Today I'm going take a walk off the beaten track of defence and discuss the upcoming EU referendum. There will be a section on defence and security, but predominantly I want to look at some of the issues that have been making the headlines and try to add a bit of clarity. I make no bones about the fact that I'm in favour of a British exit and will vote to leave the EU, because I feel this is the best course of action for the UK. But at the same time I hope this article will try and keep things in balance and provide some much needed perspective on the leave campaign side, so that undecided voters can make a better informed decision about which way to vote, even if that ultimately means they vote to remain.
It should go without saying that this article has not been sponsored by either side of the campaign, or indeed anyone else (would my blog look so bland around the edges if it was?). This a personal project, because I'm such a nice guy like that.
I want to start by discussing something which I think is a bit of a red herring on both sides of the argument.
Immigration
The basic arguments made by the remain and leave campaigns boil down to "immigration is good for the UK" in the formers case and "immigration is bad" in the latters case. The reality is that immigration can be both good and bad, sometimes at the same time, and it's value can change depending on changing economic conditions. Economic immigration basically boils down into three categories;
- Low skill, low earning labour,
- Higher skill, higher earning labour,
- High means, Entrepreneurial migrants,
Putting aside things like pensioners coming to the country to live with family but not seeking employment and high means (wealthy) individuals who use the UK simply for residential purposes without any intention of investing capital in a business, most economic migrants will fall into the three above categories. Low skill labour are those individuals with few qualifications or appreciable skills, if indeed any. Higher skill labour are those individuals who bring some kind of qualification or skill with them, which can be anything from experience in brick laying to financial accounting. High means, entrepreneurial migrants are those individuals who are independently wealthy and come to the country not just to live but to invest their excess capital in UK based businesses.
It should probably go without saying that high means individuals are nearly always welcome with open arms. The capital they bring with them adds value to the economy and they have very little downsides. The other two groups are much harder to judge in terms of their value. It is generally accepted that low skilled labour drives down wages, as the supply of cheap labour out strips the demand in terms of numbers of jobs. Such labour competes with domestic workers, as frequently the wages being offered are greater than a low skilled migrant worker could earn at home. Whether this is a good thing or a bad thing depends on your perspective.
The general workforce will typically consider this to be a negative as the cheap labour suppresses their potential earnings by diminishing their bargaining power with employers. Employers on the other hand benefit greatly from this dynamic, as it drives down one of the largest sources of expenditure in their business; the wage bill. This partially explains why many businesses are in favour of the EU, because they understand that their supply of cheap labour could be cut off in the event of a British exit. Others, like Dyson, are less bothered on the principle that most of its manufacturing has been shipped off shore anyway and what employment is left in the UK is generally high skill labour that will always attract a premium (he's also annoyed because of the EU ban on high powered vacuum cleaners...)
Generally the best way to manage the impact of low skill labour is through a quota system that reacts to the prevailing economic conditions. When an economy struggles and unemployment rises, as it did during and immediately after the financial crisis of 2008, generally it is better to tighten up the supply of low skill labour by lowering entry quotas. This stops a labour market that is already saturated with a plentiful supply of cheap labour from growing even further, suppressing wages and causing stagnation of the economy through reduced spending. On the other hand, when an economy is growing strongly and the pool of unemployed labour shrinks to low levels, generally it is better to loosen the supply of labour by increasing entry quotas and trying to widen the pool of cheap labour. This prevents a massive inflation of wages that would stifle businesses and retard growth to an unacceptable degree (employment law should normally follow a similar pattern to aid expansion and contraction, though that is a much more complex subject).
This causes a dilemma because it really supports neither sides case. High levels of low skilled immigration can - under the right circumstances - be very advantageous to an economy. The rapidly expanding US economy in the post-civil war period (mid-1800s) benefited greatly from cheap migrant labour. But at the same time cheap, low skill labour can - again, under the right circumstances - actually hold an economy back by driving unemployment levels and curtailing the populace's spending power through decreased wages. Many third world countries struggle to generate growth because their internal markets are effectively stagnant as a result of low wage levels, particularly among farmers and manufacturing workers whose goods are exported overseas at rock bottom prices.
In this case the leave campaign does have an advantage. Leaving the EU allows the UK to regain control of immigration and impose pretty much whatever quota system it sees fit. This system could be used to flexibly increase and decrease the supply of low skilled labour to fit the prevailing economic conditions, including the ability to revoke work visas on top of capping the number of entrants into the country when unemployment rises to an unacceptable level. Then when the labour supply contracts too far, the government can loosen the restrictions for entry and grant visa extensions in order to control excessively rising wages. It's this flexibility that gives an edge to the leave campaign. Remaining in the EU would mean that the UK remains tied to the rules over free movement of people across Europe, and as such is exposed to large numbers of low skill workers who can enter the country and seek employment freely, driving down wages even at times when unemployment may be high.
The case with higher skill workers is a little more complicated however. Take the NHS as an example. Among permanent staff, not including GPs, reports show that year on year about 10-12% of the staff are non-British, with about 3-4% coming from the EU. This doesn't seem like much unless you keep in mind that in recent years the NHS has been desperately trying to recruit qualified staff from all across the world in order to fill shortfalls, and even then it now relies heavily on agency staff to plug various holes. There is no large pool of highly skilled British medical workers waiting on the outside for opportunities to open up. Foreign workers are not "stealing" jobs in this sector by any means. Rather, foreign workers are the only thing keeping the NHS itself off of life support.
While it may seem simple to solve this problem by introducing a fast track system to expedite the immigration claims of suitably qualified individuals, the reality is that a restrictive immigration system will inevitably cause delays. Any quota system would have to be designed to be supremely flexible to allow such highly qualified individuals easy access to the UK and avoid a situation where excessive bureaucracy puts potential candidates off from applying to work in the UK. And it's not just in obviously beneficial cases such as these that tighter immigration controls could harm the country.
