Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 1 September 2016

Theresa May’s Brexit choice

William Wallace asks whether Brexit could split the Conservative party, even though we have voted for Brexit. The reason why this is still conceivable is clear to all except those who tweet ‘get over it’ or who are silly enough to think Brexit means Brexit has any meaning. There is, in economic terms at least, a world of difference between a Norway style deal or hard Brexit: thousands of pounds worth of difference for the future average UK household in fact. (Making trade more difficult with your immediate neighbour will reduce trade overall, which in turn will hit productivity growth and therefore living standards.)

Which option Theresa May chooses will be down to politics rather than the economic welfare of UK citizens. This is why the Conservative party will not split. Divisions over Europe have not split the party for the last two decades, and are much less likely to now that the Europhobes have had their victory. Nor will any decisions be made quickly, because the exact trade-off between single market access and free movement depends on the stance taken by the EU.

The EU could conceivably rule out membership of the single market under any account, in which case some form of hard Brexit would be inevitable. If the main objective of the EU is to ensure that the British economy does badly as a result of leaving, to offer a warning to those in other EU member states tempted to go down the same path, then the UK is simply screwed. However if the EU takes a more constructive line, along the lines of this Breugel paper, then the issue becomes how much of the single market the UK can get with some form of limits on EU migration. A simple model of the subsequent debate will be that Remainers within the cabinet will push for more single market and less restrictions on migration and the Leavers vice versa.

At first sight it appears bleak for the Remainers. Two Leavers, Fox and Davis, have been put in charge of working out what Brexit actually means. Are there any reasons to be optimistic from a Remain point of view? The answer is that there are quite a few.
  1. Remainers have the big guns at the cabinet table: principally Hammond as Chancellor and Johnson at the Foreign Office. (Yes, Johnson was the lead campaigner for Brexit, but he neither wants to leave the single market nor restrict immigration. He did, however, want to become Prime Minister.) No Prime Minister likes overruling her Chancellor on economic matters. It will be May, not Fox or Davis, that will make the final choice of the point on the trade-off she is given in negotiations with the EU

  2. UK business will overwhelmingly want to retain single market access, and in many cases also free movement, and this would normally be a powerful influence on any Conservative government. Some Conservative MPs are prepared to argue this case.

  3. At their meeting yesterday the cabinet agreed that restricting immigration will be a red line in any negotiations. But this is the same party, led by the same politician, that has put immigration control as a key objective for the last six years, and has in practice failed to control non-EU immigration. Judged by what she has done during her period as Home secretary rather than what she has said, May is not too concerned with actually reducing immigration.

  4. Part of the reason the Conservatives have focused on immigration in the past is because of the UKIP threat. But it has become clear that UKIP in practice is probably more of a threat to Labour than the Conservatives.
Yet having said all that, I cannot help feeling that I’m clutching at straws here. The Treasury nowadays often seems to only really care about the deficit and the City, and it is highly unlikely other EU countries will pass up the opportunity of stealing a lot of City business The rest of UK business can perhaps be bought off in other ways. As home secretary May’s efforts to restrict immigration may have been hampered by the concern of others (including Osborne) to help business, and she may be itching to now call the shots. And with Corbyn as Labour leader, she really has nothing to worry about in electoral terms. UK productivity stagnated under Cameron and Osborne for the first time since WWII, and she may be content to just be no worse that her predecessors on that score. So from a Remain perspective, and the prospects for UK living standards, hope is not yet lost but it is walking out of the door.




22 comments:

  1. I just cannot see the EU conceding on freedom of movement. That will guarantee the end of the EU. While trying to negotiate with the UK, Norway and Switzerland will start demanding to renegotiate their agreements (which they had to accept). And the French and other right-wingers in other countries. No, the EU simply cannot give in on that...so unfortunately it looks like the UK is off on its own into the North Atlantic...

    The only hope might be if the Apple ruling could stoke some anti-EU sentiment in Ireland and then the 2 countries might go off alone...but I don't really expect that. And Apple moving to the UK, fine...but then its offices then would be out of the EU. Also, at the end of the day, I think too many people (at least outside the UK) are probably irritated by the industrial scale tax evasion by Apple to be much bothered.

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  2. Don't follow this.

