Martin Wolf

The Economic Challenges Beyond Brexit

Samuel Hooper1 Comment

Bitter, swivel-eyed (and unrepentant) europhile he may be, but the FT’s Martin Wolf makes some valid points in his latest column, warning against any complacency that Britain’s persistent economic weak points will be automatically restored to health upon leaving the European Union.

Wolf writes:

British economic policymakers confront big challenges. They have to manage departure from the EU with the minimum damage. They also need to make the UK economy far more dynamic. The latter cannot be achieved if they do not abandon the myth that Britain is already an economic success, albeit one choked by the dead hand of an over-regulated European economy.

Simon Tilford of the Centre for European Reform provides a far more realistic picture in his Brexit Britain. Measured at purchasing power parity, the rise in the UK’s gross domestic product per head between 2000 and 2015 was smaller than in Germany, Spain and France. Over this period, the UK outperformed only Italy, among the EU’s largest pre-2000 members. In 2015, the UK’s GDP per head was lower relative to the average of the 15 pre-2000 EU members than in 2000: its GDP per head was a mere ninth within this group.

The UK also has the highest income inequality among these countries. Furthermore, notes Mr Tilford, UK real wages fell by 10 per cent between 2008 and 2014, before a tiny uptick in 2015, while German and French real wages rose. In 2015, only London and the South-East had higher GDP per head than the average of the EU-15 countries. Other UK regions were at or below that average. In all, it is hardly surprising so many UK voters feel left behind, as shown in the EU referendum.

True, the increase in French real wages has coincided with high unemployment. But that is not true in Germany. UK workers also work longer hours than those in other EU-15 countries. This is presumably to make up for low real wages, themselves largely due to the UK’s poor productivity. According to the Conference Board’s invaluable “total economy database”, the only EU-15 countries to have lower output per hour than the UK are Greece, Italy and Portugal, while the UK’s productivity per hour has stagnated since 2007. Again, of the biggest five EU-15 members only Italy performed worse on this measure. The UK also now runs the largest current account deficit, relative to GDP, in the EU-15.

The UK, then, has low unemployment. But it also has high inequality, mediocre real incomes, at least by the standards of its European peers, and poor external competitiveness. Above all, recent productivity growth has been truly awful.

These are hard, inescapable criticisms – particularly in terms of productivity growth and purchasing power parity, which is ultimately the only yardstick that matters in terms of whether people actually feel better off.

And concludes:

The implications of a realistic view of the UK economy is that, even without the looming shock of Brexit, the economy suffers from big weaknesses relative to the European economies that many Brexiters despise. Some argue that a real depreciation of sterling is mainly what is needed. If sustained, the post-referendum devaluation should indeed help, though it means a fall in real incomes and wealth. Yet devaluation alone will not cure UK weaknesses.

The UK has to rectify longstanding supply-side failings. The list includes: low investment, particularly in infrastructure; inadequate basic education of much of the population and the innumeracy of much of its elite; a grossly distorted housing market; over-centralisation of government; and a corporate sector whose leaders are motivated more by the share price than by the long-term health of the business. Not surprisingly, given all this, the UK economy is highly dependent on inward foreign direct investment, which Brexit would seem virtually certain to weaken.

If the UK is to thrive economically, it will not be enough for it to manage Brexit, hard though that will surely be. Its policymakers must also start from a realistic assessment of the UK’s mediocre performance. This is no world-beating economy. It is not even a Europe-beating economy, except on creating what are too often low-wage jobs. It will have to do far better if it is to deliver the higher living standards its people want in the tougher environment ahead.

The danger with Brexit was always that the sheer complexity of managing our secession from the European Union would prove too much for a mostly unremarkable generation of politicians and civil servants, nearly all of whom have never known life outside the EU and can scarcely imagine self-government. Even now, three months after the historic Brexit vote, there is little evidence that the government has started to get to grips with the challenge ahead of them.

Therefore, it is not unreasonable to ask – as Martin Wolf does – how much mental capacity will be left to tackle other burning issues like Britain’s low productivity, the low-skill / low-wage segment of the economy or decades-old weaknesses in British management, identified by Thatcher’s Conservatives in the late 1970s but still barely tackled even now.

And I’m not sure there is a quick fix to this problem. Brexit will inevitably dominate the political agenda, probably for the next decade, to the near exclusion of all else. And even if there was excess capacity, there is precious little evidence to suggest that Theresa May’s new government has a blazingly clear vision for reforming Britain anyway – as Isabel Hardman outlines in this excellent Spectator piece.

In short: many of these problems, though long-festering, are probably going to have to wait to be tackled, unless the government surprises us all with its radical zeal and far-reaching reform plans at the upcoming Conservative Party Conference, which seems unlikely at best.

If you wake up to discover your house is ablaze and smoke pouring into the bedroom, you don’t waste precious minutes ensuring that you are beautifully dressed and immaculately turned-out before evacuating the building. Likewise, in whatever shape Brexit ends up happening, Britain will likely emerge from the EU in much the same shape as before, with the same nagging issues and weaknesses clamouring to be addressed.

