EU’s Michel Barnier Clears Throat to Tell the UK It Won’t Get a Special Deal…After God Knows How Many EU Leaders Have Already Said That

The UK press is in a tizzy tonight over the EU’s lead trade negotiator Michel Barnier having had to stoop to make extremely explicit a position the EU has taken from the morning after the Brexit vote: any future relationship has to fit within the framework set by existing deals. The most common expression has been “no cherry picking” which along with the many other variants, EU leaders have including in public pronouncements on Brexit.

An exclusive interview with Barnier in Prospect (hat tip Richard Smith) set off the pathetic spectacle of the UK press and officialdom reacting badly when forced to swallow even a tiny dose of Brexit reality. Key sections of the interview:

What about his determination to impose the sequencing of the negotiations rather than discussing immediately about trade agreements as the British government had hoped?

“The British had the idea they could mingle everything: the price for past commitments, the financial issue and the future. We said: first we settle the past, like in any separation, then we start talking about the future. So parallel talks will start probably next March. The actual negotiations on the future relationship will only begin once the UK leaves the EU.”….

Barnier continues: “They have to realise there won’t be any cherry picking. We won’t mix up the various scenarios to create a specific one and accommodate their wishes, mixing, for instance, the advantages of the Norwegian model, member of the single market, with the simple requirements of the Canadian one. No way. They have to face the consequences of their own decision.”

As we said earlier, there’s be nothing new in what Barnier said above. WTO and EU trade officials have said that the UK cannot negotiate a new trade pact with the EU until it is a third country, meaning it has left the EU. Yet Barnier seems to be making a one-man PR push to try to cut through the fog in Britain. He said pretty much the same thing a few days earlier. Per Politico:

By the time the U.K. leaves the European Union it will only be possible to draw up a “political declaration” on the future framework for trade with the bloc, not a full trade deal, the EU’s chief Brexit negotiator Michel Barnier said Tuesday.

Speaking at a press conference after a meeting of foreign affairs and EU ministers in Brussels, he said there is not enough time to do anything more detailed, but also that agreeing a full trade deal would be prevented by legal and technical constraints.

His comments were in stark contrast to those of the U.K. Brexit Secretary David Davis, who told the BBC’s Andrew Marr program on Sunday that barring “minor tinkering” by the time of Britain’s exit date of March 2019, “we would expect the substantive trade deal to be struck.” He said that the formality of signing would need to happen “one minute, or one second, after we leave.”

Mind you, there was never any basis for thinking the EU would go along with David Davis’ “sign right on the heels of official Brexit” fantasy. If he had still been hopeful, all he had to do was read the December 15 guidelines issued by the European Council:

The European Council reconfirms its desire to establish a close partnership between the Union and the United Kingdom. While an agreement on a future relationship can only be finalised and concluded once the United Kingdom has become a third country, the Union will be ready to engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship, once additional guidelines have been adopted to this effect. Such an understanding sho
uld be elaborated in a political declaration accompanying and referred to in the Withdrawal Agreement.

Look at all the words clearly signaling that any talks that happen in the neighborhood of a trade deal will be at most early-stage clearing of some underbrush.

Even if the EU had wanted to be somewhat accommodating and hash out some preliminary issues before the departure date, the timetable for negotiating trade deals means even this concession, had the EU signaled any receptivity to it, wouldn’t buy the UK as much as Brexit fans have fantasized. The EU’s recently completed agreement with Canada took seven years to negotiate, and it is certain to be less daunting than a EU-UK deal would be. Services are an inconsequential part of the Canadian deal, CETA, while they would be a a major constituent of any EU-UK agreement. Services agreements are more difficult and time consuming to consummate than trade deals.

And on top of that, as Sir Ivan Rogers has pointed out, trade deals have always been done between partners that want to get closer to each other. Concluding one with a party that has an express desire to get further away will almost certainly be more difficult, which means slower.

Look at the timeline. A two or even three year transition isn’t remotely enough time to get a new trade pact with the EU in place. The UK faces a very hard Brexit unless it relents and decides to stay in the customs union (as in a famed Norway-type deal) or the single market. All a transition period does is allow the UK to get some other types of agreements with the EU and perhaps other countries stitched up.

However, a few years down the road can be a very long time in political terms. Remember that May’s snap election was seen as a masterstroke, potentially dealing a fatal blow to Labour? But even a climbdown to a Norway-type agreement, which presently has been ruled out, would still exclude big parts of the UK economy. From Simon Nixon in the Wall Street Journal:

The EEA doesn’t pertain to the EU customs union, all EU free-trade agreements and agriculture, so it could only be a partial solution and would mean striking many other deals.

And the UK would have to agree to the “free movement of people” which would be a bitter pill to swallow.

A companion Prospect article describes why Barnier merely reiterating the EU’s position in an explicit manner so as to hopefully penetrate the UK’s delusion, has produced indigestion. Even though this again is familiar ground to regular readers, it’s still sobering to read a short recap:

Norway represents soft Brexit: it lives by nearly all EU rules…As a result, it can trade in the single market as if it were an EU member.

Canada, by contrast, represents the hopes some hold for hard Brexit…in charge of its own rules on immigration and much else, it has nevertheless struck a deal with the EU covering free trade in goods and a few other ground rules of doing business, such as in government procurement.

May’s whole approach to managing the Brexit process and her turbulent party has been to insist that the choice between Canada and Norway can be transcended….

Instead of a Norwegian or Canadian Brexit, Britain would negotiate its own tailor-made “red, white and blue Brexit”, offering the best of both worlds. The Brexit secretary, David Davis, has been most explicit in suggesting there can and will be a middle way, what he has called “Canada plus plus plus.”

This shouldn’t be a surprise. Barnier is just explaining what the latest European Council guidelines said. Again from that document:

The Union takes note that the United Kingdom has stated its intention to no longer participate in the Customs Union and the Single Market after the end of the transition period, and the European Council will calibrate its approach as regards trade and economic cooperation in the light of this position so as to ensure a balance of rights and obligations, preserve a level playing field, avoid upsetting existing relations with other third countries, and to respect all other principles set out in its guidelines of 29 April 2017, in particular the need to preserve the integrity and proper functioning of the Single Market

I hate to have to keep coming back to this point, but the kerfluffle makes clear that pretty much no one in the UK press, or for that matter, in May’s own government, can be bothered to take the time to read and comprehend a mere four page, obviously extremely important and very clearly written document. Honesty, I don’t know how Banier can keep his cool in the face of such rampant incompetence.

We also find the UK continuing to act as if the EU’s guidelines won’t be binding. The surgically precise European Council guidelines made clear the UK’s transition period would be a standstill: it would be just like being in the EU now, except it wouldn’t get to vote on anything. It would still pay dues and still be subject to all EU rules. Yet ITV News reports that May is planning to negotiate other trade deals during the transition period. Aside from the fact that the Foreign Office is so overwhelmed by Brexit that it is highly unlikely that her Government has the capacity to do that, negotiations like these would violate EU rules.

And that’s before we get to the elephant in the room….before the UK will be permitted to discuss “the future relationship” in a serious way, it needs to finish up its “first phase” work. In other words, the European Council approval of allowing the UK to move to “second phase” issues was qualified and depends on certain actions taking place first. From the final text:

It [the Union] nunderlines that negotiations in the second phase can only progress as long as all commitments undertaken during the first phase are respected in full and translated faithfully into legal terms as quickly as possible.

Translation: the EU might entertain some talk about Phase 2 topics, but nothing will be concluded on them until Phase One is wrapped up. And that means specifically memorializing the “commitments undertaken” as in turning the statement of intent in the Joint Report into binding language. That in turn means resolving the unresolved and unresolvable contradictions in the position the UK took with respect to Ireland. The only way its no hard border solution works is by staying in at least the customs union, which May has repeatedly ruled out.

