For the UK Government “no deal” has never been better than a bad deal – and it’s now paying a price for such weakness

For the UK Government “no deal” has never been better than a bad deal – and it’s now paying a price for such weakness

by Douglas Lowe
article from Tuesday 17, April, 2018

THE BREXIT NEGOTIATIONS commence again this week and as usual EU actions will be widely influenced by political consideration. The EU’s inception, the Schuman plan (prepared by Monnet), created the European Coal and Steel Community (ECSC) whose purpose was stated to be “through the consolidation of basic production and the institution of a new High Authority (ECSC) whose decisions will bind France, Germany and any other countries that join, the proposal represents the first concrete step towards a European federation.” The Schuman declaration said “Europe will not be made at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity”, an incremental approach, building on institutions such as the ECSC, to fashion policy.

President de Gaulle’s decision in 1963 to say “non” to the UK proposal to join the EEC (pictured) was consistent with a policy to maintain continental European control of the consolidation of “Europe”, the UK being considered not to share such goals but to be politically and economically more closely aligned with the USA, a bête noire of Gaullism.

The influence of politics over economics is manifested by the formation of the Euro in 1999, a policy which recently endangered the whole EU project and has resulted in the relatively poor economic performance of the Eurozone and a long and continuing period of economic distress in many southern Eurozone economies.

That political considerations continue to lie at the centre of the EU is evident from the Commission’s current proposal to extend membership of the EU27 to six other nations, Montenegro, Serbia, Macedonia, Albania, Bosnia/Herzegovina and Kosovo from 2025.

The significance of politics gives the EU a strong bargaining position with the UK. Significantly, as the EU economy is about 10 times larger than the UK’s, any deleterious consequences of the UK withdrawal are distributed over 10 times as many people, spreading their impact. UK Leavers have consistently promoted the economic advantages of the UK market – for instance where will the Germans sell their cars? – but how much does that matter if there is a greater policy goal? Gideon Rachman, writing in the FTputs it, “Leavers already have a record of consistently underestimating the resilience of the European project. This analytical flaw stems partly from a failure to understand the utter determination of the European elite to preserve the bloc’s integrity.”

The EU negotiators have accreted an additional advantage, claiming that the process is effectively a legal one, one dependent on the “acquis” or accumulated legislation that, together with the Commission’s instructions, binds their hands. The reliance on ‘acquis’ is disingenuous, as the EU is highly politicised and capable of, and accustomed to, interpreting existing laws with extreme flexibility, to ignoring laws or, if necessary, creating new laws. France and Germany broke the EU Stability and Growth pact with impunity; there was no bail out for the euro, but Greece was bailed; and the Commission is pursuing Poland for breaching the law, but ignoring Hungary’s breaches.

The potential loss of GDP from leaving the EU can be put in perspective by considering other sources of ‘losses’ of GDP and their affects. In the Great Recession of 2008 real GDP dropped by 5 per cent over two years, in contrast to a lesser potential loss of 2.0 per cent over several years. A much greater thief of actual GDP growth, compared to potential GDP, has been the significant reduction in productivity. In the eight years before the 2008 recession productivity rose 19 per cent or about 2.35 per cent per annum following a 20 per cent rise in the previous eight years, but since 2008 productivity has risen less than 0.2 per cent per annum. The OBR estimates that output per hour is currently 21 per cent below an extrapolation of the pre-crisis trend. By the beginning of 2023 the OBR, assuming an improvement in productivity to about 1 per cent per annum, estimates that output per hour in 2023 will be 27 per cent below its pre-crisis trend. 

“Productivity” is much less tangible than images of queued ports and extensive bonded warehouses and factory closures and so may seem less important than the loss of trading opportunities but as Paul Krugman, the Nobel Laureate, says “productivity isn’t everything, but in the long run it is almost everything”. The relative insignificance of the importance attached to improving productivity must lead to an enquiry as to why discussion of withdrawal is so pervasive: it is the topic of the day, surely, but I wonder if political motives may not underlie such all-encompassing interest.

The EU maintains there can be no “cherry-picking” but reliance on ‘acquis’ is manifestly a bargaining position for which the EU exacts a high price. The UK may have harvested one cherry but it has the appearance of a Morello rather than a sweet cherry. 

The bitter fruit a “draft withdrawal agreement” lasting for 21 months until December 2019, solves little, but effects a standstill after the UK leaves the EU in March 2019 for 21 months in which to agree the outstanding issues. It is not a transition agreement as there is nothing to which to transit. During this period the UK will be subject to all the obligations of the EU treaties without being part of the EU. This delay may be considered insulting by rabid “Leavers”, but the real concern is that, having given concessions to the EU who have carefully segmented and drawn out the negotiations towards the limit of the available time, and now have gained concessions to extend them further, so significant UK objectives have not yet been attained. It has been a continuing weakness of the UK position that, given a divided political support, the UK is seen to require a “deal” – in reality no deal has never been better than a bad deal and the UK is paying a price for such weakness.

This article is an extract from Douglas Lowe’s Chairman's Statement for Caledonian Trust PLC of March 2018. For the full statement please refer to Caledonian Trust PLC Interim Statement Half Year to 31 December 2017, here.

ThinkScotland exists thanks to readers' support - please donate in any currency and often


Follow us on Facebook and Twitter & like and share this article