Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 5 June 2018

Idée fixe


Theresa May's disastrous Brexit strategy 

The arguments against staying in the Custom Union (CU) are pathetic. It is as if Brexiters, having chosen Brexit because of their visceral dislike of the EU's labour and environmental regulation, realised that this would have a major negative impact on trade and tried to compensate. ‘Global Britain’ was born. Even if you strip out the nonsensical associations with past empire, Global Britain must be one of the most ridiculous ideas to be taken seriously by the broadcast media.

According to the Brexiters, the EU prevents us doing good trade deals with other countries because of vested interests in some of the EU countries, and therefore the UK outside the CU would be in a much better position to make good deals. The first point is the EU already has trade agreements with around 50 countries, with more in the pipeline, which is a lot. Another is that third countries want trade deals with the EU much more than they would want them from the UK, because the EU is a bigger market. And finally because of its market size, the EU can set the standards with which other smaller countries have to conform. Market size brings power in any trade agreement.

If you want to see how much market size gives you power, look at what happens when Trump tries to tear up trade agreements. If you have a similar market size, as the EU does, you can retaliate with a reasonable chance of causing enough economic pain in the US to reverse the initial policy. If you are a relatively small economy, as the UK will be if it acts alone, any retaliation could be little more than a pinprick for the other side. This is also, incidentally, why arguments that we somehow had more power over the EU in the Brexit negotiations because of trade balances are ludicrous, because walking away inflicts in proportional terms so much more damage on the UK than it does to the EU.

Global Britain is so dumb a concept that you can concede huge amounts of ground and still win the argument. Suppose the UK did manage to get better trade agreements with the 50 countries the EU already has agreements with and more before the EU does. This is still likely to come nowhere near to replacing the trade we would lose from leaving the EU. The reason is that distance still matters for trade. It is one of the most robust empirical results in economics. Nor have existing trade barriers prevented Germany in particular from increasing trade to China and other countries.

In response Brexiters always say that it is more important to export to the fast growing countries that are the emerging markets, rather than the more slow growing advanced economies in the EU. But not all countries in the EU are growing slowly: we have a fast growing one, Ireland, on our doorstep. You might respond that a country like India is a much bigger market, but the UK’s exports to Ireland in 2016 were 5 times larger than those to India. The UK government have done the calculations and they suggest that successful FTAs with other countries including the US would come nowhere near compensating for lost trade with the EU.

All this is all before we think about the Irish border. It is patently obvious that if the UK leaves the EU’s CU and Single Market for goods there would have to be a ‘hard border’ either on the island of Ireland or within the UK. Instead of acknowledging this obvious fact, Brexiters have gone to incredible lengths to invent mad schemes that purport to avoid this inevitability. The way this sometimes seems to work is that policy entrepreneurs from places like the Legatum Institute feed schemes to ministers, and them after announcing them they ask civil servants to gather evidence.

The Brexiters do all this nonsense because they know even a soft Brexit like the Jersey option does not give them the freedom to ‘complete Thatcher’s project’ they crave. Which brings me to Theresa May. She is very much the wrong person to have been in the right place at the right time. Any Prime Minister worthy of that office should have quickly realised that a hard Brexit would involve economic costs that no PM should inflict on the economy. Another way of putting it is that the Brexit people voted for - taking back control and being at least no worse off in economic terms at the same time - was an impossible project. That realisation should have governed how she approached Brexit from the start. She should have said that she accepted the referendum vote, but she would not implement any deal that would do significant economic harm to the country. No one would have criticised her for such an endeavour.

The task of her premiership should therefore have been to gradually marginalise the Brexiters. They were always going to cry betrayal, so best to ensure that this happened slowly (to avoid giving them the ammunition to create a leadership election) from the moment she became PM. The way to do that was to refuse to trigger Article 50 until a clear negotiating strategy was in place and tested using a realistic view of what the EU would do. Assessments should have been made before, not after, negotiations started to ensure the right strategy was in place. To do that she had to ensure the Brexiters were involved in the process, but not in control.