Now one might wonder why the EU allowed May’s obviously unworkable Ireland compromise to not just go unchallenged but actually be legitimated by featuring it in the Joint Report. Our Colonel Smithers gave a report from a high-level conference he attended:

Both sides were keen to move on / to phase 2 and leave last Friday’s accord as a framework, not a binding agreement, but David Davis’ interview on the BBC last Sunday alarmed the EU27 who now want to have a binding agreement ASAP.

A transition is an EU27 priority, but only to protect itself and give firms time to move from the UK. The EU27 are worried about a cliff edge. With regard to financial services, the Single Supervisory Mechanism’s Sabine Lautenschlager has given firms an idea of what is expected, so no letter boxes and battle readiness from day one.

The UK is OK with a two-year transition and acceptance of new EU rules, but the EU27 are OK with a longer one. Firms see a longer transition as an incentive to move, especially as the capital markets union and other reforms, including proposals to make it easier to shift NPLs from banks to investment funds and for greater Pillar 2 scrutiny of (individual) banks and greater Pillar 3 disclosure, proceed.

On the one hand, both sides appear to have agreed on “transition as standstill” as we had anticipated (negotiating anything other than that would have been a nightmare). On the other hand, David Davis’ reckless remarks about the Joint Report not being binding (which it wasn’t if you read the text) spooked the EU members and they’ve now put the screws on the UK. No one has the foggiest idea how to resolve the Ireland conundrum, yet everyone is marching forward as if something will give.

In addition, note that that a drawn-out negotiating/transition process enables EU companies to take business from the UK in a more cost-effective, less disruptive manner.

In the meantime, the Financial Times published an article which provides new estimates on what leaving the EU will cost the UK economically. Since we have not much of an idea as to when the UK will actually leave for good and what the end state will look like, it seems pretty hard to come up with any reasonable guesstimates, particularly since a disorderly Brexit is a real possibility. Even though that looks like a certainty now, let us not forget that tail events are more likely than they seem. From the Financial Times:

Paul Johnson, director of the Institute for Fiscal Studies, says that “for every 1 per cent of GDP you lose, that’s getting on for £10bn a year of foregone tax revenues”. If 0.9 per cent of GDP has been lost over the five quarters for which data exists, there has already been a £9bn hit to the public finances. So even before the UK has left the EU, the referendum result is costing the UK government more than can possibly be recovered by ending net contributions to Brussels

I’ve never stuck my neck out with a public guesstimate of the cost of Brexit to the UK. However, I am highly confident that the UK will have a markedly smaller economy in ten years if it goes through with Brexit. Colonel Smithers reported that I am not alone:

One economist and bank capital expert said his new employer, a Japanese bank, which is moving to Frankfurt, has crunched the numbers and reckons the UK economy will be 10% smaller by the tenth anniversary of the referendum and the limited social mobility will be effectively frozen.

As I have been saying all too often, it would be better if I were proven wrong. But the fact that so many people in the UK who can get EU citizenship are doing so says plenty of Brits are worried about the downside.

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  1. Colonel Smithers

    Thank you, Yves. Splendid as always.

    With regard to a bespoke deal, a “red, white and blue Brexit”, it has been made clear to the British government, City and academia since at least 2013, including two City events that year where I represented the asset management industry, that the days of the EU allowing such access like for Switzerland and Norway are over. These arrangements were very much of their time, i.e. the EU, perhaps unrealistically, expected the Swiss and Norwegians to get over their concerns by the turn of the century and join the EU properly, so it was less of a bureaucratic hassle to give them the trappings of EU membership then / well in advance. British, French, Dutch and Polish ministers were at these particular meetings.

    It does not matter that the British government is incompetent. The UK media appears to be more concerned with Donald Trump, so does not expose such incompetence. On state-owned Channel 4 news last week, the Brexiteer talking head and presenter kept talking about the EU26 (sic). One of my former managers is a constituent of David Davis. She says she votes for him because he was in the special forces. Last week, in conversations with the head of regulatory risk at a big UK insurer and head of a special situations fund at alternative asset manager, I was told that the EU needs the UK more than the UK needs the EU and there are bigger and better opportunities trading with the US and China. In short, as long as the government can manage the PR, what happens in Brussels stays in Brussels.

    With regard to the exodus, I heard of more departures from these shores of EU27 nationals over the week-end. There are Brits who are alarmed, but don’t have access to an EU27 passport. It was put to me by the person who made the comment about the US and China coming to the UK’s rescue that the US and China provide opportunities for immigrants and there’s a bigger world than the EU.

    I hope to have another update at the end of January.

  2. templar555510

    You and Colonel Smithers ( whoever he is ) may well be right, but both I and Larry Elliott ( Guardian Economics Editor ) voted Leave to give Britain a chance of breaking out of the neoliberal consensus that is now global. One country had to take the lead in this and so far it is only the British who have done so. Do I think that the present government are doing a great job of exiting ? No because like politicians the world over don’t do, they don’t come clean because they are always chasing the vote. But the EU politicians / technocrats ( it’s hard to tell the difference ) don’t give a f…They proved that with Greece . The French and German banks were saved and Greece was the sacrificial lamb. The status quo has to be broken and there is a price to be paid for breaking it . This is about POWER . People commenting on this blog seem to be blissfully, or wilfully unaware of that .

    1. Colonel Smithers

      Thank you, Templar.

      Having worked with and in Brussels for a decade, I despise the neo-liberals and, let us not forget, neo-cons as much as you do, if not more so, and have a lot of sympathy with what you say.

      I didn’t vote in the referendum, but have share the concerns Christopher Dale Rogers, Clive, Vlade and you have expressed. This said, I have never voted in my life despite being eligible for nearly thirty years and wasn’t about to break the habit.

      I have known the Guardian’s Larry Elliott since 1994 – 5 and read his output for longer. He was one of the people who helped me with my masters dissertation on central bank independence. I agree with much of what he writes.

    2. Colonel Smithers

      I forgot to add that I work for one of the banks saved by the sacrifice of Greece on the altar of an EU fantasy. It wasn’t just Greeks, including those yet to be born, who saved my employer, but Plutonium Kun and his compatriots, Iberians and Italians, and the long-suffering British taxpayer by way of RBS, Europe’s AIG.

    3. Clive

      One of the things which is most troubling about the UK government’s complete incompetence in their handling of Brexit for leave voters such as I is that, by their various denials of reality, magical thinking and general all-around sticking their fingers into their ears and saying la-la-la-I-can’t-hear-you is they are threatening to scupper the very outcome they are prima facie trying to bring about.

      On the whole, I am generally quite optimistic about societies’ ability to, when presented with the fact set, even if the inevitable conclusion is that economic impacts will be on the downside to make an informed decision about the trade offs. Escape from the EU’s technocratic anti-democratic corporatism was a key motivation for my eventual voting decision. But it was inevitable there would be losers. With deft policy choices (especially a redistributive fiscal policy, a meaningful industrial policy, a strong emphasis on labour and environmental protection and, finally but most importantly, a recognition that a continued alignment to EU standards and membership of the customs union and access to the single market for a period of maybe around 10 years or even a little longer) these could be ameliorated. In short, leaving the EU is going to be a decade long process of slowly tweaking the relationship and progressively re drawing the boundaries.

      But by giving even the slightest credence to the flouncing-off-in-a-huff exit that the ultras are espousing, the UK government risks a chaotic crashing out which will embolden calls — calls which would in that situation be quite sensible — to re-apply for EU membership.

      Having to crawl back with our tails between our legs begging to be taken back into the fold would not only be seen as validation for the EU’s current idealisation of Project Europe being so all-important that it can merrily trample all other questions, however legitimate such as the upholding of national sovereignty where member states’ citizens have clearly indicated they wish to retain it or how you can’t get carte blanche to throw entire countries under a bus like Greece; it would actually be validation of it because it would show that national sovereignty had demonstrably failed to offer up better outcomes.