In order to prioritise skilled immigrants the government will need to periodically review which skills are in high demand and which skills are in low demand. It will have to assess the skilled domestic labour supply on a regular basis to see how well it matches up with the demand. And from there it will have assign quotas and adjust who gets fast tracked and who doesn't. But how can the government really predict which skills are valuable? Governments tend to have an appalling track record, as do most economists, of predicting the future demands of the labour market and the economy as a whole. Those skilled insurance experts that you won't allow in today because of local supply could be the very people in high demand tomorrow. And bureaucracies are many things, but quick to react to changes is not one of them. Much economic value could be lost as companies looking to grow and expand into new markets find themselves frustrated by an inability to recruit the specialist skills they need in a timely manner because the government does not consider such skills to be important.
It's a delicate balance, and I personally think it's manageable to an acceptable degree, but it is important for people to be aware of the risks. I also just want to make the point that it is disingenuous of the remain campaign to argue that a vote to leave would hamper the movement prospects of millions of British workers looking to head abroad. It could hamper some, but many will pass the normal checks that an EU country would require with relative ease. And a vote to leave also doesn't rule out the possibility that a deal could be struck with the EU to maintain the principles of free movement if that was desired.
Now I mentioned earlier that I think the whole immigration thing is a bit of a red herring. And here's another.
Red Tape
This is one of the most common complaints about the EU. That Brussels eurocrats are bogging down the UK and it's businesses with mountains of red tape. Well, the answer is yes and no.
The most commonly cited piece of red tape and the one that is believed to cost UK businesses the most amount of money to implement is the Working Time Directive. This regulates such things as the maximum number of hours that a person can work in a week (48), the minimum break allowances during a shift, the minimum amount of uninterrupted time off they must be allowed between certain shifts, the amount of holiday they are entitled to and a variety of other issues. The cost to business derives not just from complying with the paperwork requirements, but also from the lost productivity of workers taking time off, breaks, cover for holidays etc. And honestly a lot of the demands made by the directive are not really that unreasonable.
The rationale for the directive is fairly sound, designed to protect the health and well-being of workers, particularly mental health, and their life outside work. Oh and here in the UK you can actually opt out of the directive. I know first-hand, because I've had to do it myself in the past. There is even some evidence that capping the total number of working hours per week has a beneficial effect on unemployment figures, as it can force some businesses to recruit additional staff in order to cover the necessary hours.
How much it actually costs businesses is up for strong debate, not least because in the absence of the directive the UK would probably have a similar law in place anyway. The impact is also debateable as many companies have already found ways around the law. For example it is possible to hire two part time staff members for the same job, each working four hours, with their respective shifts running back to back. In this way an 8 hour shift can be covered without having to give either member of staff a break, ensuring a basically uninterrupted 8 hour period of work. Indeed, this has become a more and more frequent approach taken by many businesses, particularly in the retail sector.
And really the first part of that last paragraph is important. Just because we would be freed from EU red tape, that doesn't mean that immediately all the red tape in the country will disappear. The UK will still need regulations covering a variety of subjects, some of which is likely to go into quite onerous detail over the smallest things. Whether we'll end up with a 13 page document on the "labelling of tyres with respect to fuel efficiency and other essential parameters" is very much up for debate. And no, I'm not joking. There is indeed a 13 page document about labelling tyres, which you can read by clicking this link which will open in a new window. Though I warn you that the first three pages are basically just an extended way of saying, "tyres can affect fuel efficiency, their performance in wet conditions can vary, and they can sometimes cause a lot of noise pollution. We want you to label the tyres with ratings of these three elements so people know what they're buying". And yes, the EU does have regulations about the amount of noise that tyres make.
But does it have a regulation on the number of bananas you can sell in a bunch, or how bendy the bunch can be? The answer is no, but hold on just a second. After all I did say that the answer to Brussels eurocrats burdening business with red tape was a yes and a no.
See, this week Boris Johnson drew a lot of flak for (well, many things) saying that bananas cannot be sold in bunches of less than four. Remain campaigners and fact checking websites jumped on this immediately and pointed out that it wasn't true at all; supermarkets can sell as many bananas in a bunch as they choose. Both took the opportunity to also joke about the myth of bananas being required to be straight, or rather that they had to be "free from malformation or abnormal curvature of the fingers", pointing out that this legislation (no. 2257/94) had been repealed back in 2011. Then they laughed at what a clown Boris is.
But the thing is, Boris was actually close. He just didn't recall the details correctly.
Because although regulation 2257/94 was indeed repealed on the 19th December 2011, what the remain campaign and the fact checking websites - many of which people are now relying on to get what they believe are hard facts about the EU - failed to mention is that it was repealed by being replaced with a new regulation, 1333/2011, which also covered the same subject (the regulation of green, unripened bananas). And in that new regulation annex 1, section 5 (presentation), sub-section C (presentation) clearly states that "the bananas must be presented in hands or clusters (parts of hands) of at least four fingers. Bananas may also be presented as single fingers". Or in other words pretty much exactly what Boris said, except that the rule only applies to green, unripened bananas, not to the final sale of yellow bananas. Oh, and for those that are interested regulation 1333/2011 does contain this sentence under annex 1, section 2 (quality), sub-section A (minimum requirements) "[the bananas must be] free from malformation or abnormal curvature of the fingers"....
Repealed you say? All a nonsense myth you say, designed to mislead the public? Funny, because the currently applicable regulations would appear to say the complete opposite. We'll leave bananas as they are just for now, but we'll be coming back to them soon.
Because in general it should be remembered that although there are thousands upon thousands of regulations, many of them only apply to specific industries. If you're not a banana grower or wholesaler then you have no need to worry about regulation 1333/2011. In fact the main problem with all this red tape is not so much what it actually does to businesses, or though some are hit harder than others, a lot of it is actually to do with how much time and expense is wasted on compliance. Some businesses have even reported that the penalties for failing to complete their paperwork properly and deliver it in a timely manner are actually harsher than the penalties for not complying with the regulations that the paperwork is for.
And here is where another divide shows up among the remain and leave campaigns. Businesses that support the remain campaign tend to be larger in size. Businesses that support the leave campaign tend generally to be small and medium sized enterprises (SMEs). This isn't just because larger businesses are more likely to trade with other EU nations and so have a vested interest, whereas many SMEs do no business with other EU countries yet still have to abide by the same rules. After all many SMEs themselves do trade with other EU nations. It's more to do with the ability of companies to manage the compliance with the regulations.
