Brexit - An Article 50 Analogy

Article 50 of the Lisbon Treaty has become infamous.  Making a formal "notification" under the terms of this article is how the UK will trigger leaving the EU.  But much of the media are suggesting that the UK will have a new 'deal' with the EU within 2 years.  This isn't quite right.  It's only half the story.

The negotiations that follow triggering Article 50 are only to reach an exit deal. A 'divorce' deal, if you like.  To quote, it is only necessary to take "account of the framework for its future relationship with the Union" in respect of the UK.

It doesn't necessarily mean there will be a new trade deal in place within those 2 years.  Indeed such is the complexity of a new trade deal, this timescale is extremely unlikely.  At best there will be some sort of interim arrangement, which the EU has hinted they have in mind.  That's for their protection to continue selling to the UK as much as anything. 

AN ANALOGY

As an analogy, let's imagine a professional partnership trading as Eustace Utton. 28 solicitors, accountants or window cleaners.  The trade doesn't matter.  One of the older partners, Uberto King, decides to leave.  He doesn't want the rights and obligations of the partnership.  But he is not retiring, and there may well be ways that he will do business with the partnership in future.

Uberto has rights to a share of the assets and liabilities of Eustace Utton.  There's an office, paintings on the walls, IT equipment. But there's also obligations to pay staff, associates and to fund the pension scheme. How much Uberto is paid when he leaves, or how much he needs to pay in, has to be determined on the date he leaves.  That needs to be negotiated.

Firstly the remaining 27 partners need to decide how to approach the negotiations.  As part of the negotiations they need to take into account the future relationship.  Will Uberto become an associate, when his skills are needed?  What about if he introduces work to the firm?  The exit negotiations don't need details to be finalised. Just the "framework".

So what is Uberto's share?  As one of the first 5 partners in the firm, he still is entitled to 10% of the profits each year.  But he had to put in 20% of the deposit on the office, so is he entitled to 20% of the current value of the office?  That's all up for negotiation.

APPLYING THIS ANALOGY TO ARTICLE 50

This analogy is simplistic, and the specifics for the UK/EU exit negotiations will be somewhat different.  But similar principles apply.

For example, the EU does own offices and other assets.  There is also a pension liability that has accumulated during the UK's membership. And the current budget round, to which the UK has subscribed, does not end until 2020.  The net payment needs to be negotiated, and when it would be paid.  Indications are that the UK will have to pay money in, and do so for some time to come.

The aim is to get this exit negotiation agreed in principle within around 18 months.  That provides a few months to gain ratification within the EU and the UK, and make any necessary changes to the exit deal before the 2 years expires.

Full negotiations on a trade deal may not start until after that process is concluded. One reason being in case the UK actually remains.  Certainly the EU has indicated that detailed negotiations won't start until then, and could take several years.

So no.  It is extremely unlikely that a full new trade deal will be achieved within 2 years.  Only the 'divorce' exit deal and probably some sort of interim trading arrangement.

Brexit - Why Might We Need A Second Referendum?

Calls for a second EU referendum have got louder over the last few days.  So why might the UK need a second referendum?

It's worth stating two principles at the outset about what is a momentous decision to leave the EU:

1. The UK should leave the EU if it is in the national interest to do so
2. A referendum is the right way to decide, separate from party politics

The problem is the first referendum in June 2016 was unsatisfactory for a number of reasons, as set out below.  A second referendum would help to address these matters, and either:

1.  Confirm a Leave decision, in which case Remainers should accept it and rally behind it in a way they cannot do today
2. Reverse the decision, so the UK remains. The UK would then avoid what people then regard as Leaving being the wrong decision

Some suggest the cost of a second referendum of around £100 million would be a waste of money, especially if Leave were to win again. But this is compared to the OBR's estimate of a cost of £15 billion a year to public finances for years after leaving the EU. So £0.1 billion is a very good use of money should Remain win.  It is also worth it if  Leave win again, to galvanise the necessary support to make the best of Brexit and reduce that annual cost.

Some eminent politicians and commentators have suggested a second referendum would be an attack on democracy.   Quite the opposite.  The people would still be asked, and the Act setting up the second referendum should clearly state the decision would be accepted (which was not the case first time around).  If there's a win again for Leave, Parliament would pour over the details, but only in support of that decision.  That is entirely democratic.


