Business investment since the referendum

The Department for International Trade, led by Liam Fox, has announced that it has secured almost £16 billion of extra investment in the UK since the Brexit vote. Unsurprisingly, Fox and other Brexiters have seized on this as a vindication of Brexit with Iain Duncan Smith saying that “this latest announcement is the turning point. You are now either in the camp that fundamentally believes that Britain can do anything, anytime and anywhere, or you are in the doom and gloom camp that doesn't believe in Britain”.

It would be difficult to think of a more asinine claim, and one which reflects what I called in my previous post the “bogus patriotism” with which Brexiters are trying to close down debate and to stigmatize those disagree with them.

I call it asinine because, even if you are the most ardent Brexiter, this announcement cannot possibly be interpreted in this way. There is no suggestion that this investment was the result of the vote for Brexit, and there is no reason why it could not and would not have happened had that vote not occurred. Nor are the deals that have been struck ones that require leaving the EU or the single market; indeed, we have not done so as yet. And the deals Fox is announcing do not arise from his supposed role in making new free trade agreements; no such agreements can be made until the UK leaves not just the EU but also the customs union.

On the other hand, what has happened as a result of the vote is that many investment decisions have been deferred or abandoned. These are so far estimated to amount to £65.5 billion (as at November 2016), a far larger figure, and they involve one-third of UK companies, rising to 42% of medium and large companies (which, of course, make the biggest investments). And note that this is just UK companies, it does not even include any deferred or abandoned foreign direct investment decisions.

Not only does the figure for reduced investment dwarf that of new investment but, to underline the point already made, the reduced investment is ascribed by those who have made the decisions to the referendum vote, whereas the new investment has not been ascribed by those who decided on it to the vote. I am not aware of a single domestic or foreign investor who has publicly stated that they have made a new investment that they would not otherwise have made because of the Brexit vote. That includes such well-publicized cases as the £1 billion investment by Google, which was not a result of the vote, about which its CEO expressed “reservations”, it was just that the plans, that had been developed some years before the vote, weren’t affected by it. And with the decision came with a warning that free movement was crucial to the tech sector.

The most that Brexiters can claim is that the vote has not caused all investment in the UK to cease. But no one ever said that it would. One of the hallmarks of the leave campaign was to respond to the warnings of, in this case, the likely reduction to investment by falsely claiming that these were hyperbolic predictions that it would end, which could then be dismissed as ‘project fear’. Now, they return to those false claims and retort, as Michael Gove did with respect to the £16 billion announcement, that the “prophets of doom have once again been found wanting”. In fact, the evidence so far is clear: the vote for Brexit has led to significantly reduced business investment, exactly as predicted. And that is before Brexit has happened and before Article 50 has even been triggered.

What is true is that since the vote there have been high (though lower than the previous year) levels of merger and acquisition (M&A) activity, with foreign firms buying up UK businesses, the earliest high profile example being the purchase of Cambridge high-tech pioneer ARM by a Japanese firm. This is attributable to the vote because it caused a huge devaluation of sterling (though the ARM sale would have been likely to happen anyway) which has made it cheap for foreign companies to buy UK companies. But this is not (other than for the investment banks and other firms who do the M&A work) good news for ‘UK PLC’. It’s just a cut-price selling off of national assets, with the ARM sale being described by its founder as a “sad day for technology in Britain”. And if one of the motivations for the Brexit vote was anti-globalization sentiment and a desire for protection of jobs then it’s certainly bad news as it puts even larger numbers of British jobs at the mercy of far-away boardrooms. So much for ‘taking back control’.

The end of the beginning of Brexit

The holiday season has meant that there have been few substantive developments, but the successors of the Leave campaign have made some high profile interventions in favour of hard Brexit. First, the Leave means Leave group have written to the Chambers of Commerce in all the other EU states asking them to put pressure on their governments for a tariff-free trade agreement for the UK. The initiative is really just a reprise of the familiar refrain that ‘German car manufacturers’ will ensure that the UK gets a good deal, and it suffers from the same difficulties. First, trade policy is not determined by business interests. If it was, there would be no question of the UK leaving the EU! Second, many EU businesses see great gains to be made at the UK’s expense if it gets a bad exit deal. And, yet again, the focus is on tariffs rather than the non-tariff barriers to trade the erosion of which are the main characteristic of the single market. It will be interesting to see what replies they get.