    The term"Tory Remainer" has no meaning now. No Tory MP is arguing to ignore the referendum and stay in the EU, so for all practical purposes everyone is a Leaver.

    The one area of common agreement for all Leavers was that UK parliament should be sovereign. That is now achieved (or will be on actual exit). If that parliament votes polices that are not ones a particular member of the Leave campaign agrees with well that's just parliamentary politics as usual; no cause for a split.

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  3. Electorally she may have nothing to worry about, but she still has to watch her party's right flank. A deal that does little on immigration will stoke already heightened grassroot anger and could lead to a coup by Andrea Leadsom or potentially someone less useless. With such a slim majority she can not afford to take this risk.

    Also, on "she didn't seem to care about migration as home secretary", she has lost her scapegoat of the EU. Indeed it is a great thing for British politics that politicians can no longer claim their hands are tied and blame everything on migration and the EU.

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  4. Prof: can you spell it out in terms a non-specialist like me can understand?
    UK imports more from the EU than it exports to the latter.
    If EU imposes punitive tariffs, UK retaliates.
    And with a weak pound UK can afford to pay reasonable tariffs anyway.

    So what is really the problem?

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    1. Not a prof but one of his students, hope I can help..
      The UK may import more from the EU than it exports but the EU (minus the UK) is a much larger economy than the UK and so UK exports make up less of its overall economy than EU exports do for the UK. This means that tariffs and barriers hurt the UK more sharply than it hurts the EU and therefore the EU holds the chips at the negotiating table.

      As an extreme example, Luxembourg may well export more to the EU than it imports but the EU is still capable of calling the shots on the trade details because Luxembourg would need those deals far more than the EU does.

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  5. The problem the conservatives have which Labour does not have is that a large majority of the MPs are "Remain" and a large majority of voters are "Leave", and there is a split also between the socially regressive voters and the socially progressive or "don't care" MPs. UKIP was founded as the home for "Leave" oriented socially regressive tory voters. Even if it has started to also represent low income manual workers in competition with immigrants from eastern europe.

    As to negotiations on "free movement", any deal with the EU has to take into account that on the other side at least the polish, romanian, bulgarian, slovak, baltic, spanish, portuguese, governments will want to apply maximum pressure for "free movement", and the german, french, benelux government will have a similar incentive to avoid the flood of economic migrants being diverted to them. Plus as our blogger says the whole donor base and a large part of the voter base of the conservatives have made a lot of money from low paid, high rent paying, immigrants. They think that outside the EU they can get much cheaper colored indentured servants, I mean "guest workers", but one advantage of EU immigration is that it blends in much more easily.

    My guess is that the deal will not involve "free movement", but a slightly revised point system with very large quotas and "special points" for EU applicants, so in fact "free movement" but on paper something that looks like "take back control". Under the *current* point system "restricted" non-EU immigration has been the same or larger than unrestricted EU immigration, so not much of a tweak needed. After all most right-wing "Leave" voters, that 42% of the Conservative voters, didn't really object to cheaper workers or higher rents; they really objected to EU nationals having an automatic right of residence and civil and political rights, without having to beg. Because "Britannia rules the waves" :-).

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  6. We are now seeing the true face of Tory Brexit. As many predicted, we'll become a shrunken, xenophobic, tax haven with few labour rights, if they get their way. 'Open for Business' is code for a sweetheart deal with Apple as EU laws won't apply.

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  7. 'And with Corbyn as Labour leader, she really has nothing to worry about in electoral terms.'

    Oh dear, we're entering Nick Cohen territory now, commonly understood as the inability to construct an argument without a dig at Corbyn. Very disappointing.

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    1. No no no! It is how any politician thinks - does my action help the opposition. And it is important that May no longer needs to worry on that score. The fact that you find it awkward does not make the comment gratuitous.

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  8. «UK productivity stagnated under Cameron and Osborne for the first time since WWII,»

    There is a very plausible argument by F Coppola that most of that is due to a large fall in "productivity" in the mining and energy sectors ("Scottish oil"):

    www.coppolacomment.com/2016/07/the-untold-story-of-uks-productivity.html

    to be read while looking at what I think is the #1 graph of UK politics, my usual:

    mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_GB_MZM_NONE_auto_M.png

    The productivity stagnation began in 2007 ("output per hour started to fall in Q4 2006"), which coincides with the UK turning from oil exporter to oil importer, and T Blair resigning as PM almost in the same month that happened.

