The Great Brexit debate

Associations, European Union, News, Organisations, Politics and Government — By on June 7, 2016 at 1:28 PM
Dr. Andreas Koutras

Dr. Andreas Koutras

The birth of EU

Seventy two years ago to the day, 6th June 1944, the allies embarked on a huge operation to liberate and save Europe. Operation Overlord, the code name for the D-Day landings was a success albeit with high cost of human life. The operation names of the beaches, Utah and Omaha where the Americans landed, Gold, June and Sword where the British and Canadian forces landed are now mythical places of sacrifice for a free Europe.
After the war, the novel idea of not killing each-other led many European politicians to propose a kind of union or cooperation. Thus, the European Coal and Steel Community were born in 1951, which led to the European Economic Community (EEC till 1993) and now to the European Community (EU). Battles would be fought from now on, in market exchanges and smoky corridors.

First Referendum

Britain was not an initial signatory and when Ted Heath (then minister) approached De Gaulle, Britain was vetoed out. Later on, Heath as Prime-Minister convinced the French to lift the veto and Britain became a member of the EEC along with Denmark and Ireland. But the story did not end there. In the election manifesto of 1974, Labour had promised a referendum. Harold Wilson formed the government and a referendum was held in 1975. At the time it was the Labour government ministers that were split.

The issues were similar to today, Economy and Common agricultural policy (CAP), sovereignty. Most of the leading conservatives were in favour including the newly elected leader Margaret Thatcher. On the “No” side there was an unholy alliance of the ultra-conservative Enoch Powel (famous for his “Rivers of blood” speech), and of left hardliners Tony Benn and Michael Foot.

In a similar fashion to today, there were false claims, scaremongering and misleading numbers. Tony Benn was branded “Minister of Fear” after claiming that half a million jobs were lost and food prices had gone up as a result. In the event, 67% voted to stay in Europe with a rather high turnout of 65%. It was claimed that the “NO” lost because of the rather extreme and eccentric personalities leading the campaign.

Second Referendum

Fast forward 41 years to 2016 (1st referendum was held 5th June 1975). Now it is the Conservative cabinet that is split. The issues are again, Economy and Jobs, Sovereignty and Nationhood and we added Immigration. The colourful or eccentric characters are still with the “NO” or “Leave” campaign and the main establishment forces with the “IN”. False statistics and extraordinary claims are flying around and scaremongering is an accepted political tool by both sides. European politicians are kind of begging Britain to stay whereas many Europeans (especially on the left side) wish to see Britons out.

Main Issues

The following is by no means an exhaustive list of all the issues and arguments. Inevitably, many things were left out. Most of the data are from the British parliament and the Oxford migration observatory.

1. Economy-Trade-Jobs.
This is the main battleground and the signs are that the “In Europe” has won most points on this front. Britain’s prosperity and growth the past 30 or so years is the result of Thatcher’s drive to free up and liberalise the economy. When Europe adopted these principles and opened up the European market, British businesses were ready and profited most. Close to 50% of British exports go to Europe.

The “Leave” campaign lost many points when Mr Gove compared the trading position of Britain with that of Albania. “Leave” campaign seems also to have lost credibility by quoting misleading numbers with regards to the British contribution to the EU budget. The nominal contribution of 17.8bln is quoted heavily by the “Leave” campaign. This fails to include the 4.8bln rebate, the 4.4bln public receipts and the 1.4bln private receipts. Thus the total net contribution is around 7.2bln or 0.6% of GNI. This is the lowest in Europe, since most other countries contribute close to 1% of GNI per annum.

The truth is that it is very hard predict with any confidence what would happen to the economy long term if Britain were to leave. Short term is easy. There would be job losses, volatility, possibly a recession as the people and the economy tries to re-adjust to the new environment. Much of course will depend on the deal that will be negotiated with Europe and the rest of the world.