A process like that would have quickly established that leaving the CU and elements of the Single Market was incompatible with avoiding a hard Irish border. Of course Brexiters would dispute that, but she should have already known the rather loose relationship with the facts that many Brexiters have: for example some continue to this day to claim that the EU erects high barriers to exports from Africa. Anticipating the Irish border issue would mean that most ministers would have quickly realised that only some kind of soft Brexit was possible. There might even have been preliminary discussions with senior EU politicians about whether the Jersey option was acceptable. The UK’s bargaining power, with A50 untriggered, would have been much greater.

Theresa May chose to do the complete opposite of all that, perhaps because she could not contemplate having to take on the Brexit press. She appointed Fox, a Brexiter, to a post that depended on the UK leaving the CU. She drew red lines that were impossible without a hard Brexit. And of course she triggered Article 50 without having done the necessary analysis and with no clear strategy in place. If there was any method in what she did, it seemed to be to appease Brexiters and their press at all costs. And one thing we do know about Theresa May is that once she has chosen a course of action, she sticks to it until it becomes untenable and possibly even after that.

Andrew Rawnsley calls her a Zombie PM. But I think his analysis, of why a PM that is so bad at choosing sensible strategies and so inflexible and so hopeless at fighting elections is still with us, skirts around the answer. The party is hopelessly split over Brexit, and while the majority of MPs have no time for Rees-Mogg, he is currently favourite among the members who are mostly Brexiters and have the final say. As I have said before, so much has been written about the ‘hold’ that Labour party members have over their party, but Conservative party members have saddled the country with one of the most inadequate Prime Ministers it has ever known.

May has handled Brexit terribly, but she has enough political instinct to understand why she is still leading her party. As long as the Brexit negotiations continue, most Conservative MPs may feel too nervous to risk a new leadership election. Equally if she is challenged by the Brexiters she may well win. That knowledge gives her every incentive to bring about the perpetual Brexit that I talked about here. A Zombie PM carrying out a Zombie policy, that could haunt this country for many years to come. [1]


[1] Can Zombies haunt? I'm afraid my knowledge of horror movies is deliberately thin. I was originally going to call this post Idioteque, because it was the thought that came into my head while trying to think of a title (maybe I should blame Steve Bullock). Luckily I later realised the word I was probably searching for. Or maybe not?

17 comments:

  1. Brexit is providing really good entertainment, especially for those outside the UK/EU. The bright side is that if the Eurozone breaks up over the poor handling of Greece, Italy, etc., there may well be a new organisation that UK could join!

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  2. the Brexiters' visceral dislike of EU regulation is not confined, by any means, to the EU's labour and environmental regulation. They also want to avoid current and coming regulation on consumer protection, tax avoidance and money laundering. Indeed, one could argue these are their real motivations.

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  3. Our political system is heavily weighted to give us "bad" Prime Ministers. I believe the last "good" one was Lord Salisbury.

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  4. "The party is hopelessly split over Brexit, and while the majority of MPs have no time for Corbyn, he is currently favourite among the members who are mostly Remainers and have the final say. As I have said before, so much has been written about the ‘hold’ that Conservative party members have over their party, but Labour party members have saddled the country with the most inadequate Leaders of the Opposition it has ever known."

    Why you think your enemy's enemy is your friend is a bit of a mystery to me.

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  5. I've been wondering if we ought to just throw out every book we have on political economy. It seems the public have no real concern with economic growth anymore. Yes, they have an interest in growth, (under the ironic misconception that a conservative government actually has caused improvements in economy). But concern, no.

    I think over the past 30 years or so, public opinion has shifted and now believes that the government (or the opposition depending on political persuasion) can and will always resolve all economic growth problems, leading to voter complacency.

    On the other hand, I believe the government can resolve issues of economic inequality and distribution. Yet again there is more irony, because I suspect much of the public now believe the government has little power to do this (i.e. they believe that equality strictly comes at the expense of economic growth). Either way there is very little evidence that government is responsible for increasing the rate of economic growth. (Of course history is littered with examples of self-inflicted wounds).