Large businesses have more resources. They are better able to cover the personnel costs of filling out forms and the like, and are better able to absorb any additional costs that a regulation may inject into their products or services. Smaller businesses often struggle with this burden, especially in the case of self-employed individuals who do not have an army of admin staff to do their form filling for them. Some of the regulations are also problematic because they are really aimed at large scale businesses but due to poor implementation they often end up sweeping up a myriad of small companies who are not really the intended targets. Every unnecessary expense hurts a company and its ability to compete, especially in the international market place. Considering that figures released in 2015 show that around 60% of all the people employed in the UK's private sector are employed by SMEs, and that SMEs account for about 47% of all private sector turnover, clearly this is a major problem.
Leaving the EU would put an end to this vast burden. Some regulations would still be produced by the UK government, but not on the scale that we have now. Those businesses that choose to sell goods into the EU would still have to make sure their goods are compliant, but considering they already are this shouldn't be too much of a problem. More importantly the UK will be able to make its own choices about how much regulation is required in future, and can act in a manner that is much more sensitive to the specific needs of the UK economy.
For example, while many people are not very happy with the banks - or the financial sector in general (and with good reason) - this sector makes up a huge chunk of the UK economy, but less so on the continent. Heavy regulation, especially that which goes above and beyond what most would consider reasonable, would disproportionately effect the UK economy and threaten a key sector. Many businesses are also not very happy about the EUs approach to carbon emissions and developing a so-called "green economy".
The figures haven't been updated in a while (indeed hard, reliable figures are difficult to come by) but the UK sits approximately 14th in the world on the list of top CO2 emitters. In terms of total Greenhouse gases of all types we're at about 13th. Germany alone emits almost twice as many greenhouse gases as the UK each year. The United States produces over 11 times as many as the UK. China over 16 times as many. Now this is not an excuse for the UK to just chug away as normal. Everyone has to do their bit. Not only can some efficiency measures save both individuals and companies money in the long run, but every unit of energy less that we require as a nation from non-renewable sources like coal and oil improves our energy security by reducing our reliance on imports.
Still, in the grand scheme of things the UK is by no means a leading polluter. And the cost of meeting the various green targets isn't cheap either. The Climate Change Levy alone imposes direct costs of up to £2 billion per year onto the economy. Around 40 percent of the average household electricity bill is accounted for by the need to meet green policies. While some are quick to point out that the UK has in effect brought some of this on itself with its own demanding targets for carbon emission reductions, they're a little slower to point out that the EU has a big hand in setting the UKs targets. The EU itself has made commitments to carbon reductions only across the entire bloc, which means that if some countries within it were to make large reductions then this would effectively hand a free pass to the remaining countries to do much less, protecting their heavy industries in the process. Now take a wild guess as to which country has been asked by the EU to come up with a plan for reducing its 2030 carbon emissions to a level no higher than 57% of what they were in 1990. The EU as a whole only has to get its emissions below 40%.
This is but one example of the way some of the EU's more cack handed policies are affecting the UK. But now I want to talk bananas again, because there is another aspect to all these regulations, something that is particularly insidious.
Inside regulation 1333/2011 there is an odd exemption for bananas from Maderia, the Azores, the Algarve, Crete, Lakonia and Cyprus, allowing them to breach the rules for a minimum length of 14cm (yes, there is a rule covering the minimum length of bananas. And no, it's not a hoax or a euromyth). The reason given is the less suitable conditions for growing. They also happen to be possessions of member states (although the Canary Islands and some french territories in the Caribbean do not get such lenient treatment). Bananas from these exempt places have to be labelled as class 2, but it does seem odd that inferior quality products would be given a free pass just because they're from the EU. Until you learn a bit more about how the EU works that is, and why its regulations are so immensely complex and arbitrary.
Non-Tariff Barriers to Trade
Right, just so we're all clear a tariff is defined by the Oxford English Dictionary as "A tax or duty to be paid on a particular class of imports or exports". In other words you charge people a fee to bring certain goods into a country (or to take them out). One of the primary purpose of tariffs in ye olden days was to raise money for the government. Until people started realising that they could protect domestic industries from being priced out of business by foreign suppliers by slapping large tariffs on cheap foreign imports. Generally though as time passed people realised that all tariffs really did was obstruct trade and make consumers worse off in the long run.
To that end much time has been spent trying to break down barriers to trade by reducing tariffs. Of course some were less pleased than others by these efforts to open up their markets to hostile competition and set about seeking ways to put new barriers in the way. A good example of these are the various Non-Tariff Barriers to Trade (NTBT), which do exactly what they say on tin; they're barriers to free trade, but they're not tariffs. Generally an NTBT can fall into one of two categories; deliberate and incidental.
Incidental barriers are generally harder to overcome because they are unintended, effectively accidental barriers to trade. For example one of the major problems facing farmers and producers in many developing countries is poor infrastructure. A lack of good road and rail links, a lack of heavy transport vehicles and a lack of quality port facilities often make it prohibitively expensive (if not impossible) to move goods from their source to the best markets, including overseas. Corruption, which you would hope would be unintentional, can also provide a barrier to effective trade.
Deliberate NTBT are barriers to trade that have been specifically set up by a country to restrict the flow of certain imports and are frequently a lot harder to break down for the simple reason that the country in question has no desire to remove them. There are lots of methods of deliberately putting up barriers aside from tariffs such as having a quota system that caps the total number of imports at a given quantity. A way of effectively imposing a tariff without actually calling it that is by forcing goods to be held in a special customs area for a set period of time, with the host country charging a storage fee based on the size and type of goods. The EU however tends to go for the more slimy and very EU method of obstructing free trade; over regulation.
Now we do have to be somewhat careful here because sometimes regulations that are claimed to be "red tape" aren't really (see the bit earlier about the Working Time Directive). But many of the regulations imposed by the EU are well accepted as being designed primarily for the express purpose of increasing the costs of imports in order to protect businesses and suppliers within the EU itself. Take that bit about the bananas earlier. Regulating the size, quality and appearance of the bananas effectively excludes a certain portion of bananas from around the world (including some inside the EU) from ever making it onto the market. Rather than just allowing market forces to take over as consumers decide for themselves which bananas they are happy to pay for and how much they're willing pay for them, the EU is effectively stepping in and arguing that it knows best.