Inspiring? No. Ammunition for assorted bitter Remainers, EU-lovers and anti-patriots? Sadly, yes. But that is our lot. Brexit is likely to be a grinding, painstaking, lengthy process at the end of which the same Britain will be blinking back at us, largely unchanged, with all the rest of our work to realise the benefits of Brexit still ahead of us.

But does that mean the enterprise is not worth the effort? Hell no. And it is very telling to see those who are prepared to steel themselves for the work ahead, and those who seek to use it as a whinnying justification for giving up.

 

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The Financial Times Makes A Worryingly Stupid Cheerleader For The EU

Samuel Hooper2 Comments

A company logo hangs on the headquarters of the Financial Times newspaper in London

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The slavishly pro-EU Financial Times often displays a childlike level of understanding of how the European Union – and global regulation – actually works

Apparently the arguments for Brexit “do not add up”.

We have this from the most scrupulous and unbiased of sources, the Financial Times, so of course it must be true. Millions of Brexiteers, The Leave Alliance and little old me can pack up our things and go home, because Martin Wolf of the Financial Times has spoken.

Except that when Martin Wolf speaks on the topic of the European Union, he sounds like an idiot. This is his opening gambit:

If the UK voted to leave the EU, it would almost certainly be outside the arrangement organising the life of our neighbours and principal economic partners forever. Given this, the question is whether the option to leave should be exercised now. My answer is: absolutely not. To see why, let us examine popular arguments in favour of departure.

Oh dear. In his first sentence, Wolf inadvertently describes the overwhelming case for Brexit, before he can even launch in to his promised list of ten rebuttals. For he says that the EU is an organisation which seeks to “organis[e] the life of our neighbours and principal economic partners” – and indeed ourselves, since we are part of the union, too.

This is refreshingly honest, albeit unwittingly so. The EU does indeed seek to organise not only the lives of our neighbours and trading partners at the nation state level, but crucially (and most offensively) at the level of the private citizen too. Why? Because the EU does not see itself as some kind of a trading club. It sees itself as a government of Europe, sitting above national governments but gradually rendering them obsolete and irrelevant. The EU makes no secret of this fact – it is enshrined in the treaties, quotes from senior EU officials and even emblazoned on the wall of the European Parliament Visitors’ Centre, for those who care to look. It is only here in Britain where politicians and assorted EU apologists bury their heads in the sand and lie to themselves (and to us) about the real purpose of the European Union.

So Martin Wolf is quite correct – if Britain leaves the EU, we will absolutely be outside the arrangement which seeks to organise the lives of 500 million European citizens from every single member state. Power will be brought one step closer back to the individual citizen. And the fact that Martin Wolf and the Financial Times see this as a bad thing – that they visibly recoil from the idea that Britain should shed a superfluous layer of supranational government and seek to return power to the people – really tells you everything you need to know about whose side they are on. Hint: it is not the side of we the people.

The article then lurches from bad to worse, with a series of “rebuttals” of the Brexit case each one less supportable than the next. We are assured, for example, that a politically integrated eurozone is unlikely, despite the European Union doing everything but spell out in fireworks their intention to do exactly that.

Some of Wolf’s later points – particularly around immigration and trade agreements – are slightly more accurate. But this is only because he is creating straw man arguments to demolish, aided in his efforts by the hapless official Vote Leave campaign. The various spokespeople and figureheads of Vote Leave say enough stupid things between them to enable Martin Wolf to publish a ten point anti-Brexit rebuttal every day from now until polling day, but that is very different from Wolf managing to disprove or discredit the core arguments in favour of Brexit, most of which he pointedly skirts around.

Specifically, Martin Wolf never appears more out of his depth than when he attempts to show that there is no natural positive alternative to EU membership, and when he attempts to discredit the Norway (EFTA/EEA) option as an interim step. Thus we get utter bilge like this:

Seventh, it would be easy to agree on alternatives to EU membership. Yet those recommending leaving have no agreed position. There are three plausible alternatives: full departure with trade regulated by the World Trade Organisation, which would cost the UK its preferential market access to the EU; Swiss-style membership of a trade arrangement in goods, with bilateral deals in other areas, which is complex and would require the UK to retain free movement of people; and Norwegian-style membership of the European Economic Area, giving full access (except for having to abide by rules of origin in trade in goods) but would deprive the UK of a say on regulations. In all, the more sovereignty the UK wishes to regain, the less preferential access it retains. This trade-off cannot be fudged.

Enter Pete North, with a forensic and merciless dissection of Wolf’s position that genuinely make one wonder how it can be that North is the amateur blogger and Wolf the supposedly prestigious journalist.

North responds:

Wolf says that “There are three plausible alternatives”. This is where we are in straw man territory. He cites the WTO option which does not in any way address the multiple cooperation agreements or issues surrounding non-tariff barriers and in fact would likely cause asymmetric tariffs in the EU’s favour. If Wolf was a halfway credible analyst he would know that much. It’s a non-starter and would in fact case the very chaos that remainers have been talking up. So we are back to the age old question. Ignorance, dishonesty or both?