Hard Brexit was also promoted by Lord King, the former Governor of the Bank of England, as bringing “real benefits” but beyond the usual talk of the opportunities of doing new trade deals there was no detail of what these were, and he conceded that no one should think it was going to be “a bed of roses”. Although it was greeted with delight by Brexiters, it seemed to me a fairly cautious, even downbeat, assessment. Detail was provided by another hard Brexit pressure group, Change Britain, which estimated savings of £450M a week as a result. But as usual it was predicated on dodgy assumptions and bogus statistics, with Jonathan Portes of the National Institute of Economic and Social Research (NIESR) denouncing it as “junk” not least because it confused government revenues with exports. And, yet again, it was predicated upon airy expectations of future trade deals with third parties the terms and timescale of which are unknown.

What was really alarming about this was that Portes – a heavyweight figure, formerly the Chief Economist at the Cabinet Office – was then denounced by Michael Gove of Change Britain as a remainer who should have learned some “humility”. In fact, Portes never publicly endorsed either side of the Brexit campaign, leading Gove to challenge him to declare how he had voted. This seems truly monstrous: are we now required to reveal our vote (to leave) in order to be regarded as a legitimate voice in the debate about what to do now?

This mind set is reflected in another alarming development. The leader of the First Division Association (FDA) – in effect the trade union of senior civil servants – has said that politicians, including the Prime Minister, lack the political courage to acknowledge the complexities of Brexit. As a consequence, whenever civil servants raise these complexities they are attacked as seeking to subvert ‘the will of the people’. There are real dangers in all this, both in terms of effective policy-making and also in terms of an incipient totalitarianism in political culture.

One aspect of this is the growing narrative amongst Brexiters that we all somehow have a patriotic duty the ‘get behind’ Brexit. Thus Tory MP Charlie Elphicke responded to the Change Britain report by saying that “now everyone, Remainer or Leaver, has a duty to get on with the job of delivering a brighter future for our land”. Many similar views have been expressed across internet discussion forums. It is nonsense, for the reasons I set out in a previous post (‘Why remainers shouldn’t move on’) and most fundamentally because there is nothing patriotic about getting behind (whatever that really means) a course of action that will be catastrophic for our country.

This bogus patriotism should be completely rejected, as should the emerging Brexiter meme that all would be well if the EU were not refusing to give us a good deal – by which they mean full membership of the single market without free movement of people, budget contributions or EJ jurisdiction. But such a deal was never in prospect and nor is there any reason whatsoever why it should be on offer. That was abundantly clear before the Referendum, but Brexiters refused to accept it. So for them now to try to whip up ‘patriotic’ fervour about it is ridiculous: what it reveals is the mixture of lies and unrealism of their campaign.

On a perhaps lighter note – or is it? – take a look at this mashup video on Brexit ('Brexit means Brexit and we’re making a mess of it’) by Cassetteboy. Next year, we’re going to begin to see the full extent of the mess. It will see (presumably) the triggering of Article 50 and the revelation of whether the UK is seeking hard or soft Brexit. If, as seems increasingly likely, the former it will very likely mean a catastrophic further fall in the value of sterling and significant disinvestment in the UK. It won’t be the beginning of the end of the Brexit process, but it will be the end of the beginning, as the Phoney War of the hiatus between the referendum and A50 finishes.

A transitional deal?

For the last few weeks, the idea of a ‘transitional deal’ has been floating around the Brexit debate. It arises from the realization that the two year period specified by Lisbon A50 is too short to allow for exit terms, still less future terms, to be agreed.

It is worth pausing at this point to recall the Referendum campaign during which the leave campaign was warned that this was so by, to take one important example, Sir Gus O’Donnell the former Cabinet Secretary. This was dismissed as (of course) Project Fear and as “nonsense” by, to take another high-profile example, Fraser Nelson of the Spectator. Nelson opined that the UK could take as long as it liked, by having informal negotiations for as long as it took before triggering A50. But that was, indeed, nonsense as was said at the time and has now been shown to be true: the EU will not enter into negotiations before A50 is triggered. It’s really important to keep recording and reminding about how mislead people were during the Referendum, not just on the headline claims of the Leave campaign but on these perhaps lower-profile, but crucial, points.

At all events, the Chancellor Philip Hammond has today stated that a transitional deal will be likely to be necessary to avoid the ‘cliff edge’ which the Prime Minister recently told business leaders that she, too, understood to be a danger. The cliff edge, to make it clear, refers to the overnight collapse of the trading, regulatory and legal system if there is no agreed deal within two years of the triggering of A50. What Hammond and May are saying is no more than a pragmatic recognition of an obvious reality, but it runs into three problems which encapsulate the problems of the Brexit mess.