This imposes additional costs on people looking to import Bananas into the EU from countries like Ecuador, the world's largest supplier of the fruit. It's estimated that annually somewhere between 20% and 40% of all the Cavendish variety of Bananas produced for export worldwide are dumped by growers because they fail to meet standards such as those laid down by the EU (caveat lector; supermarkets have their own standards about what is and isn't acceptable for sale and have an equal role to play in causing the destruction of what is otherwise perfectly good fruit, as does the large US market). Just think about that for a second; 20-40% of a perfectly good product thrown away because it doesn't meet some arbitrary standard of length, straightness or width. Let's just hope the EU doesn't get any ideas in the future about regulating penises, otherwise a lot of us are in trouble...
The EU has some far more clever tricks than that up its sleeve however. Take for example "maximum residue levels", basically a fancy way of saying the amount of chemicals such as pesticides that are left on a piece of food by the time it reaches consumers. It is entirely legal under World Trade Organisation (WTO) rules to stop food being imported that fails to meet certain local standards of contamination and residue. The EU has long used what many considered to be artificially strict rules about contaminants in order to lock various producers out of its markets. For example it took the EU around 12 years to accept the more lenient UN approved standards on the presence of aflatoxins, a carcinogenic chemical sometimes found in foodstuffs like nuts and dried fruit. This is despite evidence that had been kicking around for a long time showing that reductions of the chemical to EU approved levels would save around two deaths a year... per billion people. Given the population of the EU that would mean an average saving of less than one person a year. Yet in 2006 the World Bank estimated that the cost to affected African exporters of complying with the EU standards would have been around $670 million per year.
Issues such as these are generally covered in international trade as Sanitary and Phytosanitary (plant health) (SPS) measures. SPS measures have been cited by countries all across the world as significant barriers to trade with Europe. If we go back to bananas yet again, while large exporters in Ecuador cite tariffs as their biggest gripe, smaller producers often cite the overly tight SPS measures implemented by the EU as an important barrier to trade. Many simply don't have the resources to meet these requirements given the smaller scale of their operations. For all the EU's big talk about helping developing countries, its actions speak louder than its words, and it's frequently cited by developing countries as being one of the worst offenders when it comes to imposing NTBT.
Leaving the EU would allow the UK to liberalise its markets by removing many of these barriers, allowing exporters in many developing countries to access the UK market for the first time and driving down costs for those that export to the UK already. Being removed from the EU would also allow the UK to lift tariffs on products that the UK itself doesn't produce, such as the now much talked about bananas. And that's an important point to consider - the fact that certain products are currently tariffed which the UK itself doesn't produce - because it helps to partly explain why the EU, like the US, takes such an eternity to sign trade agreements with other countries. The EU needs to get approval from its members for any agreement, so it has to act carefully when discussing which barriers to bring down lest it annoy domestic producers and expose them to lower priced foreign competition. The UK would have to do the same of course, but the list of products it need concern itself about drops significantly compared to the EU when you consider that you're now negotiating for just one country and one economy, and not 28. Lowering tariffs on wine, grapes, oranges and yes, bananas, (to name a few) are suddenly not a huge concern.
But how would an independent UK stack up on the international trade scene? How can a country of around 64 million people with a Gross Domestic Product (GDP) of $2.7 trillion per year compete vs the EU, with its current population of over 508 million people and annual GDP estimated at over $19 trillion?
Trade and the EU
Well, let's talk New Zealand for a second. New Zealand has a population of just over 4.6 million people and annual GDP estimated at just $173.2 billion. That's about 1/13th of the population of the UK, or 1/110th the population of the EU. It's economy is approximately 15 times smaller than the UK's, and around 109 times smaller than the economy of the EU. So what's so interesting about New Zealand? What does it have that the UK and the EU don't?
Answer; a free trade agreement with China.
Yes mighty New Zealand has a free trade agreement with China, something which the EU has not yet got around to. I mean, China is only the largest economy in the world after all. What possible benefits could that bring? Now you may be tempted at this point to think that New Zealand as the smaller partner in that deal got a bad hand. That the Chinese bent them over a barrel and demanded all for practically nothing in return. This is after all precisely what the remain campaign frequently warns us will happen to the UK if we were to go it alone on the world stage. That the UK would be bullied by bigger nations and ignored by others. Or put to the back of the queue in the case of the US, as Barrack Obama warned.
And you'd be dead wrong. New Zealand managed to secure the removal of duties on 96% of the products that it exports to China. 96%.
That's because despite the fear mongering of the remain campaign, generally countries will not drag their feet over trade deals that are clearly beneficial to both parties and that are reasonable in their scope. It seems the politicians in Brussels have gotten so used to dragging their feet over opening up the EU to foreign suppliers that they've forgotten that not everyone in the world is as resistant to change and freedom of trade as they are. Even David Cameron himself visited China in June of 2014 and came back with signed deals worth £14 billion (NB; most such deals would have been agreed in advance, he was basically there to dot the I's, cross the T's and sign the paperwork).
While remain campaigners assure us that the EU is our largest trading partner, they forget that trade with China alone has more than doubled since 2009. The world is changing. People are finally starting to acknowledge that while growth in Europe is generally slowing, growth in Asia and the Pacific continues at a solid rate. Even Africa with all its troubles is growing steadily. It's estimated that by 2030 around 90% of global growth will have occurred outside of Europe. By persisting with its anti-free trade approach the EU may protect some of its domestic industries for a while, but in the long run it will be the one that loses out. And if we stay in, the UK will lose out as well.
"But Chris, if we leave the EU they will slap tariffs on all our exports and begin a trade war we can't win!"