This means of exit is commonly associated with unilateral withdrawal, which no government intends to do nor would even consider it when faced with the practical ramifications. And so we can say with absolute certainty that we are looking at a negotiated exit.

With regard to the Swiss Option, comprising of membership of a trade arrangement in goods, with bilateral deals in other areas, Wolf is right to say it is “complex” and given that we have only two years under Article 50 to negotiate a settlement, we can safely assume that a bespoke deal is not on the cards. Talks may be extended but the tolerance for uncertainty will be short. Any UK government entering negotiations would rapidly be disabused of any fanciful notions of recreating the relationship from the ground up.

So actually, an off the shelf agreement based on the EEA is looking the most probable exit means and since it is the least disruptive for both parties and the most achievable, that is most likely what will be asked for and the only thing on offer. Having done a scoping exercise in advance of submitting our Article 50 notification, we can say with some confidence that a transitional deal could be arranged inside the mandated two years. To ensure it does not drag on, we will in all likelihood adopt most of the existing cooperation agreements as they are without opening them up fro scrutiny. We will swallow the lot. Wolf has it that the UK would have to retain free movement of people membership of the European Economic Area, which is true, but actually irrelevant.

At the end of negotiations what we end up with is more or less the same access to the single market and no real changes in the business environment. Cooperation agreements continue as before and nothing looks that much different on day one. This renders much of the speculation about Brexit entirely redundant. Wolf as much admits this.

Having taken Wolf to school on the fundamental about the most likely future model for UK-EU relations, North goes on to destroy Wolf’s fatuous but oft-repeated claim that an interim EEA/EFTA solution somehow means having no “say in regulations”:

In any area of regulation you care to look, the EU is a recipient of rules as much as anybody else. Its rules are subordinate to global standards and such standards from the basis of nearly all new EU technical regulation. Brexit not only gives us a right of opt out at the WTO/UNECE level, we would also enjoy EU consultation before any rules went as far as the EU parliament for what they laughingly call scrutiny. What that means is we will never again see the EU abusing its power to foist rules on us that we do not want.

Wolf is right however when he says that there are trade-offs. Asserting sovereignty in regulatory areas does have trade-offs. Because Norway has heavy protections on its own aquaculture and agriculture it is subject to tariffs. It remains that way because that is what Norway chooses to do. Their parliament examined the balance of issues and decided on a case by case basis whether the trade off was worth it. In more areas than one, Norway has concluded that sovereignty matters more. This would be that democracy thing. And the whole point of Brexit as it happens.

And while the regulatory regime doesn’t change that much, it does mean that we are free to change it where we deem change is appropriate. It categorically does not mean a huge administrative undertaking to establish a separate regulatory system. All it means is we can change it as and when we want to – and when we want regulatory reform, we have a direct line to the global bodies that make the rules rather than having the EU speak on our behalf. The clout we have in that regard in on the basis of what we bring to the table in terms of soft power and expertise which is considerable when you consider the UK’s many assets.

[..] The dinosaur hacks of the FT are fixated on “free trade deals”, many of which are not actually that useful to UK industry and we would benefit more from independent participation on global forums to remove technical barriers to trade. In that respect the traditional bilateral trade deal (or FTA as they insist on calling them) is obsolete. The future is the development of common regulatory frameworks that extend far beyond the confines of little Europe. Being independent of the EU ensures that we put the brake on the EU’s gold plating tendency while having first dibs in the global arena.

In so many ways, Brexit gives us the best of both worlds. The continuity of single market access along with trading agility, free association with global alliances and a functioning veto. All we get from the europhiles is that we can’t have our cake and eat it. It turns out we can eat the cake and ask for seconds if we so choose.

I cannot repeat this often enough: if you want sound analysis of the EU referendum question and an informed understanding what Brexit might look like, it is absolutely no good turning to the legacy media. They simply do not know what they are talking about because they have not invested the time to think through the issues clearly or to update their 1990s-era understanding of global trade and regulation. Worse still, they lack the humility to learn from those who have invested time and do know.

Martin Wolf airily tries to dismiss Brexit as a leap into the unknown, claiming that leaving the EU would entail moving toward one of three unpalatable future relationships, when it actually turns out that there is only one likely future model Brexit state given the political and economic constraints faced by both parties, and that one model preserves the single market access about which the FT and others rightly fret while extricating us from the unwanted political union.

Worse still, Wolf compounds his error by lazily asserting that this “cake and second helpings option” (as North puts it) would mean Britain having no say when it comes to shaping regulations, when in fact it is only by leaving the European Union that we are able to restore our voice at the real “top tables” where the rules are made.

We are now presented with a rather difficult set of possibilities. Either:

1. Martin Wolf and the Financial Times are so thoroughly incompetent and lacking in knowledge about one of the very subjects for which readers pay them for their expertise, or

2. Martin Wolf and the Financial Times do understand how global trade works and the true nature of the European Union, but deliberately keep this information from their own readers for some other sinister purpose (most likely because their corporate readership balks at the increased economic risk which inevitably accompanies any great enterprise worth undertaking – like Brexit)

Incompetence or malevolence. Pick your poison, but the Financial Times is undoubtedly guilty of at least one of these offences, if not both.

 

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