WHY WAS THE FIRST REFERENDUM UNSATISFACTORY?

The matters which make the first referendum unsatisfactory include:

1. Since the June vote, a lot of information is becoming available.  The Government and the EU are taking the prospect of the UK leaving the EU seriously. That includes whether Brexit should be "hard" or "soft", our EU partners' attitudes (which were not public before the June vote), the practicalities of exit, the likely cost of the transition, and much more.
2. In that context, the June vote was a vote "in principle".  A second would be more "in practice".
3. There were too many lies from both the Leave and Remain camps.  It would be hoped that second time around there would be better control of facts. 
   
4. In particular, the British public were effectively promised an extra £350m a week for the NHS on the side of a bus.  Whilst the likes of Nick Robinson proved this as woefully overstated, the bus was not withdrawn and conversations I subsequently overheard proved the correction had not been conveyed.  Now the OBR's best estimate is there will be £288m a week (£15bn a year) LESS, not more, once Brexit occurs in 2 years' time.
5. Since June there has been a 10-15% devaluation of the pound against the US Dollar and the Euro. For businesses, exporters will potentially gain, whilst importers will lose. But for people PERSONALLY, the impact is all negative with an increase in costs of food, electronics and much else, as well as the cost of foreign holidays. Whilst some suggest the pound was over-valued anyway, it was Brexit that triggered the fall. 
6. The result was a marginal 52%:48% decision, but with key areas such as Scotland, NI and London voting to Remain. That is not a "clear" result as the Prime Minister and others claim.  Indeed her constituency of Maidenhead, and those of brexiteers such as Redwood's in Wokingham and Goldsmith's in Richmond all voted clearly to Remain
7. In summary, a second referendum would allow voters to vote on what Brexit really means, with the latest information.

Furthermore, there are strong indications that many voters did not take the first vote seriously enough.  They should be given a second chance given the enormity of the decision, whether that produces a Leave or Remain vote.

The polls before the referendum suggested Remain would win.  I'm not convinced voters took the prospect of Leave winning seriously enough:

• In the days after the June vote, it was some time before I met a Leave voter who actually really voted to Leave, or clearly understood the implications.  For example a TV cameraman was going to vote Remain, but at the last moment voted Leave to "give Juncker a kicking".  A cabbie and four of his family had effectively tossed a coin.  A business man "liked Farage".  A London cabbie hadn't realised banks would likely scale down their operations in the City, which would mean less business for him. 
• In Labour heartlands, it sounds like many Leave votes were about improving their standard of living, as a general anti-establishment vote.  Many of these areas benefit more from EU support than other areas, and a Leave vote was therefore counter-productive.  Did they really understand that?  Was leaving the EU what they really wanted?  Or just an improvement to living?
• The proportion of youngsters voting was significantly lower than retired folk.  Youngsters are more likely to be away from home, working or at university.  In any case youngsters should be given a second chance to get out and vote, and be more prepared to ensure they have arranged a postal or proxy vote if necessary. 

IN SUMMARY

The decision for the UK to leave the EU is momentous, and not to be taken on a single referendum that had so many issues.  A second referendum vote is necessary to ensure voters can take into account subsequent developments, and take the vote more seriously than they appeared to do first time around:  The first vote was "in principle" and the second would be "in practice".

The second vote would either:

1. Confirm a Leave decision, in which case Remainers should accept it and rally behind it in a way they cannot do today.  This help to reduce the estimated £15 billion a year cost to the public finances of leaving, as well avoiding the lost jobs and wider economic impacts that figure implies.
2. Reverse the decision, so that the UK Remains.

The likely cost of £100 million (£0.1 billion) is nothing compared to either of those outcomes.

How and when a second referendum would be held is another matter.  But in principle a second referendum should be held.  The right way to do so is the next question.  That's a separate discussion.

Brexit - What Economic Return on the Investment?

So now we have it.  The OBR's independent forecast for the UK economy for the next 5 years has been published.  So is Brexit good or bad for the economy?  What's the economic return for any short-term investment?