First of all, calm down you alarmist wally. Secondly, no they won't. Not in the slightest. How can I be so sure? Because the World Trade Organisation (WTO), which both the UK and the EU are parties to, simply doesn't allow it. In fact the first and most important principle of the WTO is the "most favoured nation" rule. What this means is that countries have to offer the same deals to everyone as they do to their "most favoured nation" (a status which all WTO members grant to each other by default). If you strike a deal with one WTO member to reduce tariffs on a product or service, then you have to grant the same reduction to all other WTO members. This would mean the UK would immediately have the same access to the EU market as anyone else. Further, the EU would not be permitted to impose higher tariffs specifically on British goods. It would have to up the tariffs for everyone, or not at all. And any time the EU signed a free trage agreement with another WTO member that lowered certain tariffs the UK would immediately benefit from those same reduced rates.
The truly delightful thing about all this is that the UK imports more goods from the EU than it currently exports to it. So not only would any kind of trade war harm the EU more than it did the UK, but the UK would most likely be able to generate sufficient revenue from tariffs on EU goods to reimburse the tariff payments made by UK exporters. As UK companies already match EU standards for their products, no UK company should really face any undue trade barriers in the short term. In the long run, as UK regulations drifted away from those in the EU, companies might have to produce two different products essentially in order to meet EU standards, but for an advanced and wealthy economy like the UK this shouldn't really be that much of a problem (there are almost as many different plug sockets in the world as there are countries for example, a problem already dealt with by modern manufacturers).
Of course it doesn't have to get ugly in the slightest. The day after the referendum, providing people vote to leave, the UK will not immediately become an independent country once more. The EU rules set out a time table that gives the EU and the UK two years to come to an amicable agreement. After that the UK is just dropped from the EU. Some EU commissioners and bureaucrats have indicated that they will not play ball with "deserters". That's fine by me. I'm not sure what they really think they can do. Yes they can block an agreement over future trade between us, or any attempt by the government to try and get a deal similar to those of countries like Norway or Switzerland (a sort of half in, half out type deal that I'm not especially keen on) but that would really be academic at that point. The UK would be leaving and it would be doing so knowing that the basic terms on which it will trade with the EU will be no worse than any other WTO member. These threats from the EU have - to my mind - very little substance about them.
But what of the economy in general though? What might happen to the UK after leaving the EU and setting off into the big wide world? The leave campaign say everything will be fine and the UK will prosper greatly. The IMF thinks the UK will go into a recession. Who's telling the truth?
The Economy
Short answer; nobody knows for certain. The IMF for example has a quite spectacular failure rate for predicting future economic activity. Its managing director Christine Lagarde has also been criticised for her comments given her close ties to many EU officials. She's also facing trial for negligence by a French Court that specialises in ministerial misconduct, for actions she took during her time as the French finance minister. Whoops. There also seems to a bit of the "hedging your bets" about the IMF's comments. For example in the same breath as warning about a collapse in UK house prices in the event of a "brexit", they also issued warnings about the general health of the UK economy even if it voted to stay in. One of these warnings was that the UK housing market was showing signs of overheating and might require action by the Bank of England. Put another way, they think that houses in the UK are overpriced currently and that prices could fall significantly in the near future, irrespective of what actually happens in the referendum. Which is a bit like watching someone drive a car at a brick wall and then predicting in a sagely tone of voice that a crash is about to take place.
But why is it so hard for economists to predict what's going to happen though? How come nobody can just give the public a straight answer on the future of the economy? To answer that, let's talk football for a second.
Imagine you took somebody who knew nothing about football, a martian perhaps, and asked them to predict the scores of a weekends worth of premier league games; home win, draw, away win. In each case the martian would have a 1 in 3 chance of getting the result right by pure, blind luck. Now what if we showed that same martian the current league table, assuming that perhaps half the season had already been played. Based off the respective positions of the teams we would expect him (or her) to make a slightly more informed choice, in theory at least. Now what if we gave the martian the teams win/loss/draw records for the season, along with goals for and against, and the results for their last five games. We might expect the martian to make a set of even more accurate predictions.
And so on and so forth. More information, better predictions. At least in theory. This is helped by the fact that football is governed by a set of rules that don't change from game to game. The pitches in the premier league are all of approximately the same size. Each game lasts around 90 minutes, split in to two halves of 45 minutes plus any injury time. Each team starts with eleven players (though they don't always end with as many). Each team has the same number of substitute players on the bench and can bring the same maximum number of substitutes on during the course of a game. The rules about what constitutes a foul and an offside remain the same from game to game (though the referees interpretation of the rules often changes...)
Now imagine if we started tinkering with the rules. Imagine if at the start of each game each player had to roll a six sided dice and on a roll of a one he wasn't allowed to play in the game or be replaced by a substitute. What if before the game the referee flipped a coin and asked the away team captain to call it in the air; you win the toss, you get an extra player. Lose the toss and the other team gets an extra player. What if every time a player scored they had to answer a general knowledge question, and if they got it right the goal was worth two instead of one. It would be pandemonium. The results would be almost impossible to predict in advance on a reliable basis because you would have no way of predicting which team would have the advantage at the start of the game.
That's economic predictions in a nutshell. A horrendous mess of over lapping factors and variables. One change here affects something else over there. A government decides to introduce a new tax and ends up manipulating its population's behaviour in an unintended manner. The reason nobody can accurately predict what will happen is simply because nobody can reconcile all these different variables in to one, stable model. And the further in time you try to predict, typically the less accurate the prediction becomes as the effects of an unexpected variable or incorrect estimate are magnified (see the earlier estimate of 90% global growth outside Europe by 2030).
What we can do is look at risks, which finance ministers have an annoying habit of calling headwinds, because apparently that's a less dramatic and imposing way of saying risks. Or "trying to hide the truth" as it's sometimes known. To understand risks let's look at Scotland and its independence referendum campaign in 2014, because this is also a fantastic example of why economists are often untrustworthy as a source for economic forecasting. Or "shit at their jobs" as it's sometimes known.