      Very short version: very stupid governments doing outrageously stupid things have voters, being overall rational actors, rushing to embrace slightly less stupid institutions like the EU.

      1. vlade

        Your last sentence is the reason why I voted remain – because my trust in a UK government delivering a realisable vesion of Brexit in the super-charged (by Tories, UKIP and the like) environment before the referendum was exactly nil.

        That said, even my expectation of the incompetence were exceeded by a country mile.

        1. Jabawocky

          This sums up my view. Leaving the EU, the Tory right version, leads the UK towards some low tax low regulation no state services hell hole. It’s happening already to a large extent, the main barrier to more hell is those pesky EU laws. Coming in here, demanding we have clean water; demanding workers have 4 weeks paid holiday and maternity pay. We want our country back!

          I still see no route to the utopian brexit of Clive nor has anyone been able to outline one. Much as I agree about all that you all have said about the EU, the UK is mainly leaving the EU because the Daily Mail, the Barclays and Murdoch have no power over its decision making. Much better to a powerful uk executive, outside the EU, with Henry VIII powers quivering on your every word.

        1. vlade

          The requirement to join EUR is way too vague now (“sometime in the future”). Out of a8 states (that joined in 2004, so more than a decade ago) only Slovakia and Slovenia use EUR, and I’d be surprised if any of them joined in the next decade, which is politically a very long time.

          1. Antoni Jaume

            The three Baltic countries also use the Euro, of the A8 only Poland, Czech Republic and Hungary have not joined the Eurozone.

            1. vlade

              Apologies – you are right (while I have a good grasp on CEE area, I know less of baltics than I should – and I persistently forget they were part of A8)

              That said, these countries GDP put toghether is only somewhat larger than the smallest of the three others (Hungary), and in all three of these I’d argue it was done at least as much, if not more, for political than economic reasons (amongst others to cement the ties to EU and separation from Russia).

              So I believe my point on countries being able to avoid EUR for a generation or more despite technical commitment to it still stands.

  3. JayTe

    The British government hand is weak because Theresa May’s gambit on a snap election left her with a weakened hand. See has hard Brexiteers on one side and those who want to remain on the other side who are exacting their pound of flesh while the EU is in a position to play them off against each other. I’m sorry but your view of the EU guidelines being applied to the letter is valid only because of the weakness of the UK government. All one has to do is look at the ongoing financial crisis and more specifically Greece to see how much law and guidelines will go out the window when faced with an existential crisis.

    As to your view about where the UK economy will be in 10 years, this will only be the case if the UK government continues with the same failed neoliberal policies that are wrecking havoc on the majority of people’s lives in most western economies. It’s the epitome of continuing to do the same thing (as is the EU) and expecting different results. Are well paid manufacturing jobs coming to EU countries? No, there might be some jobs that come to the UK but many more will locate outside the EU. Will fintech jobs be driven out of EU countries as they realise the existential threat of blockchain and cryptocurrencies to the status quo? Yes, because the EU politicians and even EU country politicians are completely beholden to big banks. Will health care costs continue to explode as the fascistic relationship between politicians and pharmaceutical and big agriculture companies continue to cause the degradation in people’s health (the most recent EU decision to renew glyphosate being a glaring example of this)? Absolutely. Will the debt levels in EU countries continue to grow? Absolutely? Are the EU leaders inclined to resolve any of these issues? Absolutely not! Why? Because it’s the corporations that put the people at the European Commission in power only to serve their interest. Are the UK leaders inclined to resolve any of these issues at a UK level? No. Is there a way for UK politicians and people to evolve these issues? Yes. By bringing in more decentralised consensus based solutions based around local direct democratic solutions than would ever be possible at an EU level. This would require acceptance of the changes that are being brought forth by open, decentralised, borderless technologies (i.e. blockchain) that work based on consensus across the population. Will it happen? Don’t know.

  4. NT

    Ofcourse the UK have been incompetent (the Govt remind me of Dad’s Army. David Davies as Captain Mainwaring) but the EU are just as bad. It would be easy to do a trade deal with UK. The UKs rules are already harmonised with the EU etc. Its just politics.

    But the EU project is really about politics now not just trade anymore. Hence arguments about taking refugees etc etc. Ofcourse there will always be politics in trade it was always thus.
    The UK when they went in were told the EU was primarily a free trade body but it has become more and more a political entity and that is primarily why the UK voted to leave when the politicians foolishly gave them the chance.

    I suspect if any of the southern European economies like Greece, Italy, Spain were in better shape and not dependent on the EU for injections of aid the people would leave as well.
    EU now with the euro is primarily for the benefit of Germany’s trade and Germany’s business leaders. I’m sure a deal will be done to allow BMWs, Audis and Mercedes to continue to flood into the UK. -)

    I remember in the early 90s (before the euro) when I had a base model Audi as a company car and was perceived as being very successful. Today Audis are as common as Vauxhall company cars in the 90s.

    1. vlade

      Yves keeps bringing this point again and again. Pretty much always trade treaty means getting closer. UK wants to get away from the EU regulation. So your point of “UK rules already being harmonised” is irrelevant if the UK government says “but we want to be able unilateraly change it, and still keep the benefits”.

      Which NO party that has any leverage would agree to.

      Your similar point on the “flow of BMWs to the UK” – *sigh*. IT has been shown time and time again that
      a) Germany (political and business) is willing to take sacrifices for what they see as a long term goal (that being no easy rides for leaver)
      b) hit to German economy is going to be multiples smaller than the UK one.

      1. NT

        I don’t disagree with you about the hit to the UK economy “sigh”. The fact is the euro has benefited Germany in reducing the price of their cars by 40% meaning it cheaper in China, UK, US everywhere. That is why US complain about German massive trade surplus.
        In fact because we remain on the pound and have seen it fall by 12% we actually have a balance in exports and imports in the motor sector i believe, well at least assembled cars maybe not parts.

        If they were still on the Deutschmark it would strengthen and their goods would be much more expensive giving other producers more of a chance. And just like in the early 90s only rich people would afford german cars if they were 40% more expensive.

        All the countries in the EU are realising that the Euro is just a massive boost to the german export machine and no benefit to their own economies as they can’t compete with german goods priced in euros.

      1. Synoia

        But the EU project is really about politics now not just trade anymore.

        The EU changed, or evolved, over the last 40 years.

        Now its about Empire, not politics.

        The Greeks could no leave, as was discussed on this site. The UK can. and it will be painful. Will leaving the EU be more painful than remaining in the coming European Empire?

        I note that in the last two weeks there was an announcement to form an European Army – to fight whom one may ask? The Russians (that’s gone well historically,) the US (the requirement is to advance over a large ocean,) the Chinese – (long walk that one,) or to re-colonize Africa?

        Empires tend to kill a lot of people, their own people as cannon fodder, and other who have the tenacity to not want to live under the benevolent auspices of the Empire.

        1. Yves Smith Post author

          You conveniently omit that the Greeks didn’t want to leave. Something like over 60% consistently wanted to stay in the Eurozone through 2015. It’s only with the clear failure of Syriza and the still unending grind of austerity and turning Greece into an open-air refugee camp has that finally changed.

          1. PlutoniumKun

            Yup. Its a very common misconception I see here all the time on NC and left leaning sources about the EU and Eurozone. The Euro was – and is – very popular in the weaker and poorer European countries, as is the EU. People aren’t stupid – they know (or sense) many of the problems, but they also assume (with some justification) that the EU is simply more competent than their own elites. Put simply, if you are going to be ruled by a bunch of arrogant overlords, its better that they at least be competent at it.