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  9. Labour can I think lay a bigger part in this than you imagine - purely in Parliamentary terms. Parliament's assent is necessary to legisation to actually implement Brexit. We have a Government with a small majority which is divided on the issue.

    Those benighted MPs could defeat the Government if the terms are really bad - thereby forcing a general election. At the end of the day it is the only way of stopping Brexit becoming whatever Theresa May thinks she can get away with.

    I agree that Jeremy Corbyn seems to have little interest in the details of Brexit and indeed in Parliament generally but that is not the case with the vast majority of his MPs. The SNP would be liable to help as well unless another referendum on leaving the UK is still pending.On that I personally do not believe that they can keep that hanging until well after the details of a Brexit deal and even if Scotland leaves the UK it is still in the interests of Scotland that the rest of the UK has good relations with the EU.

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  10. Great post.

    "The Treasury nowadays often seems to only really care about the deficit and the City, and it is highly unlikely other EU countries will pass up the opportunity of stealing a lot of City business"

    Although I am not too sure about that - no EU country (with the exception of Ireland and possibly Scotland) would stoop to the levels the UK did to secure the "the international of London as a financial centre". If the CIty goes - and its influence with it - we have made the first real step to building an inclusive economy where the broader population has a stake in its productive output (thanks Marx for pointing out the importance of this).

    But Ireland will have second thoughts. The EU's ruling against Apple proves how only a large economic bloc with the clout of the EU market can stand up to US multinationals and the huge overpaid trade lawyers both the firm and its legislative representatives in Washington employ to protect their interests at the WTO. This loss of influence and clout is the sort of thing where we will see the real costs of Brexit.

    NK.

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  11. "If the main objective of the EU is to ensure that the British economy does badly as a result of leaving, to offer a warning to those in other EU member states tempted to go down the same path, then the UK is simply screwed."

    Well given you see this as a power struggle, why are you on their side?

    The EU has no power to stop the UK doing whatever it wants short of sending in the tanks. Essentially it can only try to apply economic sanctions, which is really a form of mutually assured destruction. But often it has little effect as we have seen with Russia. The target country simply substitutes the goods and services or finds alternative supplies with other countries in the world. Which is of course what the UK would do. Where else would the EU sell the stuff it doesn’t sell here in a world short of demand?

    It’s also worth remembering that the EU is actually a committee of 27 nations with different views — each of which has a veto on anything that actually matters. The one most closely tied to the UK is Ireland and would be hurt the most by any changes, and the Germans similarly would get hit with a contraction. This is with a still depressed Eurozone. And the Greeks on the edge of revolution.

    You’ll notice a pattern here. The Bond markets were supposed to get us but they turned out to be a damp squib because the bond markets are interest rate takers, not makers (of course the complaint turned from "higher borrowing costs" to "lower interest rates are bad because we have now only 0.25% space to cut not 0.5% to stop the recession.") We’re supposed to have a currency crisis, but that has turned out to be a mild correction because to sell Sterling you have to have somebody to sell it to who takes the opposite view to you. And now the EU is supposed to act like a vengeful Old Testament God except that any fire and brimstone thrown will hit their own economies just as hard if not harder that then UK.

    All of them have one thing in common — they say “If you don’t do as I tell you then bad things will happen”.

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  12. "There is, in economic terms at least, a world of difference between a Norway style deal or hard Brexit: thousands of pounds worth of difference for the future average UK household in fact."

    In a highly unequal society, every time someone says what will happen "on average" they make the same mistakes the Remain campaign made the entire campaign.

    If you are an out of work person living in a post-industrial town why would you care what happens on "average"? On average could mean a huge hit to a young finance fellow in London but an increase in your income up north. Or not much change in your income but less of whatever you find unpleasant about EU membership.

    Reaminers have to show how Brexit will hurt those people in particular, not how it will hurt the country "on average".

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  13. I resigned myself to a Hard Brexit (by which I mean reverting to WTO rules and capping immigration) once Theresa gave her 'Brexit means Brexit' speech.