One of the major debating points of that referendum was oil, specifically who it belonged to and how much it would be worth in the future. Alex Salmond, the Scottish First Minister at the time and leader of the out campaign, was absolutely adamant that oil was a benefit to Scotland and dismissed any kind of doom mongering about possible reductions in the price of oil. He batted away warnings from some that fracking for shale gas in the US and potentially in England could harm the Scottish economy by driving down oil prices while Scottish North sea oil was progressively getting more and more expensive to drill. He ignored warnings that his budget plans for an independent Scotland were based heavily on tax revenue from oil and that a drop in the oil price could potentially leave his government with a massive shortfall which would either have to be made up by increased taxes or reduced public spending. He crowed about the negativity of the pro-UK camp, calling it absurd that they would see oil as a negative when he saw it as an asset to Scotland, a nice bonus to have on top of everything else. After all, Alex Salmond had been an oil economist at the Royal Bank of Scotland for many years.
And then he lost the referendum.
And then oil prices crashed.
A lucky escape it would seem for Scotland as a newly independent Scottish government would have missed out on billions of revenue. Or would it have? Alex Salmond took a bet in late 2014 with the former political editor of the Sun newspaper Trevor Kavanagh that Brent crude prices would not dip below $50 a barrel in 2015. Salmond lost. But he was quick to point out to critics that the economic strategy he had set out for a potentially independent Scotland was actually not in jeopardy because Scotland would not have achieved full independence until 2016, by which time he was confident the price would recover. So confident was he that he bet Kavanagh another $50 that the Brent crude price would recover above $50 per barrel by the end of 2015. He reminded Kavanagh that he was a former RBS oil economist. And as we know, economists earn their living by correctly predicting the future path of the economy.
Salmond ended up owing Kavanagh another $50.
As I type this Brent crude is almost back to $50 per barrel, having dropped into the twenties in the early part of the year. To get to where it is now has required a massive amount of disruption such as recent damage to Nigerian pipelines and the affect of the wildfires in Canada on its oil producing ability, causing a reduction in global output and hence a price rise. And it's still about $60 per barrel short of where Alex Salmond needed it to be to make his revenue numbers work. So what does all this actually tell us that's useful to assessing the impact of a British exit from the EU? Well a couple of things.
Firstly, that even someone who worked as an oil economist for many years at a major global bank, and who then went on to become the first minister of a country that relies substantially on oil for its revenue, and who then went on to produce an economic plan that required extensive studies of the future of the oil market, couldn't predict the movement in the price of that one commodity. Notice there I said one commodity. We're not even talking about the complexity of predicting the future of a whole economy, just the one commodity. We're talking about someone who was a leading expert on oil, who would have spoken to every contact he had in the business about the future of oil, and even then he couldn't accurately predict what would happen to it. Indeed, his prediction was so far off the mark that had he been trading peoples money on oil futures the fund would now be virtually bankrupt and he'd have been out of a job. Predicting the future movement of an entire economy is even more difficult than that. Economics is a series of educated guesses for the most part, not a science.
Secondly, that economic predictions are susceptible to unforeseen events. Someone at the start of 2016 would have had difficulty seeing that oil prices would move to their current position based on the information they had then. Predicting the exact timing of damage to Nigerian pipelines and a forest fire in Canada are not something your average person can do. The global economy is rife with this sort of thing. Events that are completely unexpected, completely beyond prediction, can have a massive influence on the path of the global economy as a whole and especially in local economies. You can try and hedge against the risk of such events, but you cannot realistically expect to anticipate them with any degree of certainty and thus make plans based around them.
Thirdly, that the further out your predictions go, the more likely you are to get things horribly wrong. Trying to predict where an economy will be in six months time is tough. Two years is tougher. Twenty years is even tougher. Fourth and finally we can see that people will inevitably allow their biases to creep into their predictions. Granted, Alex Salmond might not have campaigned for independence if he could have foreseen the drop in oil prices, but his personal bias and desire to get out of the UK helped him to see rosy forecasts through even rosier tinted glasses. Similarly those opposing independence were likely on that side of the fence in the first place because they saw the potential dangers of leaving the UK, but their personal bias would have driven them to view every piece of negative data about possible Scottish independence with even greater fervour.
So when we look at the referendum on the EU and listen to both sides making their economic predictions we can be fairly safe in assuming that those making bold predictions of huge success outside the EU are probably being too optimistic, and those predicting the death of the UK if it leaves are probably being a bit over dramatic. But which one is it? Do the scales slightly tip towards the positive or slightly towards the negative?
Hopefully by this point you've cottoned on that the answer is; we just don't know for certain. Nobody does. So what follows comes with a massive dose of caveat lector ("let the reader beware"). This is my opinion, I'm intending to vote leave at the referendum, and I don't know for certain what is going to happen any more than anybody else does. You have been thoroughly warned.
Everyone will be millionaires within a year!
Ok, so that's unlikely.
In the run up to the referendum we're likely to see investment slow in certain sectors, as will the creation of new jobs. Corporate finance, confectionary manufacturers and some drinks businesses are likely to be the most affected. Automotive, aviation, and pharmaceuticals to a slightly lesser degree. SMEs that genuinely do a lot of business within the EU will also be affected. Until people know whether it's going to be leave or remain anyone that has to base their future personnel or investment decisions on the outcome is going to hold on. But a good chunk of the economy should keep chugging away as normal as frankly the result doesn't affect them immediately. Even post referendum we'll have to wait and see what kind of deal is struck and how long that deal could go on for. In some respects this poses a danger, as the EU dragging its heels over an exit deal could stifle some investment. But fundamentally we should get an idea fairly early on of where this is going, i.e. what the government is trying to negotiate and how the major players across the EU feel about this.
In the short term then I can see growth slowing, potentially carrying over into 2017. The reality is though that the UK economy has been doing pretty well compared to the rest of Europe and is likely to continue doing so, albeit at a slightly more sedate pace. The interesting bit really comes in 2018 when either a deal has been reached and the UK leaves the EU with some kind of agreement in place, or it just falls off the EU map. Either way this should have been ample time to get the gears in motion for a few limited scope trade deals with other countries and given the UK government enough time to start rolling back some of the tariffs on imports, opening up the UK market and lowering some food prices. By this point oil is likely to have finally recovered much of its pre-2015 value so prices in general will have gone up a bit.
