Thursday 26 October 2017

Time's running out: economics is now going faster than politics

It’s a truism that the Article 50 clock is ticking. In March 2019 the UK will be a third country to the EU with all that entails, and any deal will have to be done at least six months before that in order to allow ratification. So there is about a year left.

What is becoming increasingly clear is that this political timescale is being overtaken by the timescale of economics and business. This week, five groups representing British business wrote to the government urging an early agreement to a transitional agreement on, effectively, status quo terms – which would mean many of the things that are red lines for the Brexit ultras, including ECJ jurisdiction. It’s a mark of how strange British politics has become that a Tory government regards these business groups as peripherally relevant or even, for the Brexit Jacobins in the Tory Party, just another group of saboteurs who don’t share the true faith.

But faith doesn’t really cut it when it comes to investment decisions, and whilst the Cabinet have reportedly not discussed what future trade terms the government will seek with the EU (even whilst insisting that the EU must start trade talks immediately) for fear of the splits it will reveal, businesses are obliged to make those decisions. For example, supermarket chains faced with the possibility of lengthy customs checks need to decide very soon on investments in new refrigeration facilities. For airlines, the crunch point of selling post-March 2019 seats is coming in March 2018. And before long, farmers are going to have to make decisions about what crops to plant.

Brexiters don’t understand any of this, partly because very few of them know anything about modern business practice. Very few business people support Brexit – it’s telling that only three have really had a significant profile: James Dyson, JCB boss Lord Bamford and Tim Martin of Wetherspoon. The first two of these have had massive legal disputes with the EU, with JCB suffering a hefty fine for anti-competitive practices, whilst Wetherspoon does not export and is highly reliant on EU migrant labour.

At all events, we’re now getting to the point of no return as regards business decisions. For some, the point is already passed. Internet entrepreneur Jean Meyer is moving his company from London to Paris having “lost track of the number of developers, marketing managers or data scientists who refused to join us following the Brexit vote”. On a bigger scale, the strategically vital pharma industry is getting very alarmed: “will we be able to do everything on time? Probably not” said one senior manager of Merck, a leading player.

Brexiters dismissed the warnings of business as ‘Project Fear’ before the referendum, and since then have dishonestly pretended that since the warnings did not come true the day after (which they did, in fact, as regards sterling) then they will never do so. But the situation now is quite clear: businesses are not investing and are beginning to leave. Jon Worth wrote an excellent blog this week arguing that politically ‘something has got to give’. That’s true, but when it does it is likely only to increase the political uncertainty around Brexit. Which will only accelerate disinvestment. And businesses which leave now won’t come back, whatever subsequently happens with Brexit.

Beyond all the business issues, it’s crucial to remember that uncertainty bites very hard upon individuals, especially EU citizens in the UK and UK citizens in the EU-27 but also people who may be thinking of moving to work, study or retire in other countries. Many of these people are facing decisions without any real way of knowing on what basis to make them: decisions about themselves but also about, say, their children’s schooling. Literally millions of people who, quite reasonably, have built their lives on a presumption of UK membership of the EU are having those lives wrecked and having to make decisions, whilst the meaning of Brexit cannot be defined even by those who most assiduously campaigned for it. Those decisions, like those of businesses, are also being made right now and won’t easily be revoked.

Formally, Brexit happens in March 2019. For many businesses and individuals it is happening right now. Is there anything on the other side of the coin? Are there any businesses or individuals investing in or coming to Britain because of Brexit? No. That is an extraordinary fact so it's worth repeating: there is not one single business investment that has been announced as a result of Brexit.

Update (with apologies for the font/formatting problems which I haven't been able to resolve): The claim at the end of this post, that not one single business investment has been announced as being a result of Brexit, has been criticised on Twitter. Some named well-known cases of companies (such as Amazon, Google and Toyota) which have made investments since the Brexit vote, but these investments are not as result of that vote. Another criticism was that the collapse of sterling following the Brexit vote has made UK firms attractive for purchase by foreign investors. This may be true – although the case most usually cited of this development is the purchase of ARM by SoftBank, whose CEO said “I did not make this investment because of Brexit” - but what I actually had in mind with my claim was firms making new productive investments because Britain has voted to leave the EU rather than the sell-off of British assets to foreign ownership because, as a knock on effect of the vote, the pound has collapsed. It’s also worth saying that the fall in sterling doesn’t necessarily make firms cheaper to acquire because if they make profits in other currencies (notably, dollars) the fall in sterling makes their share price, and therefore acquisition price, higher.
Anyway, I undertook to amend this blog post if examples could be found of companies announcing investments made because the UK had voted to leave the EU. In response, links to several news stories were proposed as examples. However, with one partial exception, which I will come to, they did not show evidence of a company making a new investment because of the vote to leave. They were: a report of an Asian hotel chain that wanted to open a hotel in the UK because of the fall of sterling (but had as yet not done so); a UK holiday camp being re-developed (with an investment that started in 2014, so not as a result of the vote) which is experiencing a boom because the falling pound is leading to more ‘staycations’; a report of booming yacht exports because of the falling pound (no investment announced); an airline saying that it ‘expects’ more business travel as a result of Brexit (no investment announced); a report predicting that more US films ‘could’ be made in the UK because of the falling pound (no investment announcement); a survey showing that 52% of Scottish food and drink firms had increased their investment ‘plans’ because of the Brexit vote (no investment announced); a story about how gin exports have increased because of the falling pound (no investment announced); a report of the CEO of AstraZeneca saying that Brexit will create (unspecified) new opportunities for UK life sciences (no investment announced); and a report of a construction industry leader saying that Brexit ‘could be great news’ for the sector (no investment announced).
So none of these stories show a company announcing a new investment made because the UK voted to leave the EU. But I mentioned that there was one partial exception, a story in the Express, published the same day as my post. This was about a Dutch private equity firm opening a UK office. They see Brexit as an opportunity to “help UK companies to internationalise and to move into the continent” and “provide strategic advice to chief executives that might feel a little lonely at negotiating tables after Brexit”. It is true to say that this is happening because of the vote to leave the EU (although it is not clear what the nature of the investment is) and I am sure that there are many other examples of an industry developing to give advice to companies about how to deal with Brexit. But it’s rather like the chutzpah definition about the man who sought clemency for having murdered his parents by pleading that he deserves sympathy as an orphan to claim that the development of such an industry shows the business potentials of Brexit.
Coming back to the main issue, it may have been a hostage to fortune to say that there have been no announcements of this sort. But I haven’t seen any. Still, it’s impossible to prove a negative only to disprove one, and I wouldn’t be completely surprised if with enough digging it might be possible to come up with some examples. The fact that it is necessary to dig deep is telling in itself and suggests that they will be vanishingly few, and seem likely to be a side effect of the damage that the Brexit vote has done to sterling rather than a direct effect of the decision to leave the EU per se. Thus, at most, they will be indirect consequences. If so, it also bears saying that many Brexiters, most prominently John Redwood, claim that the fall in the pound is nothing to do with Brexit anyway!

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