            And as Frenchguy points out in another comment here, just because in theory having your own currency gives you many more economic options, doesn’t mean they’ll be taken. People in France, Spain, Greece etc., generally remember well having their own currencies and for very good reasons don’t miss them.

            1. Antoni Jaume

              People in France, Spain, Greece etc., generally remember well having their own currencies and for very good reasons don’t miss them.

              As far as I can see in Spain, the local currency amounted to a big company scrip, in a simplified telling, economics elites took to put their gains in Swiss banks instead of investing in the country, and when their businesses stopped being profitable there was a devaluation to restore competitivity through low pay and inflation.

    2. Antoni Jaume

      But the EU project is really about politics now not just trade anymore.

      That anymore is out of place, as even in Common Market times the political aspects were clear to anyone that did not lie to itself.

  5. Expat

    The Brits went from euphoria and rainbows after the initial Brexit to doldrums and depression about reality. Now, after some extremely limited “successes” in their negotiations with the EU, they once again believe they are in control and can dictate terms.

    Europe is not overly sorry to see Britain go, except perhaps on principle. but Britain has never been a full member and has always pretended they were above the EU and separate from Europe. The Brits were convinced that France, Germany and the rest could not get along without them and would come crying to them for trade deals and various other alliances. They believed they could get better terms outside of the union and its obligations than they could get inside.

    Delusions. Delusions spurred in part by Trumpism across the ocean. Europe cannot possibly give Britain a good deal let alone a better deal. First, Europe has no need to give Britain a good deal. Second, if they did, then everyone else would leave.

    Final note. There are a fresh round of articles coming out talking about how well Britain is doing despite Brexit. And a fresh round of comments from me stating the obvious: THEY HAVEN’T LEFT YET!

  6. Kk

    It is well known that the British make excellent spies, diplomats and actors i.e. professional liars; take no notice of what is said only what is done; you are very literal in the US and what you say is what you mean, here in the U.K. words mean whatever is helpful at the time. Nothing has happened but empty talk and nothing will happen, the U.K. is bound into Europe and has been forever.

    1. Colonel Smithers

      Thank you, KK.

      The above-mentioned Larry Elliott reckons the UK’s speciality is now BS industries. There’s a team at the ministry for trade and industry called the Creative Industries Unit.

  7. PlutoniumKun

    Browsing the UK media is like having a glimpse into a never neverland where there is constant movement towards some sort of gentle(wo)mans agreement over some fudges, and mostly all will be ok in the end. Even the very anti-Brexit Guardian seems to think like this. I’m assuming at this stage that it will be well into the New Year before the Brexiteers start realising that they are firmly tied up in a trap which will give them, at least in the short to medium term – the worst of all worlds. An almost complete loss of sovereignty while their economy is bled dry.

    I think some sort of political crisis is now inevitable in the first half of 2018 in the UK. The soft Brexiteers and pragmatists seem to have a temporary upper hand at the moment as they see the opportunity to force a reversal and maybe even a new referendum. But at some stage the hardliners will force May to stop fudging and declare what direction she will lead the UK.

    I wonder though whether a political storm comes before or after an economic crisis. There are multiple indicators that the housing bubble has peaked and may well pop. And I’m assuming that January is the time when many companies start making announcements to either exit the UK, or cut back on investments.

    1. vlade

      Your last para. Especially around the companies. Realistically, the companies have to start doing something (the ones who have a clue) no latter than end of Q1 – that gives them 12 months to get it all rolling and done. Given that you’d really want to be migrated by end of Jan 2019 latest (to settle down and watch the fireworks), and that not much gets done in December, it’s more like 8 months – which you can do, if you have contingency plans ready and trigger them right away. But you can’t wait till summer (if for nothing else, Europe more or less closes down July/August, so unless you’re already running, you lose two months there too).

      So now the question is, whether the businesses live in cloud cuckoo land too, or whether there is sufficient number of we-don’t-want-to-risk it businesses to populate the headlines in the next three months.

      From what I have seen so far, I’d not bet on the latter – although I have started to see more ads saying “project manager, Brexit” and similar.

  8. NT

    My view is that the EU lost their way when they introduced the euro and became a way for German goods to be 40% cheaper than when they had the Deutschmark and no more super cheap holidays for germans in Greece anymore with their strong Deutschmark. -)

    Interestingly the UK would find it very difficult to leave the EU if they had joined the euro so its kind of an accident that they are able to do it.

    A free trade deal in goods like Canada is highly likely so BMWs, Audis and Mercs can continue to flood into UK. My view is that the EU is not a free trade zone in services anyway as lots of barriers have been put up for services between countries at least for consumers. For example I’ve never bought an insurance policy from a non-UK company. I guess there is more trade in services between companies in the EU but I have no way of gauging that. I guess we will find out shortly in the UK. -)

    1. vlade

      The paradox of your fist para is that Germans did not want to give up their DM, and French talked them to it… French being now one of those who are probably marginally worse of than they would be if they didn’t join EUR.

      1. expat

        The problem with this analysis is that you can’t possibly know what would have happened without Europe and without the euro. It is not intellectually honest to say that anyone is worse off because you can’t prove it. You can show the many positives of being in the Eurozone and perhaps hypothesize about what marginal or peripheral eurozone countries might be like outside but you can’t say definitively that Greece or Germany or France would be better off outside the euro.

        The same might be said about Britain. We still don’t know what will happen once Britain leaves the EU. Maybe there will be a worldwide economic boom which Britain is able to benefit from faster without EU constraints and obligations. Perhaps there will be another crisis which isolates Britain while the EU pulls together and muddles through.

        1. vlade

          Of course no-one can say anything with 100% certainty, but it is extremely likely that Greece, Spain and Portugal, and probably Italy, marginally France, would be better off w/o Euro.

          All of those countries were historically high-interest rates countries, due to high likelyhood of devaluation. It is _very_ unlikely that the real estate booms would have happened the same way as they did, for two reasons:
          – the interest rates were way below what their economy needed
          – the ability to borrow against a property elsewhere than your country of residence was made much easier (here both EU law, and EUR played a role).
          – the ability of domestic central banks in limiting the loans against their country collateral became extremely limited (see Spanish CB), as they could affect only the local banks.

          Real-estate boom (residential and commercial) was behind a lot of problems in all of these countries (although it wasn’t the only large cause).

          1. Frenchguy

            While your argument has a lot of merits I don’t think “extremely likely” is appropriate (I’d settle on ‘likely” :) ). After all, Spain had higher unemployment rates in the 19 years before the currency union than in the 19 years with the euro.

            And the convergence and fall in interest rates and inflation was of course much easier with a common currency but it can be argued that the fundamental driver was not the currency but the further liberalisation of trade/capital flows and the China/Eastern Europe shock on the global supply of labour. Yes, the real estate bubbles in the periphery popped early compared to Canadian/Australian ones but, by definition, the jury’s still out on whether that was the worst outcome…

            1. vlade

              Australia and New Zealand still had very high intererst rates, as they were/are capital importers. You can say that they are also commodity exporter, so less affected by the labour issues than Spain etc – but then we’re getting into a massively speculative scenarios.

              To be clear – I am not saying that these countries would have walk-in-part life if they did not join EUR, but the crisis of 2007+ would have hit them much less than it did. I believe (and it’s just a belief, as there’s no counterfactual timeline to check) that overall the last two decades would have been better for them, as GDP for all of them (excep for Greece) is basically at the 2005-2006 (for Greece 2001) level.

              What hurts people more than slow GDP growth is GDP volatility. Slow GDP growh can actually be ok (for example if it means restucturing the economy from investment to domestic consuption, which in the end means people are better off). Very volatile GDP is pretty much job losses, redundancies etc.

