Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 27 June 2018

Business Brexit Blues

Project Fear was the device that allowed those arguing for independence for Scotland to ignore the short term fiscal realities [1], and it was the device used by Leave to discount the countless warnings that Brexit could make the UK significantly poorer. The device was indulged by the broadcast media, who now duly quote it back at businesses who warn that jobs are at stake with any kind of hard Brexit.

There are good reasons why so many businesses have finally decided to make their concerns public. They have lost all faith that the government knows what it is doing, and they have recently lost faith in parliament restoring any kind of sanity. Hence the warnings from Airbus, BMW, and the society of Motor Manufacturers. This is no posturing, as figures for car industry investment show. These numbers will only jump back up once Brexit uncertainty ends if the final deal is a positive one as far as car makers are concerned. A UBS survey suggests that car makers are not unusual in this respect. 

So why are firms not excited by the opportunities a Tory Brexit will bring in terms of less regulation and ‘global Britain’? They know global Britain is a myth: they can export perfectly well outside the EU as it is, and they are more likely to get a good trade deal with third countries by being in the EU than outside it. Those who say that a post-Brexit UK could do trade deals tailor made to UK business misunderstand what trade deals are mainly about nowadays. They are about harmonisation of regulations. And if a country is going to harmonise its regulations, it will do this with the EU rather than the UK because the EU is a much larger market.

Which is why the prospect of a regulation free post-Brexit UK has little appeal to businesses that trade. What business wants is harmonised regulations, giving them less costs and a large market. The EU is really all about harmonisation of regulations. These include regulation on working hours or the environment because all these things are required to get a level playing field for business and therefore a true single and very large market.

As Anthony Barnett in a very interesting essay argues, the sovereignty argument for Brexit involves a huge misconception. What the EU does (human rights aside) is harmonise regulations. Most people, including Leavers, have little problem with that. What Brexiters did was relabel this as giving away sovereignty, which sounds bad. I often ask Leavers if they can name any EU law ‘imposed’ on the UK that they do not like, and I have yet to get anyone to respond with one. It is the principle, one said. But their inability to quote an example of loss of sovereignty reveals an underlying truth. The EU is about harmonisation of regulations, regulations that most people have no problem with.

I do not think this was just a deliberate bit of Leave deceit, although there was plenty of that. I suspect this was also a genuine lack of understanding among our out of touch, privileged elite. Partly as a result, when businesses ask for harmonised regulations in the form of the single market they are nonplused. Hence the response of the government to these warnings. They include the “fuck business” of Boris Johnson and Jeremy Hunt saying the warnings were “completely inappropriate” because it could undermine the prospects for a good deal! These replies reflect the bewildered fumbling of an elite that thought they were pro-business and suddenly finding that they are doing it considerable harm.

The irony is that any deal that is done will involve the UK still being subject to EU regulations, only without the UK having any effective say in how those regulations evolve. For the leavers who equated regulations with sovereignty, we will be less sovereign as a result of Brexit than we were before. Brexit as a project has failed. We continue with it simply because of a flawed referendum and because politicians cannot admit the truth to save their own reputations and for fear of the reaction of the Brexiter press.. 

It should also be the end of Project Fear, for those at least who still have an open mind and who do not believe everything they read in the Brexit press (which I admit may rule out around a third of the UK population). Project Fear, in the two main contexts that it has been used, is equivalent to the claim that we don’t need experts. Just as Faisal Islam reacted to Gove when he first talked about having enough of experts, so other journalists should react when Project Fear is used to bat away major expected costs based on expert analysis. Otherwise we just normalise a kind of Republican anti-science attitude that is now official US policy.

[1] although, to save a lot of comments, the term itself was invented by those arguing against independence.


  1. I like it when the Brexit elite say that all Leavers knew what they were voting for because Osborne and Clegg spelt it out for them.

    So the same folks who are Project Fear have morphed into the voice of a truth that the Brexit elite could not speak during the referendum.

    And then the Brexit elite turn them back into Project Fear when they say something against the Leave movement.

    It is Osborne and Clegg hoist by their own petards, but for the rest of us it is just desperate Brexit nonsense.

  2. I think Remain was the right position (the bad recovery is due to austerity, not the EU), but there's a number of problems with your post.

    The EU is not "realy all about harmonisation of regulations". There is now the Common Foreign and Security Policy, and it was EU overconfidence which led to Russia annexing Crimea. There is also the European Arrest Warrant which leads to many people being extradited over relatively minor offences and/or very early in proceedings compared to how it was carried out by the UK formerly, and still with the rest of the world.

    There is also the CAP which even fervent Remainers should admit is a waste of our taxpayers' money as well as having increased the cost of our food. And there's the CFP which pooled the fishing stocks, the continental Europeans took far more and shrank our fishing industry.

