irony that one of the key protagonists in the Leave campaign is Gisela Stuart MP who is herself German-born. I have nothing against Ms Stuart, who is a perfectly competent MP, but in effect she is seeking to deny those from a similar background the same opportunities which were granted to her. 

Ultimately the EU referendum has proven to be a debate in which both sides are talking at cross purposes. The Remainers argue that the economic costs are too high (they're right) whilst the Brexiters argue that this is about regaining sovereignty (they're wrong). We live in a globalised world in which countries such as China are awakening giants. I believe we are indeed better together with our European partners, with Britain's voice more likely to be heard if we act in concert with our neighbours. 

Last week's murder of MP Jo Cox was a symbol of the divisions in British society - divisions which have been exacerbated by the ferocity of this debate. Whatever happens tomorrow, the divisions which have been opened up will be slow to heal. The referendum is not just about Europe: It is the chance for the British electorate to vent its spleen along the same lines that Donald Trump has been elevated to become the Republicans' candidate for the US presidency. If we could hold up a mirror to our society, we might not like what we see. I, for one, certainly do not. 

Euro countdown

In less than two weeks the fate of the UK in Europe will be decided. The referendum campaign has been an unedifying spectacle, characterised by the distortion of the facts by the Brexiteers on one side and the relentless negativity of the Remainers on the other. In a sense, the latter has been dictated by the former. The idea advanced by the Leave camp that the UK will somehow find its way to economic nirvana by leaving the EU is not just a distortion of the truth, it is a torturing of the facts until they say anything you want them to. Naturally the Remainers have been forced to counter these untruths by pointing out the reality of their opponents views. And yes, it comes across as negative. And perhaps some of the arguments are a bit overdone in the opposite direction. But one thing is clear: The Remainers position has not been helped by their failure to make a positive case for the EU.

So what might that positive case be? Let's try the obvious tack that by tying economies together in the world's richest trading bloc, you make everyone better off. Those are the gains from trade that all economists are taught about early on. Another simple idea that there is strength in numbers. Britain gets a far bigger hearing on the world stage thanks to its EU membership than it ever would if it were acting alone. The US and Chinese won't be falling over themselves to offer us a trade deal in the event of Brexit. If they offer us anything at all, it will be a series of demands on their terms which will not be designed with British interests in mind. It may not be what BoJo and his cronies want to tell the British electorate but it's a damn sight closer to the truth than most of their economic ramblings.

The referendum will, of course, be won and lost on the issue of immigration. It is hard to refute the Brexit claim that so long as we are a member of the EU we can control our own borders. But it is interesting to note that over the past decade around 80% of net immigration into the UK has come from outside the EU. Even now, more than half does. You can argue about whether this is a good or a bad thing, I will leave that to you. But it suggests that leaving the EU will not serve to reduce immigration levels to the "tens of thousands" promised by David Cameron in 2010. Moreover, the largest proportion  of non-EU immigrants come here to study. To the extent that they are charged higher fees than domestic students, they help to subsidise the education of British students.

There are no easy answers to any of the questions raised by the referendum. But there is truth and there are lies. And our politicians owe it to the electorate to be more honest about the pros and cons of the EU than the antics we have seen so far, which are often more worthy of the playground than the debating chamber.