              1. NT

                Yes their are multiple factors for poor economic performance for “southern european” countries. Globalisation and the rise of China would have hurt them even if they didn’t join the euro.
                They may well have had higher interest rates if they had not joined the euro so the property bubbles in spain may not have been so severe.
                Clearly the property bubble in Spain was bad for the economy.
                The General feeling in the UK is we were lucky not to join the euro. If the southern european left the euro it probably would not help them now.
                My feeling is that the euro has destroyed alot of the good work done by the EU prior to its introduction in 1999. I wish we could wind the clock back and not have the euro but we will never know,

                1. Frenchguy

                  There is one thing one can say in favour of the euro in light of Brexit: it is probably necessary to tie the EU together. Without it, it is hard to visualize what an EU exit would mean in practical terms. The main reason EU exit is not popular in the continent is because people know changing currency is a very disruptful event. British people voted for it because, without the euro, they thought Brexit could go swimmingly.

                  So while vlade is very probably right that in economic terms the euro was a net negative*, the political implications may balance them in the end (and yes, the politicians/civil servants that pushed for the euro were very aware of this balance).

                  *actually where I disagree with vlade is that you say the periphery “would be better off w/o Euro”. While I think it is right to say it “would have been better off”, I very much doubt that it would be now worth changing back to national currency… (having their own currency might have mitigated the real estates booms but we should be careful when we say that a national currency would now allow to recover much quickly thx to foreign demand. This would work only if trade flows are kept open. Germany or France for that matter would not let Italy/Spain devaluate 20%+ without any kind of trade retaliations…).

                  1. Antoni Jaume

                    In Spain housing boom, foreign demand was a very important part. Especially people from northern Europe.

            2. Joel

              Spain and Portugal were emerging from dictatorship for the 19 years before the euro.

              They were supposed to be reaping the fruits of democracy now.

          2. Colonel Smithers

            Thank you, Vlade.

            Around 2010, the Bank of England ran simulations which reached conclusions similar to yours.

        2. Fazal Majid

          The interest rate the French government pays on its debt is certainly lower because it no longer contains franc devaluation insurance built-in.

          The boost from frictionless pan-European trade significantly outweighs the disadvantages of the German-inspired monetary hairshirt. I remember when traveling from Paris to Brussels involved tricky logistics because Belgian ATMs did not accept French debit cards, and my only solution, ironically enough, was American Express.

          1. vlade

            Not sure when this was the case, but I have happily used my Kiwi card (issued by an Aussie bank) pretty much all around the EU. Same with my UK card these days.

            Out of the A8 countries only Slovakia and Slovenia use EUR now, and while one can argue that Slovakia was one of the fastest growing economy in the EU (it was growing >10% annually at some stage), CZ is waster growing this year (5%), and that despite massive (as in 10%+) appreciation of Czech Koruna vs EUR. The hamonization of standards and removal of physical borders does much more to get a frictionless trade than currency TBH.

          2. PlutoniumKun

            One irony about the euro is that its strong popularity was due to the (correct) perception that there was rampant price gouging between European countries, whether it was the cost of changing money, excessive bank charges when travelling, restaurants and taxi drivers ripping off tourists (Italians being particular experts as they knew tourists always got confused with the number of zeros in lire), and differential pricing across the EU. The transparency and easy of cross-country travel is a major benefit from the euro, and the general stability of the currency is much prized by those who used to live in weaker currency areas (the Italians and Spanish in particular).

            Of course a lot of this could have been overcome with stronger regulation, in particular insisting on the cross-country applicability of cards and eliminating bank rip-offs, as they did with mobile phones (another hugely popular EU policy).

            The ‘costs’ of the Euro were, and are, hidden from most people. Very few people truly realise the loss of sovereignty involved in losing your currency (how many people really understand MMT?). And while some economists (I remember Paul Krugman being one), warned that the inevitable result of the euro would be huge regional bubbles as surplus German savings overwhelmed low productivity economies, this is still quite an arcane issue for most people, and probably quite difficult to quantify.

            And for people who now have what they feel is a ‘strong’ currency in their pocket, including of course millions of people in south and eastern Europe, they see the ‘benefit’ in this, but don’t quite appreciate that this has been at the cost of constant and high unemployment. People just don’t see the connection.

            Even pre becoming an NC junkie I considered myself reasonably economically literate, having read the basic textbooks and a selection of heterodox thinkers (and got a mediocre undergrad degree). But at the time of the introduction of the euro I was generally quite enthusiastic – I thought that the benefits significantly outweighed the costs.

            1. Irrational

              Funnily enough, as far as I remember, when the EUR was introduced all the chatter was about the outrageous price increases on all consumer goods as businesses rounded prices up to an EUR amount, sometimes generously.

            2. Frenchguy

              On the other hand, the UK/US have taught us that having your own currency is not sufficient for having the quickest recovery (austerity is a political choice, a common currency just transfer that choice to the intergovernmental body, it can happen with or without it). And the euro recovery (which came later but is now proceeding at the same pace) shows that it not necessary to have your own currency.

              Also, on the foreign trade angle, having your own currency is of course better since it gives you one more degree of freedom to adjust economic policy but, in my view, people downplay way too much the trade policy implications. Devaluating is all and well but it’s only useful if you can trade. And history has shown that other countries generally don’t roll over when you try to export your lack of demand. Adopting a common currency was just the recognition that devalutions would be met with trade barriers and that the world would end up worst off.

              In short, having your own currency is of course the best choice in theory but, in practice, it is far from the panacea the MMT people make it out to be.

        3. Yves Smith Post author

          Sorry, this is deeply wrongheaded. You are doing the equivalent of putting your fingers in your ears and saying “Nyah, nyah, nyah, I still believe in my glorious Brexit” and all you offer is empty handwaves. The post points out the UK has already suffered economically and Brexit isn’t even here yet.

          There are things that are obvious if you are willing to be dispassionate about them. That the UK will suffer badly from a Brexit is one of them. It was possible to foresee the financial crisis (we and others did). It was possible to foresee that Obama was a neoliberal sellout (that was clear as soon as he appointed Timothy Geithner as Treasury Secretary; a very few people like Matt Stoller saw it even earlier). It was possible to see that the 2016 negotiations between the Trokia and Greece would fail, and Greece would be the big loser (recall that some commentators insisted that Greece had the upper hand and that the Troika would fold). That the US has become deeply corrupt was obvious post 9/11 if not sooner (the looting related to the massive war spending, on top of the lack of any justification for the war; the WMD claims were a ridiculous reason to go in even if they had been true. Hans Blix, the UN inspector, was in Iraq going through sites in order of priority and had already gotten though 75% at the time the US invaded. Mind you I am not saying the US was not corrupt before, but differences in degree can be differences in kind).

          Brexit will create obstacles to the UK trading with what is far and away its biggest trading partner, the EU. The UK is already weak in exports, with financial services, transport (auto and airplane parts) and pharmaceuticals its biggest exports. The EU is not enamored of finance (which happens to be a correct view, overly large financial sectors are a drag on growth) and to the extent they have to have one, they’d rather have their national players become stronger. There are perfectly good EU institutions and no particular reason to be sanctimonious about the City. Brexit will be used to take business from London.

          As we have written, the value of the pound is most dependent on the perceived status of the City. Exports didn’t pick up the last time the pound fell. Please tell me what skills and sectors the UK can ramp up to take advantage of Brexit.

          It’s not autos and auto parts. Those industries are dominated by large multinationals who don’t care about the UK. Manufacturing in the UK to ship to Europe will be unattractive post Brexit. And automakers have excess capacity in Europe. Most won’t have to invest much/at all to more production out of the UK. EADS partsmakers will also be required to move production out of the UK.