    There's also the Eurozone disaster the they were unwilling to give Cameron his desired separation of the euro and non-euro member states, they would not concede this and he could not use his threat to veto future treaties because they made a fait accompli. A future disorderly breakout of the euro would be a serious danger to our economy.

    There's also the overall net budget contribution of about £10 billion per year.

    None of those things is about harmonisation of regulations at all!

    Furthermore where this meets trade deals is important. If we had trade deals with the EU or other countries in future, it doesn't mean regulations have to apply to us INTERNALLY. It only means it applies to imports and exports. Thus, Brexit would allow us to escape EU regulation domestically. You may not care about that but you don't acknowledge it and some Leavers want it. "Less sovereign than before" is simply not true for the UK economy internally, it applies only to trade, and it was never possible to be sovereign over foreign markets. The EU would no longer "impose" anything on the UK's own market (it's an imposition since we lack the veto).

    Tory MP David Campbell Bannerman wanted this with "EEA Plus" though his suggested route, threaten to veto treaties to get that concession, was proven closed by Cameron and Merkel.

    The sovereignty issue also revolves around the loss of the national vetoes. With 27 other members, our say via qualified majority voting is no longer very much, so it is not much of a say to lose. Norway has a bigger say via the EEA. You may disagree but some Leavers want that, so you can't elide it. This stuff has been going on for a year now.

    Same goes for tariffs. They're low now except for agriculture, and on manufactures they're not very scary when you compare currency movements.

    So that's half a dozen things you're neglecting, underestimating how significant the EU really is. Remain commentary like this does us a disservice especially when you complain about public ignorance and the misleading Brexit press.

    Lastly, the Scottish comparison is a bit funny. The net fiscal transfer is about 8% of Scottish GDP. Is that really a "short term fiscal reality"? Looks more like a permanent and immediate loss of 8% of GDP to me. They can't regrow it overnight, there's no reason to think they'll grow faster to catch back up once independent, and they will have to hike taxes or cut spending massively in the medium term. A far more serious disaster than Brexit.

    1. Two many things to respond to here, so let me take up a few. First it is wrong to say our current slowdown is due to austerity alone (or even mainly). Business investment and therefore productivity growth have virtually stopped because of Brexit. Second, the idea that outside of the EU we could only apply EU regulations to EU trade is nonsense in practice. Third, we are not bound by EU foreign or security positions. Fourth, a breakdown of the EZ would have serious consequences for the UK whether we were in the EU or not.

    2. Thank you for responding.

      Please see my points in light of whether the EU is "about harminsation" and you will see where I'm coming from.

      I don't claim the current slowdown is due to austerity alone either, I claim that a Leave vote would not speed up the recovery and that this is why I voted Remain. As you say, one should expect a Leave vote to increase business uncertainty, cut investment and slow growth down again. Productivity growth was already nearly stopped however.

      I doubt that's nonsense since not all firms are exporters and not all exporters are interested in the domestic market; the conflict between the two is a recurring theme in the political history and indeed the history of economic thought.

      Even non-binding CFSP is something unlike being a trading bloc or group which harmonises regulations so you are underplaying the signficance of EU integration in the post.

      Leaving the EU doesn't let us escape the EZ danger. Point was, the EZ is an example of how the EU is about MUCH MUCH more than harmonisation. (Or if you want to see the euro in that way, consider that letting business avoid exchange rate risk is a small thing compared to the massive political integration this has required!)

  3. I should add to my "half a dozen things" comment above, that saying the EU is all about regulation misses the biggest point: it's about free trade!

    If you're Ricardo, you think tariffs are bad and tariff free trade is thus surely the most important thing about the EU. If you're Kaldor you think it limits economic growth.

    So "harmonisation" is not "what the EU does" or "is about". Good grief.

    Secondly: free movement of people.

    As for "major expected costs" I'd like to see you tackle more of Coutts & Gudgin than just the trade penetration point. And they complain about gravity models simply because they think they're not being calibrated realistically. Otherwise, I really think you have not dealt with major expected costs and your case is unproven.

    1. Common regulations achieve free trade. The point was to talk about regulations in the context of claims of loss of sovereignty. C&G are really out on a limb on this, and I really do not want to say anymore about what they have done. Go with the experts on international trade.

    2. Regulations do entail a loss of sovereignty unless national vetoes exist. Otherwise the only way to regain sovereignty on a given issue is literally to leave the EU.

      I'm disappointed what you're saying about C&G, maybe you will link me to something from international trade ppl critiquing them if you don't feel like it yourself.

    3. I think the important point from Coutts and Gudgin was that (for rich countries) there isn't a link between trade and productivity, and forecasts that there would be, say, a 6-10% loss of GDP relied on that assertion.