In the financial sector which is a major component of the GDP, any changes would affect the economy most. For example, Britain has a financial services trade surplus of around 71bln, 41% of the global FX market and more than 1trillion or 12.5% of the total UCITS funds. The sector has gained most from the so called “European passport” and the common de-regulation. Settlement and custodial services may suffer too as they need to be on EU soil (EMIR). On the other hand, hedge funds would probably gain most as Britain may not adhere to the Alternative Investments Fund Management Directive (AIFMD). Also any market volatility is good for hedge funds. Banker’s pay would improve too as the current cap on pay imposed by the EU has been
resisted by the British government. So, everything depends on the post-leave agreement.

A frequent scare story that is propagated by the “IN” camp is that house prices would fall following leavevote. That may be true for some small localised regions but the high real estate prices have to do more with the small supply which seems to be intentional in order to keep artificial high prices.

On the economy, the “Leave” campaign has not produced any credible plan for the day after. Most of what they said is wishful thinking or lacking hard evidence. Their scare stories involve immigration, the NHS and sovereignty.

2. Sovereignty-Regulation
This is one area were the battle seems to be even. The “take back control” slogan is very effective as it is populist. Sovereignty is never absolute unless you are in North Korea. It is defined and is delimited by constraints treaties and agreements. For example, Britain is a member of NATO and under Article 5, Britain is forced to declare war to any country that attacks a fellow member (remember the recent skirmish between Turkey and Russia over Syria?). By the way, in-family conflicts are excluded, so if Germany attacks France,  the UK can stay put.

Similarly, World Trade Organization agreements bound Britain in many ways and so do other treaties. Supporters of the “Leave” campaign claim that Britain has lost sovereignty and is about to lose more as the EU pulls powers away from the national parliaments. The main point is the European Communities 1972 Act which “surrendered” powers to the EU. The other side, points out that the British parliament is supreme. In other words, it is not an irrevocable change. Parliament can always vote the powers back home.

Another contentious point is the European Convention of Human Rights. Now, one cannot easily understand why Human Rights are a problem but Abu Qatada made it so. Supporters of the “Leave” campaign point out to the delay (many years) that it caused in extraditing him to Jordan. On the other side, supporters of the “IN” campaign point out that this is a worthy price if Britain wants to adhere to the high standards of the convention. Leaving the convention would damage the international reputation of Britain.

Finally is the issue of extraditing British citizens to EU countries. British citizens can be s end to face trials in countries that allegedly do not have the same judiciary high standards as in Britain and serve jail sentences in appalling conditions. Although a valid criticism, it is by no means without remedy. The British government already said that they would engage the 100 or so opt-outs they have with regards these regulations. They could also follow the Dutch example and refuse to extradite anyone for actions that are not crimes in Holland. EU Regulation

From prawn cocktail crisps to the definition of real chocolate the EU is full of regulations. Most of them mundane and boring, occasionally they find life on the front pages of newspapers. Many of the stories like the one of banning prawn cocktail crisps from pubs are distorted (there was never any ban. There was a
bureaucratic error on the side of Britain that was quickly corrected). Others like the definition of chocolate are true. British chocolate manufacturers use vegetable fats instead of cocoa butter. It took around 15years for the EU to accept British chocolate as chocolate. Then there are the PDO, Protected Designation of Origin. French cannot produce Dorset blue cheese or Italians cannot produce Roquefort or the Spanish Feta. Or rather you can produce it and sell it as long as you don’t call it as such.

Thus many of the regulations touch upon the small things of everyday life and can be easily mocked or joke about. No-one likes regulations especially if they infringe on personal choice and freedom. On the other hand,  they are necessary if you want to have some order in market of 500mln people or indeed in any market. And here is the problem. The balance between balance and intrusion is not always struck. Also many nationalistic interests get in the way of protectionism. For example, the CAP (Common Agricultural Policy) was constructed with the French farmers in mind rather than the Spanish or the British or the consumers.