          The UK has hollowed out its economy as a result of Thatcherism. As we have said repeatedly, it would need to be engaged in a war-level planning and mobilization effort to have Brexit not be massively disruptive. That isn’t happening nor will it happen given the UK;s leadership and neoliberal habits.

          And tell me who is going to give the UK a break on trade? All the countries in the world ex the US are mildly to very mercantilist. They will see the UK’s weakness and use it to their maximum advantage in cutting post-Brexit deals. The US dictates terms in its deals and prioritizes getting trade partners to accept its relatively few trade priorities, like accepting more US ag exports despite our lax production/consumer safety standards. And don’t fantasize that the US will want more UK car parts. Mexico is closer and has lower labor costs too.

            1. Colonel Smithers

              + 1.

              Yves’ former employer, MacKinsey, has analysed the strengths and weaknesses of the UK’s economy and concluded that much of the industry located in the UK is there due to the single market, not because of a USP.

              1. CharlesV

                So the has attracted a disproportionate amount of the inward investment to the EU. So it must have something going for it. Or is the suggestion that after brexit the little it has going for it just disappears?

                1. Yves Smith Post author

                  US multinationals being provincial and liking an English-language country so they could move execs around more readily. US firms played a very disproportionate role in trade and capital flows well into the 1980s and the US still punches above its weight in this category.

                  US firms now prioritize cost savings over pretty much everything. And they can outsource to get someone else to deal with the language/cultural hassles if they are too lazy to do that.

                  So the advantages the UK had are no longer operative. Many businesses are their out of inertia/installed base. It won’t be attractive to do business in the EU via the UK, so they’ll figure something else out.

                  1. Fazal Majid

                    It’s not just language. Ford and GM were big players in the UK long before it joined the EU. The Japanese also invested massively in the UK in the 80s as it was a trojan horse into Fortress Europe. There’s a reason why the UK has been blocking EU sanctions against Chinese steel dumping, it’s the gains to the British auto industry far outweigh the value of the rump UK steel industry.

                    The UK’s lax labor standards (by EU standards) certainly helped as well.

                    All those auto jobs are moving to Eastern Europe, however, specially Poland and the Czech Republic. Sterling’s depreciation plus a CETA style agreement that covers physical goods should limit the damage to the British auto industry, but the City is toast.

                    As for the sad state of UK manufacturing, Thatcher was merely the undertaker, but neglect had been going on since WWII, probably because of liberal arts types running the country. The UK got fully half of Marshall Plan funds, but instead of modernizing its industry as the Germans and French did with their share, it spent it on vanity projects and propping up the Empire:

                    1. Anonymous2

                      I full accept that UK industry was badly run as at 1979 but more could have been done by the Thatcher government to save manufacturing in the early 1980s. When North Sea Oil started to flow in serious quantity the Government allowed sterling to rise very steeply, making many businesses uneconomic at the prevailing exchange rate. Firms which could have survived in other circumstances were allowed to go the wall. A wiser government would have introduced inward exchange controls to reduce the upward pressure on the pound and established a sovereign wealth fund to invest the proceeds from what was a windfall gain. Instead the money was squandered on high unemployment and consumption.

                    2. ozajh

                      Very interesting. I am 62, born in the UK, and I am truly amazed that I have not discovered those details about Marshall Aid before now.

                      Mind you, in my defence I can assure you that all my relatives from my parents’ generation or older gave me the same message when they were alive. Namely, that the US used Marshall Aid to rebuild the German and Japanese industrial base using the most modern equipment while simultaneously starving British industry of capital so they (the US) could capture the export markets and/or take over British manufacturing companies.

          1. Colonel Smithers

            Thank you, Yves.

            Further to the mobilisation and planning required, it’s not just the neo-liberal ideology, but the hollowed out and often corrupt leadership, too, whether in the government or business. You correctly call out Thatcherism. Thatcher’s cultural impact was as bad, if not worse, than what she did to industry, the regions away from London and working class communities.

            It’s not just Thatcher’s impact on manufacturing that caused concern. There are many in the City, including its chronicler David Kynaston, who thinks she was responsible for destroying the old / storied UK City firms and laid the foundations for 2008 with Big Bang in 1986.

            A South African banker was interviewed by the BBC early this year. He reckoned that even RSA could expect a better deal from the UK than it has from the EU as the UK is so weak.

            I have heard of thorough analyses, which pointed to the UK’s weaknesses and how a mercantilist approach could feast on the carcass, from Belgian and Irish sources. In the Irish case, there was also a recognition that this approach would have to be balanced by the problems of Northern Ireland. At least, Plutonium Kun’s compatriots live in reality.

            1. templar555510

              I agree wholeheartedly Colonel Smithers. I watched Adam Curtis’s documentary ‘ The Mayfair Set ‘ again recently and am old enough to remember all those ‘ Entrepreneurs spelt S.P.I.V. ‘ as Curtis calls them – Jim Slater, Tiny Rowland et al . I knew some of their brethren asset strippers. That was the ‘ Thatcher Revolution ‘ . It was a con and Brexit is the direct result of that con, but as the cliche goes ‘ we are where we are are ‘. We can cling to any economic metric we perceive to be ‘ strong and stable ‘ ( none ) , or as the poet Andrew Marvel wrote we can do this :

              Let us roll all our strength and all
              Our sweetness up into one ball,
              And tear our pleasure with rough strife
              Through the iron gates of life

          2. Joel

            Reading Yves’s comment, I started to get a vision of a post-Brexit Britain that would experience the growth and opportunities that would come from being lightly regulated.

            A mix of the Cayman Islands, Panama, Macau, and Mexico.

            An even bigger tax haven for parking dodgy cash. Even more casinos and sports betting. Risky medical procedures and pharmaceuticals like in Mexico. A black market trade of smuggling non-EU-approved goods into the EU via Ireland or maybe even France. Universities that sell slots and credentials to underqualified foreign students (I mean even more than they’re doing now). And of course, lots of tourism to quaint historic villages and towns along with the less savory varieties of tourism.

            A kind of Biff’s Hill Valley version of Britain.

            More or less, Britain going down the same path it’s going now but at an even faster clip.

            1. PlutoniumKun

              This is the dream of at least some of the Brexiters – the old style libertarians who were among the biggest funders of the Brexit campaign.

              The problem for them is that there is no incentive for other countries to let the UK away with it. Membership of the EU allowed the UK to weaken or outright destroy attempts to undermine regulations within Europe, and to likewise undermine international efforts to control tax havens. A weakened UK, desperately trying to sign up bilateral trade agreements around the world, simply has no leverage to do this. Countries and blocs will favour their own little tax boltholes, whether it be HK/Macau, the Carribean, UAE or Switzerland/Dublin/Amsterdam/ Liechtenstein, etc.

            2. Fazal Majid

              That was pretty much the entirety of Osborne’s economic plan, but it only works as long as the UK has veto power at the EU to stop sanctions against tax havens.

          3. CharlesV

            Overall I also struggle to see it being anything other than a net negative.

            But who knows how it will play out for each and every industry (not the government obviously). And who knows whether there will be (m)any winners to offset those that lose.

            Will the creative industries be adversely affected? Will the UK be a less attractive place to make video games, TV show and the rest?

            Will people like Dyson and Bamford be proved correct that brexit will be good thing for their businesses?

            Will the UK go from being a place where it has significantly more new companies per head than the most of Europe to less?

            Will London go from being a global city to a cultural backwater in which people no longer want to work or visit?

            I’ve got no idea, don’t think anyone does. But it will be the answer to a million and one questions like this which determine how this plays out for UK plc. We can either be pessimistic or get on with it.

            1. Fazal Majid

              Dyson makes physical goods, and even without a CETA-like FTA, tariffs on goods are fairly low nowadays so he won’t be too badly impacted. It’s services that are the crux, and they represent fully 80% of the UK economy.