    As the public cares not about economic growth (more presciently any departure from international average growth rates), or holds the government to account on it, the government has no incentive to prioritise it, a priori. (Osborne only did to assist fiscal targets).

    I suspect this has happened because it has been too tempting for all politicians to take credit for what is more likely a result of basic market forces (falling unemployment for one) (also these forces are ones that even the most left wing government would leave in place) So we think politicians have more economic power than they do. In addition, we are all very difficult at comparing our wellbeing over time, and instead focus on relative wellbeing today. In all, we now live in a world where we might as well assume the size of the pie is fixed, and all that matters is how we divide it up...

    What might change that? When we suddenly realise GDP per capita is lagging behind the rest of the world? Or when the divisions of the pie become unacceptable to a voting majority? Maybe Britain is happy to slowly decline?

    But then what, I fear that the spectre of nationalism will then prove more appealing than liberalism. I can only draw some comfort in that whatever Brexit advocates believe in, I hope at this they draw the line. (Although I wouldn't be surprised if they saw intermediate nationalism as a means to their end as a price worth paying).

    Can this path be changed? I don't know, it would I believe require a new political platform, a shift in the overton window, and I can't see Corbyn willing to take the risk to do this (redividing the pie is more popular).

    It's a strange logic, but I think politics and general economic success has bred voter misunderstanding, and disbelief in negative economic costs that can't be solved. In short, modern society believes it can have its cake and eat it, or (more unlikely I hope) it is happy to slowly decline.

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  6. At the extreme one can see the disadvantage of being part of larger block by looking at Gibraltar. If Gibraltar tried to negotiate its own terms for leaving the EU, it would undoubtedly do worse than working in conjunction with the UK. There is just one little problem. Only 4% of voters in Gibraltar wanted to Leave.

    Likewise with the UK and the EU. When the EU negotiates, you can bet your life that market access for German engineering and Airbus aircrafts has a much higher priority than access for UK financial services. Most trade deals involve compromises. Supposes the EU makes a concession in its negotiations with another country, in order that olive oil or wine producers can have better access to the market. The UK receives any downside from such a compromise but no upside.

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  7. Perhaps May has a monomania to stay as Prime Minister?

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  8. 'The arguments against staying in the Custom Union (CU) are pathetic'. Quite.
    All very well excoriating May, but Labour rather than highlighting the futility and economic damage of leaving the CU, and the need to negotiate an equivalent one (including external tariffs maintained to avoid rules of origin consistent with no hard border and frictionless trade), it is fudging and risks dishonoring its responsibilities as the Official Opposition.

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  9. Hello Simon,
    Just trying to follow your blog I get the impression you are in favour of the UK remaining in EU partly because of the strong trading links that the EU has. As I understand it the EU does its best to force the member countries to manage without any fiscal stimulus and suffer the austerity measures which clearly do not work. If we were to stay in the EU we would be pressured into not using a fiscal stimulus when it was obviously the best action to get us out of the damaging austerity we are suffering because of Tory/Neolib dogma which only favours the rich. So as far as I can see we are better OUT of the EU regardless of the theoretical benefits because we would be trapped in their nonsensical and unworkable austerity agenda.
    Ron

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  10. Very nice analysis. I agree with it all.

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  11. While I agree with most of your evaluation of the current PM, there are MP's, even in the Conservative party who would have carried out your suggested strategy. Which is a big part of the reason none of them ever stood a chance of getting the position! Anyone with a sensible approach to Brexit would never get the party member votes and if their position had changed since the referendum, we would not still have May as PM.

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  12. I agree with you here and I believe that we'll end up with the worst of all possible world's; the sheer incompetence almost beggar's belief.

    However, in the long run I think it will make little difference. There are already considerable strains within the EU which are multiplying by the day and the next crash/economic downturn will compound these to the point where the viability of the EU itself comes into question. The EU will not collapse; it is not in the nature of such organisations to do so; but it will gradually disintegrate until the point where substantial reform becomes inevitable - and I believe it is inevitable even without the UK - and a different animal arises. This animal is far more likely to address the grievances held by the UK and it may well be that we would rejoin such a reformed group.