The OBR (Office of Budget Responsibility), which is independent of the Government but has access to ministers and other civil servants, has concluded:

1. Growth will be lower under Brexit than it would have been
2. This translates into the UK having to borrow an extra £15 billion a year from 2018/19. That totals nearly £59 billion over the next 5 years, with potentially more to come
3. There is is no discernible upturn arising from Brexit within 5 years

To put that in context:

• £15 billion is some £288 million a week more to borrow, not £350m per week more to spend
• £59 billion is some £3,400 for each of the 17 million people who voted to leave the EU

So in the next 5 years the OBR is saying that Brexit will be bad for the economy, when borrowings are in any case rising too fast.

"Brexit means Brexit".  Economically it means:

• Bad for jobs
• A tighter squeeze on public services
• And/or higher borrowings to pass onto future generations

SURELY THE OBR IS WRONG?

The OBR acknowledges that the uncertainty in forecasts is greater than normal.  The adverse amounts could be lower or indeed higher.

It would appear that the OBR has had little more information from the Government than the general public.  "Brexit means Brexit", with of course little knowledge of what the EU will agree for its future relationship with the UK, other than what has been stated publicly.

The OBR has effectively had to pull figures out the hat.  But what they are saying is that the figures they had to choose from reflect that:

• On balance the OBR believes the negative effects of Brexit will significantly outweigh any positive effects for each of the next 5 years
• In particular, there is nothing to indicate that the economy will be getting any better as a result of Brexit until sometime after those 5 years, if at all

This is entirely consistent with other forecasters, and reflects:

• The uncertainty that is likely to result in deferred or cancelled investment by the private sector
• The devaluation of sterling that has already occurred
• The years it will take to put any new trade deals in place

We also have to recognise that their forecast may be optimistic, and the actual outcome could be far worse.


SO WHAT WILL WE GET FROM THIS INVESTMENT?

The Leave campaign boils down to three potential advantages of leaving the EU:

1. Freedom to negotiate the UK's own trade deals with USA, China and others.
2. Control over immigration and the UK's borders
3. Being able to set our own laws, without the interference of the European Commission or being beholden to the ECJ (European Court of Justice)

As noted above, the problem is that trade deals take many years to negotiate.  In the case of a replacement deal with the EU:

• The two years after Article 50 notification is to negotiate the terms of the "divorce" not the "re-marriage".  A new trade deal could take years longer.
• It is unreasonable to expect the EU to agree to a deal which is as good or better than the terms of EU membership.  That would only result in other countries following suit, and the EU disintegrating. The message from the EU is that can't be allowed to happen.  That is also the view of senior representatives of Germany's car industry that sells massively into the UK. 
• That principle would apply to any interim trade deal.  That is now looking likely to be put in place in the first two years as part of the Article 50 negotiations.

Immigration pros and cons is too big a subject to cover here. But the OBR specifically expects lower immigration and a significant economic hit as a result - some £6 billion in the fifth year:

HOW ABOUT AN ECONOMIC RETURN ON THAT INVESTMENT? 

In economic terms, within five years there is no return on the investment. The jury's out as to:

• Whether the sunlit uplands of Post-Brexit Britain will ever be better than staying in the EU?
• If so, how far away will the economy turn for the better?

One has to wonder whether the cost of Brexit could ever be worth the investment.


SO IS BREXIT GOOD OR BAD FOR THE ECONOMY?

The OBR, supported by other forecasters, suggests that negative factors resulting from Brexit will significantly outweigh positive factors for at least 5 years, perhaps much longer.

The best estimate, which could be lower or higher, is:

• Some £288 million a week more to borrow each year from 2018/19, not £350m per week more to spend as had been suggested by the Leave campaign prior to the referendum
• An investment of some £3,400 over the next 5 years for each of the 17 million people who voted to leave the EU. That's with no indication of any economic upturn, so that figure could increase in further years. Nor is there any clear indication of any return on that investment.

 That means:

• Brexit is bad for jobs
• A tighter squeeze on public services
• And/or higher borrowings to pass onto future generations

So Brexit is clearly bad for the economy.  Whether it is also bad for the UK's "National Interest" is a matter for debate.  But for many people personally affected by lost income or poorer services, that is what matters.

Arguably the economic impact should be put above any other factors put forward in favour of Brexit.  In that respect, the debate goes on. 

Brexit - How Do You Feel?