              1. PlutoniumKun

                Most Dysons are made in Malaysia. Its the research and development (which in reality is mostly marketing) that takes place in Britain.

                Dyson seems to have had a bee in his bonnet about how he was outmanoeuvred in Brussels by German manufacturers when regulations were drawn up on energy saving in domestic devices. The regulations seem miraculously to favour German companies. But then again, Dyson products are notorious energy hogs.

                His problem of course is that outside the EU it will be much worse for him. Its not tariffs that will kill Dyson its regulations. The EU will simply make Dyson products illegal.

                1. vlade

                  Not a technical opinion – but I’d never buy a Dyson again. Had a Dyson vacuum cleaner once, and compared to half the wattage Samsung we have now it was extremely noisy, and worked way less too.

                  I never understood the point of saying “it has RPM of F1 engine” – why the heck should I care?

                  1. PlutoniumKun

                    I think everyone buys a Dyson once, then never again. I have one of their vacuum cleaners (talked into it against my better judgement). Unreliable and little better than one of those cheap hand held cleaners you can buy in any electronics store for a fifth of the price.

        4. TimH

          Maybe there will be a worldwide economic boom which Britain is able to benefit from faster without EU constraints and obligations.

          How will it benefit? What hard goods will UK export better? What hard goods exports are the UK currently associated with that are world leading? Armaments is all I can come with, with France and Belgium strong competitors.

          Surely the City financial services will be clobbered hard by Brexit, since UK will be neither in EU nor Euro currency.

          1. Joel

            But the Brexiteers mostly hate the City, don’t they? It’s kind of like ending things with a murder-suicide.

            1. PlutoniumKun

              Many of the most enthusiastic Brexiters are well and truly part of the City. While the establishment big banks are horrified by it, plenty of hedgies and wealth managers and others either see Brexit as an opportunity for disaster capitalism, or they are ideologically very keen on it for a mixture of libertarian and nationalistic reasons.

    2. Colonel Smithers

      Thank you, NT.

      If you browse through the small print of an / your insurance policy, you will often see Spain’s Mapfre, France’s GAN or Germany’s Allianz mentioned.

      1. NT

        Well then they will lose business. ha ha.
        I guess i’m disappointed with the EU, the euro and the general direction of EU policy as a german led trade block.
        Once you take that view then i guess you have to decide if you want the UK to stay in the EU because it would be better economically which it probably would be or if you think we should leave because you disagree with the direction of travel. Politically its probably better to leave and avoid the “thatcher handbagging the EU” and “thatcher being in a minority of one” on so many policies. Better to let the EU get on with it. Maybe they will be more successful without the UK. I hope they are. -)

    3. Kat

      No, German exports would not be 40% more expensive even if we had fully floating national currencies in all of the EU. It might have been true in the 1980s (though even then 40% strike me as exaggerated), but not now.

      This is a long story, so bear with me.

      Reunification hit Germany hard. That was primarily the result of two failed domestic policies, plus the fall of the Iron Curtain. One was the currency union between East and West Germany; as a gift to Eastern voters, Chancellor Kohl basically set the exchange rate between the two currencies at 1:1, with only savings exceeding an exemptions, loans and debts being exchanged at a 2:1 rate. A more realistic exchange rate would probably have been between 5:1 and 10:1. Importantly, this also affected wages; East German businesses became uncompetitive overnight because their revenues didn’t change much, while their labor costs exploded.

      The second problem was the Treuhand privatization. Without going into the gory details (you can google them), it was poorly done as a mix of incompetence and corruption and added more destruction to the East German economy. One result of these policies was that unemployment in East Germany peaked at around 20% in the late 90s and early aughts.

      On top of that, the fall of the Iron Curtain created wage competition, especially for cheap manufacturing. It was basically as though you had teleported China to a place just adjacent to the California coastline.

      The result of this was a major and extremely painful restructuring of the German economy that wasn’t just limited to the former East Germany. Whatever companies could outsource to Eastern Europe, they did, while wage freezes or in some cases, outright wage cuts, kept labor costs somewhat competitive (German labor costs are still fairly high). As an extreme case, Volkswagen (in full agreement with German unions) cut working hours and wages by 20% in 1993 to prevent 20% layoffs.

      The most important aspect of all these changes, however, was that over the course of 10-20 years German manufacturing shifted to key parts of the value chain that are either price-insensitive or add high value, justifying high labor costs. For example, for pretty much any vehicle produced by Volkswagen or Audi in Germany, the actual engine block is built in a plant in Eastern Europe (e.g. Hungary). Supply chains cross the entire continent, with mostly just the final steps taking place in Germany. Also, it isn’t just cars that Germany exports; in fact, cars make up just 11% of their exports. Other popular exports include high value tools and machinery. For example, the tunnel boring machines used for the Gotthard Base Tunnel were manufactured by Herrenknecht in Baden-Württemberg; for this kind of machinery, buyers don’t haggle over pennies. Tools are one of the major reasons why Germany has a nearly balanced trade with China (the other major reason is that Germany went out of its way to cultivate trade relationships with China).

      What this means is, first of all, that Germany is not only the world’s third-biggest exporter, it’s also the world’s third-biggest importer. Exports of $1.32T vs. imports of $1.06T in 2016. Germany having its own currency might make exports more expensive, but it would also make imports less expensive. The euro being very strong in the early aughts did not make any real difference to the German trade balance. Note also that the highly positive trade balance is in large parts due to comparatively low domestic consumption; Germany has had a large trade surplus for ages, despite never devaluing its currency. ECB monetary policy helped bump it up a bit, but it would be high regardless.

      Also, it’s not only Germany that has a largely positive trade balance. As a percentage of GDP, it is a bit, but not much higher than much of the rest of Central and Northern Europe (Finland is one of the few exceptions, having been hit hard by the trifecta of the Nokia demise, downsizing of the paper industry, and Russian sanctions). Germany’s intra-EU trade is actually largely balanced and (along with the Netherlands) it functions as a major exit valve for EU exports.

      This means two things in particular: it’s not just Germany that’s interested in keeping things as they are, but a large number of other EU countries share that interest. Second, keeping the large intra-EU supply chains that are the lifeblood of German manufacturing frictionless is a lot more important for German companies than exports to the UK specifically. German car companies would like it if nothing went in the way of exporting to the UK, but that takes a distant second seat to the integrity of their supply chains.

      1. Frenchguy

        Great points, I agree wholeheartedly with your analysis.

        Fun fact: if you take the current account of Germany, it looks like big surpluses start to appear with the introduction of the euro. But actually, West Germany started having big surplus at the end of the 80s and those were only masked in the 90s by huge transfers to East Germany. With this modified timeline, German surpluses seem more linked to the single market or the opening up of Eastern Europe than to the euro.

  9. lou strong

    Being an Italian citizen and resident, I obviously miss all the nuances of the Uk politics, but I have to say that I don’t get the way of reasoning of those that here above say they voted in favour of Brexit as an anti-neoliberal vote.For instance, I remember I read , during the campaign, a facebook appeal by Boris Johnson saying inter alia that the increase in inequality was a devastating issue and that to get rid of the super-riches/elites Brexit was necessary , but that made me only more suspicious .

    1. PlutoniumKun

      Its not just you. There has long been a strain in English left wing thinking that is very strongly nationalistic. I’ve read quite a few English left wing writers who’s views on Europe are indistinguishable from a typical Daily Mail or Telegraph leader writer, they just throw in the word ‘neoliberal’ occasionally in their rants to distinguish themselves.

      There are of course mainstream left wing eurosceptics, right across Europe, mostly Trotskyists for some reason (I’ve never bothered to find out why). In Northern Ireland, the main alliance of left wing groups called for a Brexit vote (they called it ‘Lexit’, but significantly they were wiped out in the subsequent election, indicating strongly that their supporters didn’t think much of their arguments.