      Ashoka Mody also think it's wrong. Going out on a limb?

  4. (Also could you please approve pending comments before making each new post? I see you tweet regularly, I doubt it takes very long to disapprove spam or nasty blog comments?)

    1. Unfortunately it does take a significant amount of time, as spammers are getting better and better, and about half the comments I get are spam.

    2. While I've never used Blogspot I don't find this persuasive, it would mean if there's 13 legit comments there's 13 spam ones. Surely spam ones are easy to spot due to links or business names, and take only seconds to delete. Perhaps like many comments sections the annoying contents hurt your head and you don't feel like reading them all but I would think skim reading would do the job.

      The delay means we get a dozen one-off comments and a discussion doesn't develop. Points get left dangling.

  5. "their inability to quote an example of loss of sovereignty reveals an underlying truth."

    Mr Cameron went to the EU to change certain conditions of our EU membership and he failed. Had we remained in the EU we would have had to conform to the EU wishes on those matters rather than those of our Government. That is self evidently a loss of sovereignty.

    The fact that our fishing rights are determined by the EU is a loss of sovereignty. The EU says that women and men should have equality on annuities and insurance even though on the one hand women live longer than men and on the other hand men are more likely to have a car accident then women. The fact that the French can bid and win contracts for defence, gas, water, electricity, railways is a loss of sovereignty. It might be an acceptable loss of sovereignty if there was any evidence that British firms could win comparable contracts in France. (Hopefully we will insist on meaningful reciprocity after Brexit.) We are not able to ban live exports of animals. .....etc etc etc etc

    The interesting thing about fishing is that if we claim back our fishing rights then there is no other comparable rights that we have to relinquish on a pro rata basis.

    Happy Christmas everybody! Or if our blogger takes even longer than usual to process this comment, then Happy Easter!.

    1. "The fact that our fishing rights are determined by the EU is a loss of sovereignty. "

      If everyone fished as much as they wanted, we would run out of fish. It's common sense to have a multilateral framework for allocating this. As for the fact many of the quotas are now ultimately owned by companies in spain, look to the fishermen who sold their shares, and now whinge about it to a credulous press.

    2. The main thing is this loss of sovereignty (or harmonmisation or whatever SW-L wants to call it) was supposed to generate higher economic growth. "You've got to get in to get on"

      I'm a Remainer and ex-Europhile but I can't abide this stuff about the loss of control not being a legitimate complaint. If we could (convincingly) demonstrate that EU membership had increased our growth then political support would be easier.

      The voters ratified EEC membership by a massive margin in 1975 thinking they would be made better off. 40 years later it's obvious the growth has not materialised but the political problems (immigration is one) are big.

      People have to think the fishermen were put out of work for a good reason, for the common good. That consumers pay more for food for a reason. That the lack of tariffs is worth the membership fee.

      There's really nothing anti-science about these complaints. I've thought for a long time that "we can't leave in case it causes an economic crisis" is not a good case to stay in.

      Despite how disgustingly shrill and ignorant Leave politicians and journalists are, the points I list above are not exactly nationalist or anti-science. A fault of our blogger's is that he is too keen to lump Leavers together. "Socially conservative" etc. People who don't get it!

  6. There is a lot political posturing going on by Business. Much of will prove as insubstantial as Osborne’s emergency budget.

    As recently as last March Airbus made an empty threat not to work with GKN if they were taken over.

    The British car industry has called previously ‘wolf’ over membership of the Euro.

    “Nissan closure fear haunts Blair ….. and all because Britain fails to join the Euro.”

    “Up to 10,000 jobs in companies supplying luxury carmaker Jaguar are at risk if Britain remains outside the euro.”

    1. Indeed. And BMW have done a U-turn or clarified on what Simon linked to.

      Obviously Brexit would disrupt supply chains with the continent; whether business would move depends on whether it's worth it to get around this problem.

  7. Wow. You Remainer guys are something else.

    "What the EU does (human rights aside) is harmonise regulations."

    No. What the EU does is create a single European super-state. How many times do senior Europeans have to say this before you hear it? How many pan-national institutions have to come into being before you see it?

    Take the Euro. You have criticised this quite a lot. I am no economist, and I don't know if your criticisms are correct. What I do know is no-one in the EU who matters cares a jot what you think about anything. It is a political device to erode the power of nation states.

    David Cameron asked the German Chancellor if she would let him control his borders. She refused. Game over.

    And on the subject of regulations, regulations should, and are, moving away from national bodies to international organisations that exist to promote trade between nations, not to use them as weapons to remove the independence of nation states.

    1. I will not take the Euro. We are in the EU not the EZ. We do control our borders. And why are you happy to have regulations imposed by international bodies but not the EU?