The first problem is the internal politics of the government. David Davis, the Minister for Brexit, said just last week that he was “not really interested” in a transitional deal, and went on to say that he would only consider it to be “kind” to the EU – implying that it was something that was of no importance to the UK. So this contradicts Hammond both with respect to the need for such a deal and also with respect to the Chancellor’s formulation that such a deal would be in the interests of both the UK and the EU. Meanwhile, again just last week, Foreign Secretary Boris Johnson said that 18 months would be “ample time” to conclude negotiations. So there is no clear government agreement on this.

The second problem is that of wider politics. Hammond’s statement received a furious reaction from readers of the Brexiter press, as the comments under this report in the rabidly pro-Brexit Express show. More generally, many leave voters are becoming frustrated with what they expected to be an immediate exit from the EU, and if the Tory government go into the 2020 election without having delivered Brexit they will be likely to lose a lot of votes to UKIP, who are now committed to the (crazy) idea of leaving the EU without even triggering A50, let alone having a transitional deal.

The third problem is the EU itself. All of the UK Brexit debate is occurring in a vacuum, as has so much of the discussion about the EU for decades. But Michel Barnier, the EU’s chief Brexit negotiator has indicated that he is opposed to a transitional deal that simply allows the UK to cherry pick terms for single market access. Manfred Weber, conservative leader in the European Parliament and a key ally of Angela Merkel, has been similarly scathing. Others, such as Luxembourg’s Prime Minister Xavier Bettel have been even clearer: there is no half-in, half-out deal on offer. All the indications are that the EU will offer a hard Brexit, with no transitional deal.

This is the realpolitik of Brexit in general, and a transitional deal in particular. Again, it is worth contrasting this with the blithe assurances given by Brexiters during the referendum campaign. Again and again they insisted that ‘the German car industry’ would ensure the sweetest of Brexit deals. It was said to be nonsense then; it has been proved to be nonsense now.

Hammond’s statement about the need for a transitional deal is reasonable, so far as it goes. But unless the UK economy is going to be completely wrecked then at some point – and time is running out – the Prime Minister is going to have tell the British people the truth that Brexit itself is unworkable. That would be hugely politically dangerous for her; but the greater danger to her may lie in not doing so, and having that truth emerge when her currently high poll ratings have slumped. Now, she could lead what is going to happen; then she will have to apologise for it.

The Article 127 challenge

It’s probably a fair bet that few of us thought much about – if we had even heard of – Article 50 of the Lisbon Treaty until recent months. Now, just as that is becoming part of every news story, we need to give attention to Article 127. This is not (as is sometimes being misreported) an article within the Lisbon Treaty, but rather within the European Economic Area (EEA) Agreement of 1992, to which the UK was a signatory. The significance of this is that as such, it may be that the UK remains a member of the EEA – which means the single market – even if it leaves the EU after invoking Lisbon A50. This is because to leave the EEA arguably requires invoking A127 of the EEA Agreement. Whether or not this is so is to be the subject of a judicial review in a case being brought to the High Court by campaigners to stay in the single market.

The complex legal issues at stake are discussed in Professor Steve Peers’ ever-useful EU Law Blog, and I will not repeat what he says (and am not competent to add to it). The political consequences if it were upheld that A127 also needs to be invoked would be interesting. At one level, this could simply be done in the same way as with A50 – by the government, with or without parliamentary authority (depending on the outcome of the Supreme Court case). But the dynamics might be very different.

The Referendum asked about EU membership, so the result makes it difficult for Remain MPs to withhold consent to triggering A50. However, nothing was asked about leaving the EEA, so withholding consent to trigger A127 would be politically easier. This is a version of the point I’ve repeatedly made on this blog, namely that the referendum did not mandate hard Brexit; but it gives an important legal ballast to that argument, since it would mean that a specific legal process (A127) must be followed for hard Brexit to occur.

Of course all this may be rendered irrelevant if the judicial review does not uphold the argument that A127 must be invoked in addition to A50 in order to leave the single market; or, equally, it could be irrelevant if the government decide for a soft Brexit of their own accord (on which, we are no further forward than when I last posted).

Inevitably this latest case has outraged Brexit politicians and press, but they are going to have to get used to the fact that the Referendum was not the end but the beginning of a very long and complicated set of political and legal processes. That is a consequence of voting leave, and if those who did so don’t like it they should have listened to the many warnings – dismissed as ‘project Fear’ – that this would be so. In a similar way, the call today from Gisela Stuart, the Labour MP who was a leader of the official Leave campaign, to guarantee the rights of EU citizens in the UK and vice versa prompts an obvious thought. She should have thought about what it would mean for those affected before she lent her weight to the ferociously anti-immigration campaign.