      Corbyn of course represents a sort of soft euroscepticism on the Labour right. I don’t think his strain of thought considers the EU to be a neoliberal evil, it is more that they genuinely believe that a genuine left wing government could only survive in a sort of autarky. I’m not really sure if thats practical, but it is a genuine argument.

      From what I can gather from Labour friends in England, Corbyn is under very strong pressure from his younger supporters, who are much more strongly pro-EU. A few Corbyn supporting friends of mine are genuinely very angry at what they see as his weakness on Brexit. The Scottish and Irish mainstream left of centre is also soft to strong pro-EU. Unions and NGO’s in the UK tend to be strongly pro-EU. So I think that even as the Tories tear themselves to pieces over this, the broad Left will have a big battle on this too.

      1. Fazal Majid

        Left-wing Euroskepticism in the UK is particularly bizarre, since the UK is to the right of the EU in every single respect, including under New Labour. I can understand French or Italian Socialists yearning for a nationalized and protectionist utopia that was demolished by big bad Brussels, but the British left cannot make the argument that the EU is hindering its policies with a straight face.

        1. PlutoniumKun

          Yes, when I lived and worked in the UK I was always somewhat perplexed by the constant ‘we can’t do X its ‘cos of EU rules’ excuse, which was almost always untrue. It always seemed a standard fall back excuse for not doing something, a slight variation on ‘its ‘ealth and safety mate’.

          The notion that a government could not implement good socialist policies because of EU Directives is largely a myth. A really aggressive policy of nationalisation and localism would fall foul of some Competition Directives, but for any genuine socialist government getting taken to the ECJ for technical breaches of those Directives would be a minor irritation at worst compared to all the other fights they’d have on their hands.

    2. Kat

      I tend to agree. By and large, the high inequality in the UK is a homemade issue. Being an EU member has not stopped Denmark and Sweden – heck, virtually all other EU member states – from having lower income inequality, in many cases far lower income inequality.

      There are so many things wrong at the domestic level, I don’t know where to start.

      There’s the issue of weak unions and a “deregulated” labor market. John Major’s government actively opposed the Working Time Directive, until the UK opted into the EU’s social chapter under Blair; they still negotiated an opt-out from workers being limited to working 48 hours per week (and the 48 hours are already an average calculated over several months, so there’s plenty of flexibility to deal with variations in demand).

      Britain is a highly centralized economy, with London being the primary beneficiary of policies and also the primary source of GDP. Outside of London, the UK resembles Spain more than it does Germany or Sweden. The economy in Northern England has been neglected for a long time; Scotland has been able to buck the trend somewhat, due to devolution (the high outcome in favor of Scottish independence was in large part driven by economic rather than nationalist concerns, IMO).

      Productivity is extremely low compared to the US, Germany, or France. I recommend this excellent article by Thomas Piketty. If, for some reason, you don’t trust Piketty, the British ONS has similar numbers for productivity. (Note that productivity is simply productivity in the economic sense of GDP per hour worked and has nothing to do with being industrious; a lazy financial analyst can add more to productivity than a hard-working carpenter.)

      Real wages in the UK since the recession have fallen unlike other EU economy except Greece; not surprising, as economic growth over the past years has largely been fueled by rising real estate prices and positive net immigration. (Note that these are TUC numbers; depending on which deflator you choose, you may get different results, though the relations between them shouldn’t change much.)

      It is not all bad, though. The British government has been raising the minimum wage (which was unconscionably low) over the past years; while arguably still too low, it’s an improvement over the previous minimum wage. Income inequality has actually been slowly falling. But overall, most of these problems are pretty much homemade ones.

      1. vlade

        Agree with most of what you say, but careful on the real wages – that very much depends on the period.

        The Czech Republic had between 2009 and 2014 around 10% drop in real wages too (in 2014 it was the steepest drop in the EU IIRC) – but the drop is very different if you include the period just before or just after (in fact, it now has some of the fastest real wage growth in the EU).

      2. PlutoniumKun

        Thanks, very interesting points. The productivity figures for the UK are quite appalling. Its ironic that it seems to be an Anglo-American thing to mock the French work ethic when (at least measured by productivity) its quite good.

        Of course, this is one of the paradox’s of hammering working rights – you end up removing the capitalist incentive to invest in plant and efficiency and suddenly you find yourself years behind your competitors.

  10. Synoia

    It may be that either path, Brexit on No Brexit are equally difficult.

    Brexit is going to leave a hole in the EU budget, and the lack of progress can be seen as refusal to accommodate the large, justified or not, divorce settlement demanded by the EU.

    I’ve seen no analysis of a rosy path if the EU continues on its neo-liberal path. The PIIGS are a clear indication of the predilections of the EU.

    Either way the peasants will be trampled under the hooves of the rich owner’s ponies. Twas ever thus.

  11. Abi

    Wondering about the cost of Brexit to the higher education system. In 2012, as Home Secretary Theresa May enacted the absolute worst policy to achieve the Tory’s utopian dream of 0 net migration, forcing international students to leave the U.K. immediately after the degree with no chance of work experience. I know since then a lot more students have chosen Canada as their destination, curious to know what will change post brexit. Education is actually the Uks best remaining industry but Theresa’s policy seriously damaged it.

    1. PlutoniumKun

      Anecdotal – but I was recently talking to an acquaintance who is a foreign marketing manager for a small Irish college. She was on her way to a student fair in Taipei. She said the number 1 talking point she would be making is Brexit, and the implications for UK degrees (i.e. they may not be recognised across Europe). She said there is genuine worry across Asia about the implications for students in the UK, so I’ve absolutely no doubt it is benefiting other countries.

  12. Abi

    Might I also add this perspective, in 2008 my sixth form economics teacher was supremely euro skeptic, and he most definitely instilled those values in us. This man was a Ghanaian immigrant but didn’t like the overly massive influx on new immigrants. I might also add that this man was one of the best teachers ever.

    In the years since then, I’ve come to realize a certain truth about countries and supranational bodies. What the citizens perceive at the local level is more important than what statistics or macroeconomics might like to tell us.

    Most 20 something year old British only like the EU because of borderless travel and most middle to lower class people actually hate the fact that Britain is not sovereign and there are lots of immigrants filling up schools and hospitals. The rich doctors love the EU because they can retire in the sun.

    Economics matters true, but politics drives economics and the social realities drive the politics. Sovereignty/nationalism nearly always trumps economics.

    As a last thought, I think on a whole it’s a bit premature to predict what would happen, not sure we have seen anything like this to draw from. I think the chips are yet to fall

    1. Clive

      I think that is a very astute observation —- that sovereignty/nationalism trumps economic impacts. But I would probably qualify that, because it only applies to the U.K. to some degree. The Japanese, for example are much less willing to make sacrifices to sovereignty if it puts economic progress in jeopardy.

      A largely unique — as far as I can tell — facet of British culture is our ability to dine out on our past, as we imagine it was, regurgitate the partially digested morsels, warm them over again, add a little seasoning, present them as a completely new banquet, eat them and then complain about getting indigestion. We try to serve this fare to guests, who if they have the nerve to suggest wouldn’t it be better to eat out, just for a change, get high-handedly informed that there’s nothing wrong with British culture and, yes, it’s an acquired taste but you soon get used to it. Which you do. Sort-of.

      1. Anonymous2

        It is a generalisation but I think culture only trumps economics until people notice that the neighbours are richer than them. At that point I think it tends to flip.

    2. jabawocky

      Good point. I think for middle aged people in the UK the predominant social reality is the failure of right wing governments to prioritise the well-being of the general citizen over the rich. For this reason there is real fear about how right wing governments will use powers repatriated from Brussels to make life ever more miserable for the average Joe.

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