From here on out is where I think things will get interesting. The UK will still face challenges with tapping into some markets. Earlier I mentioned the Non-Tariff Barriers to Trade in some countries such as poor infrastructure. Much of that will still be there. But the UK will now be moving at a pace of its own choosing, using further reductions in tariffs and the breaking down of our own barriers in order to gain better access to some of the world's more dynamic markets such as China. This will be a China that over the next decade is going to be trying to rebalance its economy from being a low value added manufacturing economy to one that seeks to improve its internal market, raising living standards and wages. As it does so the countries around it such as Malaysia, Vietnam, the Philippines, Myanmar and Indonesia will likely begin to take on some of its old role as the worlds low cost manufacturing base. The UK will be poised to both win contracts helping China convert its economy to one that is more service based while also helping the developing economies of the region to grow their potential as exporters.
Africa and Latin America are also likely to continue growing at a decent pace, though that poor infrastructure will hurt their development. But again the UK will be poised to now sign preferencial trade agreements that are not concerned with protecting vast swathes of the EU's varied economic activity, and in return the UK can help these countries with vital services, expertise and investment on their path forward. The UK's place as one of the great financial centres of the world, with lots of capital to spend and lots of skills to offer, will ensure it one of the leading roles in African development over the coming decade.
This is all helped by the nature of UK exports. The UK produces large amounts of high value machinery and vehicles, everything from precision medical instruments to jet engines for aircraft to the iconic Land Rover. Many of these goods contain a built in comparative advantage for the UK in that trademarks such as Rolls-Royce (the airline engine builder) and Jaguar are simply irreplaceable, along with the products they make being unsuitable for production by low cost, low skilled labour forces. Safety, reliability and quality are hallmarks of many of these UK products, a reputation that takes many years to acquire. Other large exports include pharmaceuticals, which are typically protected by extensive and long lasting patent systems which make cheap reproduction difficult, as well as gems and precious metals which are exported extensively to non-EU Switzerland (£12bn a year on average).
So although growth may slow in the short run, I see the UK prospering in the long run. Annual growth rates a percentage point above current forecasts for the UK should be achievable from 2018 onwards due to lower prices and higher employment rates, along with a growth in non-EU trade. A reasonably favourable exit deal with the EU might put another percentage point on top of that, as lower costs at home translate into businesses better able to compete in the European markets than they are even now.
And what of the EU? Where do they end up in all of this?
The future of the EU
Personally I think one of the biggest myths that is pushed by the remain campaign is that by leaving the EU we'll be missing out on a great cocktail party and be reduced to slumming it at home in front of the TV with a beer and a microwave pizza. Because I for one see the EU as something of a basket case. It's a disaster waiting to happen and one of the best arguments for leaving the EU is to get away from the centre of it before it implodes. In fact perversely the biggest risk of a "Brexit" might actually be caused by the "Brexit" itself
It is irrefutable that the EU is working towards closer integration, the dreaded "ever closer union" despite the resistance of some countries and the empty assurances of people like David Cameron. The Euro is key to this project, one of the reasons why all new member states to the EU will be required to take it on. That and the fact that integrating new countries into the Euro helps to depress its value and keep German exports competitive. Which is also the main reason that the Germans (well, the German government at any rate) are so keen to keep pumping good money after bad into Greece to keep its economy afloat. Because their own economy is tied to the future of Greece and the Euro.
Prior to the introduction of the Euro Germany was running a trade deficit. Not a huge one, just a few percent of GDP. France and Italy by comparison were doing ok, running small surpluses. This was down to the relative strength of their currencies. The Euro changed all that. By locking Germany into the same currency as some of the weaker states in Europe it effectively devalued the German currency overnight and made its goods much cheaper to buy. At the same time the currencies of the other Eurozone members were effectively strengthened overnight, improving their ability to purchase the now cheaper German goods. And therein lies the problem for Germany. The Euro both helps to keep German exports affordable while also maintaining the purchasing power of the other members. Germany's own finance ministry has estimated that if it left the Euro and went back to the Deutschmark the resulting hike in the cost of German exports combined with the collapse of purchasing power for other Eurozone members would cost Germany as much as 10% of its GDP in the first year.
But even basket case economies like Greece, Portugal, Spain and Italy can't hold the Euro back. For all their weakness, Germany's strength continues to drive the value of the Euro up. The only way to keep suppressing its value, thus keeping German manufacturers in business, is to keep expanding. Every new country that joins the Euro pushes its value back down again, while at the same time creating a fresh supply of potential customers for German goods with suddenly increased spending power. The addition of Turkey to the European Union - and thus the Euro - would add another 80 million consumers with a wad of freshly minted Euros burning holes in their back pockets. At the same time the addition of Turkey would drive the value of the Euro back down again, making sure that German exports remained competitive across the globe. Wrapping Turkey up in the EU system, along with all the regulations that entails, would also immediately begin to erode Turkey's current competitive advantage over other EU member states. To the benefit of Germany most of all.
On the other hand if someone like Greece were inspired by a "Brexit" to leave the Euro the results could be serious for the richer countries of Europe, especially Germany. The Greeks would be able to return to the drachma and devalue it down to a more appropriate level. Their ability to buy German pharmaceuticals, cars and washing machines would fall off a cliff, as would their ability to buy French meat and Italian machinery. But more importantly their ability to actually sell goods to other countries would increase dramatically. Tourism into Greece would become significantly cheaper. And the whole thing would open the flood gates for a series of countries to dump the Euro and reset their currencies back to a normal rate. Which in turn would reset the German currency, or the Euro if there were still people mad enough to share it with them, back to a normal rate. The results would be much as the German finance ministry fears, though the figure of 10% of GDP lost in one year is up for debate (it sounds a little too high for my liking).
Fundamentally this is the state of the EU that desires ever closer union with the UK. A basket case currency that cannot go on indefinitely adding members (though they're certainly trying) weighed down by a regulatory regime that crushes the competitive ability of weaker economies when they join, ruled over by a bureaucracy that it is determined to hinder the ability its people to get free and fair trading conditions with the rest of the world, and one that looks destined to disappear up its own arse over the next decade if it's not careful. The level of mismanagement at the top of the EU would have made the old British Rail blush. These are not the sort of people I would want to be running the UK economy and making its laws in the future, which is the inevitable end goal to which the EU is committed. Even being tied to them as loosely as we are now is - in my opinion - detrimental to the country's prospects. I hate to think where we'll be ten years from now if we vote to remain.