The “Leave” campaign wants to do away with EU regulation. The “IN” supporters point out that whether Britain is in or out it would have to abide by EU rules if British manufacturers want to sell products in the EU. And currently 50% of British exports go to the EU. In addition Britain would lose a seat on the table and thus it would have to accept whatever is pushed by Brussels with no recourse.

3. Immigration
Immigration is the subject that the “Leave” campaign feels the strongest. It touches people in many different ways and has high sentimental value. Let’s look at the numbers. Total population is around 65mln. Around 8mln have been born outside the UK (This must include Prince Philip as he was born in Greece) but only 3mln of them are EU citizens. EU immigration has seen the greatest increase of 1.9mln in the years after the EU expanded eastwards (2003).

So clearly we see that there was a marked increase in the last decade. In terms of nationalities there are around Poles 800k, Irish 390k, Germans 280k, French 150k, Spanish 137k, Romanian 223k, Italian 176k, Portuguese 140k, Hungarian 96k etc. The reasons why they are in Britain are as follows: 68% for work, for study 21% and 11% family.

The main attraction of coming into Britain is the level of pay which is higher than in many EU countries and the high levels of unemployment in Europe. One could say that immigration is the result but also a contributing factor to the successful and growing British economy. However the argument that they are arbitraging benefits or take advantage of the welfare state is not supported by numbers. The majority of 80% have jobs and do not claim jobseekers allowance or incapacity benefits. Many however claim tax credits as they are in low paid jobs. The “Leave” camp says that a new point system would be introduced similar to the Australian one limiting or rather targeting immigration. The “IN” camp touts the new deal that was struck by PM Cameron as the only way forward.

There is however one big problem. If Britain wants to trade freely with the EU which comprises 20% of the global market then it would have to accept free movement of human capital too. This is the so called Norway model. The EU is unlikely to give free trade without something in return as it has done in the case of Norway. Thus even if “Leave” campaign wins they may find that the realistic approach is to allow immigration. In fact, it is highly possible that a successful “Leave” vote becomes an “IN” vote in practice albeit after losing many of the benefits. This is what happened in the Greek referendum last year. The Greeks under the populist  Mr.Tsipras voted overwhelmingly NO only to find out that a YES was implemented albeit with much-much
harsher terms.

Conclusion
The most recent polls published show that the “IN” campaign is ahead but the “Leave” is closing in. The difficulty with polling is twofold. Firstly, as it is a referendum and not a general election it is not possible to use historical patterns or prediction models. Secondly, the outcome would be conditioned on how many actually vote. It is claimed that a high turnout favours “IN” whereas a low turnout favours the “Leave”. Although the question asked on the ballot paper is simple, in order to make an informed decision it is extremely difficult. The issues behind are very complex and information is not always available. Even if we assume that all information given to the public is correct (far from the truth) it is still hard to decide as the issues are technical.
It is thus inevitable that people look for simplifications and “credibility” in those who promote the case. Here lies the main conundrum. Most of the main stream politicians and what one might call the establishment are in favour of staying “IN”. The problem is that the credibility of the establishment has suffered a lot since the crisis of 2008 (saving bankers and not people etc.) and there is popular discontent against the “old regime”. We have seen this
not only in Britain but globally. Thus even if their arguments are based more on facts and figures voters are sceptical.

On the other hand the leaders of the “Leave” have two issues. Firstly, they know that their economic proposal is full of known unknowns and unknown unknowns and they prefer generalities. They play on the sentiment and nationalistic feeling (Sovereignty, take back control etc) and the signs are that their strategy is working. The second issue is eccentricity and credibility. The main leaders of the “Leave” campaign (as was the case in 1975) have serious credibility deficit. It is thus understandable why the polls have not given a clear guidance on the referendum. One thing is however certain. Geopolitically a “Leave” vote would be a game changer. Markets have been very complacent so far and have not priced in the possibility of a “Leave” vote. More on the markets in our next note.

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