The athlete crosses the finishing line. The first question they are asked by the TV presenter is "How do you feel?"

Emotions are so important.  Not least when making a purchase.  Let's say you're making an important decision like who is going to rewire your house.  You've got three quotes, and have whittled it down to two.  You may have conflicting advantages.  Or you may be totally confused.  You have to make a decision.  You have to go with your gut feel. Which electrician's offer feels more comfortable?

The same applies to voting.  As you put your cross on the voting paper, you may be confused, or having second thoughts.  But you feel you have to vote. Again, which option feels more comfortable? Or indeed which is less uncomfortable?

On a scale of +2 to -2, as you put your cross on the paper your feelings might be:

• Ecstatic
• Comfortable
• Confused
• Uncomfortable
• Dreading

Presumably you wouldn't vote for something you are dreading. But you might vote "uncomfortable" if the other option was worse.   It's how the options compare.

Then it's a matter of why?  It could be fear.  Perhaps fear of the risk of an economic downturn. Or fear of someone taking your job.

Would you feel happier to be "in control"? How about more money for the NHS on which you rely?

Of course you would feel happier.  That's how the Leave Bus captured hearts as well as minds.

That beat "Project Fear".



HOW DID YOU FEEL ON REFERENDUM DAY?

So how did you feel when you were in the polling booth on Referendum day?  What emotions did you feel?

The polling companies tend to ask questions like "Which was the most important factor?", with choices such as "immigration"  That's about thought, not feelings.

Did any ask questions about how people felt about immigration, control or econimics?  That would provide much better insight into how people are feeling and likely to vote.  (If the polling companies did, please add a comment.)



HOW DO YOU FEEL NOW?

In any case, how do you feel now?

This posting was prompted by a rather innocuous tweet that Cava in Tesco has gone up 40p, which the author blamed on Brexit.  It was clear that they buy Cava. So how do they feel?  How would you feel?  Poorer I'm sure, and blaming Brexit.  There's now many more food and drink examples.  What was a risk, a fear, before the referendum has become a reality.

The £350m on the bus has already been debunked by Theresa May offering the NHS no more money.  How do Leave voters feel about that? Let down? Angry to have been lied to?  It can only be negative.

Senior EU representatives emphasies again today that they will negotiate hard in the interests of the remaining 27 EU countries.  How confident do you feel that the UK could get a deal at least as good as currently?

So how do you feel now?  If you voted to Leave or to Remain are you more or less comfortable? If you were to vote now, would your vote change?

Will we get an EndoBrexit or an ExoBrexit ?

In chemical reactions, the energy you put in (shown by the humps) can either take you to a higher energy level or a lower level~:

With Brexit there is an equivalent situation.  Will the transition take the UK to:

• A higher level - an #EndoBrexit, or
• A lower level - an #ExoBrexit ?

Furthermore, if it looks like an #EndoBrexit, will all the investment in time, cost and energy for the transition have been low enough to be worthwhile?


WHAT ARE THE ANSWERS?

Let's look at the transition first.  It is likely to take many years, whether it is a "Hard Brexit" or a "Soft Brexit".

The UK's divorce from the EU, triggered by Article 50, will likely take the full two years allowed.  Any new trade deal with the EU will likely take years longer, subject to any interim agreement. A deal with the EU must be in place to set the foundations for any new trade deals with non-EU countries. So many years longer before all's in place.  A massive investment in time, money and energy.  Then you need to add the hidden cost of the people involved not doing anything else constructive that needs doing.  Yet any benefits of new trade deals will only arise many years away. 

Furthermore, all indications are that the economy will suffer during the transition.  This is through uncertainty and the opportunity for businesses to reassess their location and investment.  Jobs lost, growth slowed, and tax receipts down.

Brexit must be strongly "Endo" to even begin to consider such a massive cost and investment.

The problem is that it is not at all clear the UK is headed for an #EndoBrexit.  If anything, the likely damage done to the economy during the transition will never be recovered.  It's looking like an #ExoBrexit.

There is certainly no justification for an expensive transition.

Some will say that any cost is worthwhile for regaining UK sovereignty and control over the UK's borders. Others will wonder what's the point if the economy is going backwards as a result?

Recent polls suggest many voted to Leave on the basis that there would be little or no cost for Brexit - essentially expecting free trade with the EU would continue un-interrupted.  That is by no means guaranteed.