    The dynamics of the EU itself are just, if not more, important than those of Brexit.

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  13. Thanks for your thoughts. How do you think this plays out now? I read your May column on indefinite transition and tend to agree, though am wondering if EU is looking to blowup May’s tenuous position by insisting NI solution cannot apply to U.K. as a whole and also ruling out Jersey model between now and the fall?

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  14. A Remainer here, so I hope you'll listen while I push back on some of your points. I agree Brexit will be harmful at least in the short term especially if "hard".

    50 countries is a lot, sure, but as far as the world economy goes it is not. It doesn't include the USA, China or Japan. As for market size, Switzerland has done tons of trade deals despite its small size.

    Ireland has reason to grow fast since it's just emerged from a recession which wiped 15% off GDP. And the difference between GDP and GNP is massive in Ireland's case due to the multinationals. Ashoka Mody credits them with the recovery -- English-speaking workforce, big US firms that want to keep their relationship. However he thinks international tax changes are a time bomb. https://www.independent.ie/business/irish/warning-that-ireland-faces-huge-economic-threat-over-corporate-tax-reliance-troika-chief-36992083.html

    If you think a hard border in Ireland is a problem, it's your responsibility to say what a hard border is. The UK says something like no visible infrastructure, the EU won't say what it means. There was no reason to concede a "guarantee of no [undefined] hard border" other than for May to get to the next stage of the talks. It isn't part of the Good Friday Agreement. If May's hoping for a FTA with the EU post-Brexit then it renders the point moot. However if there is no deal then the UK should have a border there; Ireland shouldn't dictate our trade policy especially using nationalist discontent as a shield for their land bridge over GB to the EU.

    I doubt the UK would have bargaining power even without Article 50. The EU made it clear they would not negotiate in advance of this. The Tories may have come up with a common position and they may not. The Article 50 may be concentrating their minds more than would have happened otherwise, funny though that sounds! The EU would still be free to reject any proposal, because why should they accept any when they want to prevent other Member States from leaving?

    An electronic hard border is quite doable, though not in the space of a year, as Switzerland has shown.

    And I don't think any of us can read May's mind since she has indeed been making mutually exclusive demands and thus we have no idea if she is still a Remainer and seeks BINO or is prepared to accept a hard Brexit.

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  15. I'm sure you won't agree SImon but for others: Nicholas Kaldor thought that economic growth was constrained by the balance of payments and thus free trade must be avoided. Instead, there should be some system of managed trade.

    It seems like a paradox but it means tariffs across the board in each country are to some extent beneficial because they will let you run the economy "hot" with a lower *propensity* to import. Because as the economy nears full employment you will, pound for pound, normally be sucking in more imports and worsening your balance of payments. With tariffs, you could get closer to full employment. The total volume of imports would still be higher, to the benefit of each country.

    There is also "circular and cumulative causation" where the stronger member will go from strength to strength of the expense of the weaker. You would not then expect the UK of 1973 to prosper in the EEC compared to Germany and this fits with what has happened since.

    I don't think there's any chance of Jezza and McDonnell taking up Kaldor's ideas but it's something for the left of the party to think about. Especially since the last ten years have been so unpredictable in party politics.

    Would another example of a policy entrepreneur be a lobbyist for a multinational who wants to penetrate different markets more easily and offers a vision from Ricardo that it will be for the mutual benefit of all the free trading countries as the solution?

    https://www.concertedaction.com/2016/03/13/the-paradox-of-protectionism/

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  16. Point about lack of preparation is interesting.

    Apparently there was no Cabinet discussion of the implications of the referendum before it was promised in the general election and legislated for. Perhaps some of your blame for not having a strategy really devolves on Cameron, since he did not get economic analysis and consideration of the options outside the EU done beforehand. Apparently Wilson and Callaghan did do this in 1975 and did mean it when they said they would implement the result to leave the EEC if the vote turned out that way.

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  17. One grain of truth in Global Britain that makes it more plausible, or makes EU membership seem less than it's cracked up to be, is that Commonwealth countries grew faster than the EEC since 1973

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