On the other hand if we leave, we might find ourselves watching world war three break out. Isn't that what Cameron et al have been warning?
Defence and Security
That is of course, to anyone with half a brain, patently horseshit. The idea that if the UK left the EU then European countries would immediately start invading each other is both stupid and laughable in equal measure. As is the oft touted idea that the EU has guaranteed peace and security in Europe since the last world war. I think NATO chiefs, and specifically the US, might have something to say about that. I'm not sure if the EU leaders realise this but at the conclusion of the last world war in 1945 the former allies ended up squaring off against each other across different sides of Germany. The UK, US, France and other allies took the western portion of the country. The Russians took the eastern portion. And then gradually both sides expanded their influence across the continent and settled down into a 45-year stalemate. The reason Germany and France haven't been to war since the demise of Hitler has nothing to do with the EU and everything to do with the sizeable contingent of NATO forces that have been camped on German soil ever since. Oh, and the French possession of an independent nuclear deterrent.
When the Berlin wall was dragged down and consigned to history it was NATO that stepped in to fill the void, integrating various former eastern bloc countries into the alliance and extending to them the protection provided under Article 5 (an attack against one is an attack against all). Germany can try invading France again if it likes, but once the French are done turning German tanks into glass as a warning, the rest of NATO is likely to descend on Germany in a fairly rapid manner and put to bed any other bellicose tendencies it might have. Poland could try a mirror universe rerun of the 1939 invasion, this time being the aggressor rumbling its tanks over the German-Polish border, but they'd have to go through a mixed German-British-US force to get anywhere. And that "anywhere" would likely be "nowhere".
Not that any country in the EU has a military big enough to mount any kind of serious invasion attempt of another member state anyway, NATO or no NATO. The UK is one of the larger military spenders in Europe and would struggle to put down a division on the continent at current levels. By comparison the first wave of the Normandy invasion involved 5 divisions, plus three parachute divisions. Even accepting that over time the various countries could rebuild their militaries in preparation for this envisioned war, what does David Cameron and Angela Merkel consider to be the rationale for it? Why would a UK exit from the EU suddenly spark this desire for Europe wide conflict? The whole thing is absurd and smacks of the absolute desperation of the remain campaign.
Outside of the EU the UK would continue to operate within NATO as normal. Keep in mind that the US is by far the biggest contributor to NATO and it is most certainly not an EU member. There is no sound reasoning or rationale as to why EU members would suddenly start trying to obstruct UK contributions to NATO. Given the significant combat experience built up by UK forces, mixed with its high levels of training and modern equipment, the UK adds value to NATO that few EU nations can match. Most importantly of all, the US understands this and would be unlikely to tolerate any kind of obstruction from pouting EU members.
Security wise it is laughable to claim that leaving the EU would make the UK less secure. I'd be interested to know how Theresa May and co. came to that conclusion. The idea that EU countries would stop sharing intelligence with the UK - a country renowned for the quality of its own intelligence services - is just bizarre. Given the reputational damage suffered by Belgium due to accusations by France in the wake of the Paris attacks last year it would certainly take a brave security minister in an EU country to allow crucial intelligence to intentionally sit on a desk and not be passed on to the UK, just as it would be unthinkable for the UK to sit on similar intelligence and not inform a European neighbour of a potential threat.
On the flip side, the claims made by people like Nigel Farage that the UK would be immensely safer out of the EU should also be treated with a degree of caution (as should anything in general that comes out of Nigel Farage's mouth). It should be remembered that almost all terrorist attacks perpetrated or plotted on UK soil over the last decade by Islamic extremists have been carried out and/or planned by UK citizens. Leaving the EU will not suddenly erase the threat overnight from home grown attacks. There is after all a very good reason why they're called "home grown", and it's not because they stepped off a plane from Romania or Bulgaria.
That said, leaving the EU does offer a measure of additional security, though its value should not be over stated. Removing the UK from the rules regarding free movement of people across the EU would offer a layer of protection by preventing potentially dangerous individuals who enter the EU through another country and then settle from obtaining automatic rights to enter and remain in the UK. The main benefits would be derived not necessarily in the fight against terrorism but in the field of crime prevention. Criminals wishing to enter and/or stay in the UK would no longer have such easy access and it's likely that leaving the EU would reduce crime committed by foreign nationals in the UK. Up to a point at least.
Of course lots of people are salivating at the prospect of the UK being freed from the European Convention of Human Rights. I'm not sure diminished protection of human rights is something that people should really be looking forward to, especially given the current governments desire to snoop seemingly into every corner of peoples personal lives. Yes, every now and again we get stuck with some Jihadist nutcase or foreign rapist who we can't deport and end up having to prop up in jail at taxpayers expense. But the number of such cases occurring at any one time is normally quite low and the protections offered by acts such as the ECHR are important in preventing the government from having a free reign to nose about in people's business where they're not wanted. The glee and relish that the current government seems to take in the prospect of being able to one day tap into everyone's phones and e-mails without a warrant is far scarier and more offensive to the principles of liberty than the inability to deport a would-be terrorist for a few years until we gain proper, binding assurances that he will not be tortured if we hand him over.
All in all leaving the EU is likely to have a marginal affect on the safety and security of the UK, with a slight lean towards the positive. If you're basing your voting decision on this issue then first of all, I hate to tell you this, but you might be a bit of a wally. Secondly there really isn't that much in it I don't think. Leaving the EU might make you marginally safer, but then again there may be an unforeseen circumstance that actually does the opposite.
And that, finally, is that. In retrospect I probably should have broken this up and done it in parts. Bit late for that now. I'm off, but don't forget to drop a comment on the article and share this on Twitter and Facebook etc if you can. I'd be much obliged.
I fancy a banana now for some reason. If you'd like to read the full text of regulation 1333/2011 then you can by clicking on this link here.