    2. Cave in now and will not be able to withstand the pressure to remain out of the Euro. We will be subject to all sorts of pressure and exclusions if we do not sign up, and as your Remainer mates have been stating for the last two years the EU will be able to dictate terms.

      I'm happy to be part of international bodies that created and administer regulations but that is not what the EU is about. It is blatantly a political scheme not just a free trade area.

    3. to labour the point, aren't you having your cake and eating it by wanting to be in the EU but not in the EZ? You cannot pick and choose which bits of the EU you want. Adopting the Euro is central to the EU project.

    4. We do not control our borders and the claim we do because we're allowed to send ppl home who haven't got a job within so many months is ridiculous.

  8. The repost of this excellent column at the CEPR illustrates it with a cute but deeply misleading image. It shows two paper boats navigating a sea chock-full of spiky icebergs, the bigger boat sporting the European flag, the smaller one the Union Jack. This has it exactly wrong. in a real ocean, the big ships like the Titanic are more vulnerable because they are hard to steer. Nimble small boats can avoid the bergs.

    There are circumstances where being small and autonomous does allow a faster and more flexible response, such as a banking crisis. Australia for instance handled the GFC very well. Trade negotiations are not among these circumstances. They are never quick, and market size determines your negotiating strength. Brexiters will not face up to this obvious truth.

    1. I did not choose the image, or the ** between f and k!

  9. Australia has done something like 8 trade deals in the last 12 years. However, it has not good on the GFC, since that was caused by the private debt to GDP ratio being too high. That is still the problem in Australia, so it is overdue for a Great Recession.

  10. Airbus. The threat is that because the UK is leaving the EU, Airbus will have to relocate the manufacture of wings to ... China.

    This is patently ridiculous. Either Airbus can operate with countries outside the EU, in which case there is no problem working with the UK, or else it cannot, in which case why is it getting stuff made in China?

    Again, the constant point, that the only way to be part of Europe is to be in the EU, which is not just a forum for member nations to work together for peace and prosperity but a full blown initiative for Federal Europe

  11. And to drone interminably on about this, Henry Newman's twitter feed this morning is full of the usual FBPE stuff about how the EU is only interested in its own power, will offer the UK poor terms or oblivion, and the UK will have to accept whatever punishment terms the EU decides to offer us.

    The over-riding question that comes from this is why anyone thinks things would be different if we had stayed in the EU? It is, to borrow phrases, to have your cake and eat it, to believe in Unicorns, magical thinking, to think there is in the long term a world where the UK could exist in the EU without adopting the full Federal infrastructure of single currency, single Army, that is the clear and frequently repeated aim of the EU.

  12. Higher economic growth did not materialise after EEC membership. Also, the Tories became Thatcherite. They have got more market-fundamentalist over time.

    The British disease was later wiped out but that was in the 80s and 90s under Thatcherite rule. They can conclude the EU didn't save our economy but they can achieve things themselves.

    Then we had the ERM crisis and we can observe the Eurozone catastrophe today.

    The tariffs they badly wanted to get around are mostly gone, leaving will not be the opposite of joining.

    And of course market fundamentalists among the Tories and the Tory press now dream of higher profits by further deregulation, and can get it by leaving.

    It's not surprising then that a lot of right-wing support for the EU disappeared.

    Some left wing reasons to avoid the EEC were bad e.g. to protect lame ducks. But the theme of protecting democracy from the likes of Benn and Powell became more convincing over time because European integration was greater. Corresponding benefits to this are not obvious to the voters.

    While British elites and the economics profession have been pro-free trade for an eternity, Joe Public is not the same, they are not on your side by default.

    Last but not least austerity made the recovery achingly slow, stopping immigration is plausible to the public as a way of raising wages and cutting unemployment, especially since Labour had denied that stimulus was the cure, and economists warning about Brexit have a tarnished reputation due to the Great Recession.

  13. I wouldn't want to be part of an organization that treats Greece so badly, using economics as a justification for imposing austerity. EU regulations on speech are bad, but you UKians are just as bad on free speech and open borders as the EU. You should stop listening to economists and politicians; you have made a right mess of things.

    You assume that money measures value. I do not. We should start the argument there. Your arguments are hopelessly materialistic. I do not think public policy should strive to maximize output and employment. Knowledge should be the overarching goal, and money supplied as necessary towards advancing knowledge in individualized, non-neoliberal ways.

    Firms are biased towards subscription products. Firms throttle innovation on products they can not easily enclose and enforce access restrictions on. Government should encourage innovation in individualized, one-off ways (cures for rare diseases) that firms see no profit in, and therefore spend no money on. Print money for good ideas that don't need sales or a lot of customers to be a good idea.


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