But that's only one view.


KEY QUESTIONS THAT STILL NEED TO BE ANSWERED

To come to a proper collective view, let's make every effort to answer three questions:

1. Economically, is it looking like a higher #EndoBrexit or a lower #ExoBrexit ?
2. If #EndoBrexit, is the investment in the transition worthwhile?
3. If there's going to be a net cost, why bother with Brexit?

Is the EU Referendum result 'safe' or 'unsafe'?

Leaving the European Union is a major step for the United Kingdom.  We should only do that if we are certain there is public support for such a move. If we are, then it is "safe" to leave the EU.  If not, then we should remain in the EU.

The question is, did the Referendum in June 2016 provide the answer?  Was the result "safe"?  Or was it "unsafe"?

THE BASIC MAJORITY

The Referendum Act of 2015 set the bar at a simple majority of those voting.  In the event the result was pretty close: 51.9% to 48.1%.  A difference of not quite 1.3 million people.

The Government are using words about the result like "clear", "emphatic", "overwhelming" and "unarguable".

But it wasn't clear:

• A net switch of less than 650,000 from Leave to Remain would have meant a win for Remain
• As can be seen in the pie chart below, 62.5% in total did NOT vote to leave the EU. Almost as many did not vote as voted either Leave or Remain

One would hope that a move to leave the EU would therefore be done with some caution, not the gung-ho approach currently being taken.


HOW CLEAR WERE THE ARGUMENTS?

It would be far easier to accept the June result if the referendum campaigns had been clear and honest, so people could have made a well-informed decision. Sadly there were deficiencies on both sides, but the Leave campaign had more clearly lied and deceived voters.  As mentioned above, a switch of only 650,000 would have resulted in a Remain win.  Quite likely given what is discussed below:

The £350million extra that could be spent on the NHS 

One of the most prominent messages approaching referendum day was this on the side of a bus:

But this was utterly misleading:

• £350m was a gross figure rather than net figure after monies deducted or paid back to the UK. The net figure is under £160m .  
• This did not take into account any monies that will need to be paid for continued access to EU markets. The main headline in the Financial Times today says "Cabinet looks at paying billions to keep single-market access for City"
• This did not take account of extra costs the UK will need to incur duplicating administrative functions currently delegated to the EU, such as the UK's input to how the global internet functions. 
• It was not clear that in any case the UK is committed to paying money to the EU for at least two years before the UK were to leave.  Theresa May and Jeremy Hunt, as Health Secretary, have just confirmed that the NHS still needs to find £22,000 million per year in savings in the short term.
• The underlying assumption was that economy would not take a hit, so money wasn't needed elsewhere.  This is unlikely, as discussed further below.

The £350m claim should have been withdrawn. It wasn't. Instead it became more prominent.

"Project Fear" Debunked

Before the referendum, various people warned that there was the risk that various economic damage would be caused by leaving the EU.  These could result in:

• Lost jobs
• A risk that economic growth would slow - even producing a self-induced recession
• A consequent reduction in tax revenues (and therefore increased pressure on public spending and/or borrowings).

The Leave campaign said such claims were rubbish.

Whilst a recession has so far been avoided, the risks remain.  A number of things have happened since the referendum to highlight tbose risks as real:

• Countries like Japan have warned of a cut in investment into the UK
• Specifically, Nissan has said they will cut, defer or stop investment in their major car plant in Sunderland.  The Government has offered some form of guarantee. But at what cost?
• Banks in the City of London are more openly considering moving jobs to the continent
• Dublin, which as capital of Eire will remain in the EU, has reported a massive increase in enquiries to move professional service companies there
• The pound has crashed some 15-20% lower against other major currencies such as the US dollar and Euro.  Whilst some people are saying the pound was overvalued, it was the Brexit vote and announcements at the Tory conference that triggered specific falls
• There is a distinct possibility that the pound will lose its hard-earned status as a reserve currency.
• The interest rate at which the Government can borrow money has increased.  That means greater strain on money for public services

Confusion between the EU and the Single Market

To some people in the Leave camp, leaving the EU also meant leaving the Single Market.  A new free trade deal would need to be negotiated with the EU, but would be expected on more favourable terms than currently.