    I've heard others speak of a second referendum (she firmly rebuffed that) or an early general election (the Conservatives have a majority so Parliament won't have the necessary will to call it). So the question became what kind of Brexit?Here, I just don't see the government budging on immigration control (it would be seen as a betryal for most Leavers) and likewise the EU needs to disincentivise others from leaving (they will of course offer some concessions to mitigate the impact on their own businesses, though). Putting all that together means Hard Brexit. We may get a trade deal eventually, but we're talking a decade away for that. For one thing, the City will be diminished by then.

    Can anyone offer any hope?!

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  14. Simon, given a Hard Brexit looks likely to me, I'm wondering what are your thoughts on the prospects of the UK ramping up trade with the US, Commonwealth, China and other fast-growing economies such that we offset the likely decline in trade with Europe?

    On the one hand, I see a Hard Brexit meaning more flexibility for us and scope for trade deals to boost non-EU trade. But on the other hand, I see a low-tariff world in which EU membership may not have been much of a barrier to non-EU trade anyway. Non-tariff barriers with non-EU countries are likely to be problematic to some degree whether we are in or out of the EU/Single Market.

    Just curious.

    S

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    1. I agree. But I'd add the key point that it remains more difficult to trade with far away places. (Of course China does it, but we do not have their very cheap labour.) So Brexit means in aggregate lower trade.

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    2. Thanks, Simon. Keep up the good work.

      S

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  15. «And with Corbyn as Labour leader, she really has nothing to worry about in electoral terms.»

    But electorally leaders don't matter much, plenty of unknown and untried leaders have won elections, even quite uninspiring ones.

    May has to worry electorally only if her government screws up a lot, like letting house prices fall. As I always repeat UK/english voters nearly always re-elect governments that don't screw up, regardless of how cool the opposition leader looks (like O Smith? :->). Blair lost 3-5 million votes over his tenure, and yet New Labour lost an election only when they screwed up in the eyes of voters and house prices fell.

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  16. It would seem that Mr Blair's intervention has made it all but certain the UK will exit! The British public seem to take the view that if he is for something the opposite is the way to go.

    It may be because he seems to represents an elite that see democracy as an inconvenience. The truth of what we should do is revealed to them as our Leaders and we should gratefully follow. I fear the approach of ignoring the referendum vote because it is inconvenient or unwise would further hollow out democracy. We can already see in Europe significant moves toward the ultra nationalist right in Sweden, Denmark, Poland, Hungry, France and Germany.
    While you may not wish to hear it again, it may be time to get over it and move on. After all there may be positives from leaving the EU:
    - we would no longer be associated with the policies that have caused humanitarian disasters in Greece and the Mediterranean countries. We could actually implement Keynsian policies on the economy.
    - it is not necessary to be part of the EU to trade successfully with it. The US, China, Japan, Russia all manage and are not bound by EU regulations. We can seek 'favoured nation' status.
    - withdrawal can mean an end to the bar on state aid to industries or public ownership. Or on the need to further privatise the remaining public industries like the NHS.
    - we will no longer need to reduce National debt to 60% of GDP or include things like Housing Association debts in public sector debt.
    - we will not need to follow EU 2020 Programme and 'reform' pension provision, benefits and labour market rules in ways which increase insecurity and risk.
    And to clutch at some straws, May's Cabinet looks an unstable cocktail of people who will have an ongoing series of bitter rows. While, after Labour's election returns Corbyn some of the organisational skills and energies that have spent the last year undermining him may take the 'lesser evil' approach and start working with him to develop the strategies and actions needed to be an effective opposition. Who knows, that may even include you.

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  17. This is somewhat tangential, but it seems important to put this idea to you:

    The culture of economics has enabled the Leavers to pretend that everything will be ok.

    As far as we can tell (and there's very little information) the Tories are leaning to a Hard Brexit and the underlying theory can only be that manufacturing will pick up to take over as services exports plummet. But it is the culture of frictionless change in economics that lets them pretend that this will be a pain-free process. (And indeed, lets them ignore the possibility that the frictions will be so great as to prevent the strategy working at all.)

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    1. No, the Brexit lot are just ignoring economics: completely and utterly.

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