The Leave campaign - as they delight in telling us - won, and now they must take responsibility for all of the consequences and for delivering Brexit. They are no longer a campaign against ‘the ruling elite’; they are the ruling elite. So they will be held to account both for the promises they made, including the £350 million a week for the NHS which they now disown, and for their lack of planning for what the process and outcome of leaving the EU would consist of. So, as in the present case, they can hardly complain that the courts must decide on whether A127 is relevant: they should have worked out what needed to be done to leave the single market as well as the EU before they recommended that people vote for them. On which subject, there is a pervasive attempt amongst Brexiters to claim, now, that they had always made it clear that a vote to leave the EU was also a vote to leave the single market. As this instructive video shows, they did not. So just as they are trying to re-write history by dropping the £350M slogan, they are inventing claims they did not make.

Implications of the Richmond by-election

The surprise LibDem victory in the Richmond Park by-election yesterday could have considerable significance. Winning on a strongly anti-Brexit platform, it opens the possibility that the LibDems could make further gains in some areas. It also tells us that ‘remain’ voters cannot simply be ignored.

Much attention has focussed on the possibility that pro-Brexit MPs (especially Labour) might be vulnerable, especially to UKIP, in constituencies that voted to leave the EU. I am not entirely convinced by that because voting patterns in the referendum were different to those in parliamentary elections in that many who voted leave do not normally vote at all. In any case, about two-thirds of habitual Labour voters voted remain, so the idea that Labour’s core vote is capturable by UKIP is unlikely. Nevertheless, there are important issues for Labour in all this: are they going to be an anti-Brexit party or not? If not, they will lose out in their London heartlands; if so, they will have to struggle with UKIP in their Northern heartlands. My feeling is that the Brexit vote in combination with Corbyn’s agnosticism on the EU means that Labour are finished as a political party.

However that may be, the neglected issue is what remain voters now do. With Brexit now being the dominant political issue and voter cleavage predictions are difficult. From Richmond, it seems that the one third or so of voters who are habitually Tories but who voted remain might be willing to support the LibDems, as, in certain constituencies, might be Labour Remainers. So although the national opinion polls show the LibDems at something like 8-10% in places like Richmond where the remain vote was high the picture could be different. That would be relevant in several parts of London, as well as Cambridge, Oxford, Bristol, Exeter etc. and could translate into several seats at a future General Election.

Regardless of electoral arithmetic, Richmond is important in another way. It’s a reminder that the country is bitterly split on Brexit, and that there is no mandate at all for a hard Brexit (it appears that many Tory Leave voters supported the LibDems in Richmond). If the government try to force a hard Brexit in order to appease one (minority) group of their backbenchers, there will be an electoral price to pay. Equally, or more, significant the traditional financers and supporters of the Tory Party in business and the City will strongly oppose it.

Underneath all this there is a harsh and controversial truth – controversial, that is, within the prevailing discourse that the Brexit vote was ‘the will of the people’. Because the demographics of the vote show very clearly that those who voted Brexit were more likely to be economically inactive and/or in lower social classes. Now of course everyone’s vote is worth the same – but is a Tory (or any) government really going to prioritise the wishes of the demographic that voted leave over the professional and corporate middle class? At the end of the day, like it or not, pensioners in Lowestoft are not going to be the cultural or economic future of the UK; young pan-European teams of scientists spinning businesses out of Cambridge University are. So although everyone’s vote rightly counts for the same in a referendum, there has to be a realism beyond that piety, at least for any half-way sensible government.

That ‘realeconomic’ has its counterpart in the realpolitik of what kind of Brexit can be achieved, and in the last couple of days there have been signals from the British government that a soft Brexit is in prospect. I don’t attach much meaning to that, because the government are sending out so many contradictory messages. Even so, some kind of EEA deal would seem to be the most obvious way out of this situation, both as regards negotiations with the EU and also as regards the British electorate. That is to say, about half of the country don’t want to the leave the EU but almost all of them could probably just about be satisfied with EEA membership; just about half the country want to leave the EU and some of them would be happy with EEA membership. So, if we are really concerned about the ‘will of the people’ then EEA membership is probably about the best way forward. And in a way it would, actually, reflect where the UK has always been, ever since accession in 1972: a kind of semi-detached member of the EU.