But other Leavers were saying, or at least implying, that a free trade deal could be provided similar to Iceland, which is members of the Single Market without being a member of the EU.

The public were undoubtedly confused.  The referendum question itself only mentioned the EU.  It would be "unsafe" to assume that meant leaving the Single Market as well.

Indeed the latest poll mid October suggests voters want to stay in the Single Market by 59% to 41% to leave.  That is well in excess of the margin of votes to leave the EU.  Again that may be because the similarities and differences between the Single Market and the EU are still not well understood.  It is only one poll, but suggests a potential shift away from support for Brexit

It is certainly not "safe" to suggest that the June vote was to leave the Single Market.  This is termed a "Hard Brexit", rather than some softer alternative within the Single Market.

Yet Donald Tusk, the President of the European Council, has recently echoed many other EU politicians in saying "It's a hard Brexit or no Brexit".

It is not "safe" to interpret the vote to leave the EU as a vote for a hard Brexit.


WHAT ELSE HAS CHANGED SINCE THE REFERENDUM?

The sharp drop in the value of the pound is making imports far more expensive.  Consumers are beginning to see price rises on supermarket shelves, clothes, foreign cars, white goods and many other imported products.

The key indicator of inflation is also expected to increase.

For the Government, there will be increased pressure on costs:

• Any purchases from abroad, such as drugs, will be at a higher cost
• There will be an increase in cost to the Exchequer for anything such as pensions that are index-linked.

Whether the pound's devaluation was caused by the Brexit vote or not, most people will believe that it was.  The correlation is too stark.

Like everything else above, increased costs will tend to make people change their minds from Leave to Remain.


WHAT ABOUT ECONOMIC FORECASTS?

The forecasts before the Referendum suggests the risk of a major slowdown in the British economy.

Forecasts for the Autumn Statement at the end of November have not yet been published.  But we now know the drop in sterling value, the consequent icncrease in some Government costs, and an increase in borrowing costs. The chances are still very high new forecasts will show a slowdown compared to remaining in the EU.

How will the public react?  Likely more against Brexit than in support.


SO HOW SAFE WAS THE REFERENDUM RESULT?

If leaving the EU is a good idea, then public support for Brexit would increase.  But all the issues above will tend to produce a shift towards Remain.  Certainly there is no clear support for a Hard Brexit, where the UK also leaves the Single Market.

So was the referendum result to leave the EU "safe"?   No.  In itself it is not clear.

Indeed it is "unsafe", as public opinion is likely to shift away from Brexit in the months before the Article 50 Leave button is pressed.

What should the Government do?  Proceed with great caution, and be prepared to cancel Brexit unless it can more clearly show a "safe" desire to leave the EU. 

If this means a second referendum, then maybe that's what we need.  But it's quite likely that cancellation of Brexit will becone blatantly obvious.  We'll see.

What will get Theresa May to stop and think about Brexit?

Yesterday (Wednesday) the Prime Minister, Theresa May, remained gung-ho about Brexit.  Now there's a court case running to see if she needs to consult Parliament formally before proceeding.

But what about the Court of Public Opinion?  What in that will get her to stop and think more carefully?

Firstly here's a look at the Referendum result:
"How much of a mandate for Brexit does May actually have?"

This article has had over 2500 reads in little more than 48 hours, in response to a few tweets. Feedback has been positive:  For example, from @247 "An excellent and clear article that all people interested in #Brexit should read especially @TheresaMay_MP and her government"

But the odd thing about the Referendum is that it wasn't decided on the normal basis of "It's the Economy, Stupid".  According to polls, most people who voted to Leave did so on principle, firstly Sovereignty and secondly Immigration.

Now economic matters are dominating the headlines, with the devaluation of sterling already having real practical effects on food prices and even availability.  So the follow-up article is:
"How will Public Opinion change to support or reject Brexit?" 

The likelihood is that Public Opinion will, start to swing against Brexit.  How far will it need to go before Theresa May realises she hasn't got enough public support for Brexit any longer? 

Not an easy question to answer, as there are ifs about changes in public support and ifs about her reaction to it.  But as we approach the Autumn Statement in November, economic matters in the shops, at the airports and in the forecasts will become clearer.  Might we even see Brexit cancelled?