Luncheon - The Brexit Debate

Michael Ward & John Hollis debate "Brexit: What Happens Now?"

Both speakers will have 5 minutes to put forward their point of view with a five minute Q&A slot at the end.

Michael will present an optimistic post Brexit outlook and John will outline some of the challenges for the UK and Guernsey (and within the EU).

The debate will cover issues such as follows......"

10 key points, followed by 4 predictions.

 1.    The key trade-off in the Referendum was "economic benefit versus a varying perceived or actual future loss of control/sovereignty" (laws, borders, immigration, population........army, budgets, tax & social policies etc...per Greece). That trade-off is uncertain and personal for everyone, so the arrogance of claims of mis-voting is misplaced.

2.    My personal heart was with Brexit, but my logical choice was with Remain, because I perceived the scale of the economic hit of dislocation will prevent a post-Brexit Tory or Labour government from delivering on its financial and social policies. This could open the door to a damaging extreme left-wing government in the UK in 2020 or by 2025.

3.    Britain is a high-cost low-productivity economy, which relies unduly on Financial Services, an industry which is far more mobile and easier to relocate than manufacturing or other services. It has relied on high immigration to become lower-cost and improve productivity in other sectors in recent years (via Poles, Latvians and other hard workers).

4.    The initial economic hit to the UK will be significant, perhaps 5% of GDP. This swamps any monetary savings of the cost of EU membership sent to Brussels (less than 1% of GDP). The UK will therefore be worse off, but what matters most is what happens next over the period 2017-2025 in terms of the fiscal and trade policies it adopts, and it's negotiations with a weakening but resentful EU.

5.    As a high-cost low-productivity economy, it is not credible for the UK to suddenly compete so successfully in far flung markets which it had previously somehow 'overlooked.' It is far more credible and immediate that parts of the Financial Services industry, which provides high tax revenues to the UK, will be required to relocate from London to Paris, Frankfurt or Dublin.

6.    But let us look for some positives and try to be constructive. The pound Sterling has dropped by more than 10% following the Referendum result. If (emphasise if), the inflationary import costs can be contained, this will help exporters (although probably not net national wealth). Exporters may sell more at the newly devalued prices. This could help boost employment, which is what devaluations are meant to do according to economic theory. Will that employment be of more UK nationals, or of an increased influx of migrant labour escaping depressed economies with low wages and/or high youth unemployment (Spain, Portugal, Greece etc at 30-40% youth unemployment, or Poland, Italy, France etc around 20%, or Syria, Turkey, Somalia and elsewhere.......)? Employers will decide; what will they prefer and choose?

7.    Having "taken back control" and facing an economic shock/crisis, the public and UK Parliament will have to choose between an 'all backs to the wall' effort to drive economic growth, or indulging in a divisive 'blame game.' So far, the signals have not been good, but it is early days. Is there a leader and leadership team in place to unify the nation and inspire a competitive fight-back? Clearly not in the Labour Party. Maybe in Theresa May, but she'll probably need big Magic Roundabout 'Florence Boots' rather than flashy shoes. And a lot more besides.......

8.    And what of the Scots? Will the Scots get the chance and vote to split from the UK and operate within the EU as "Greece without the sun", as some have predicted? Surely, they are large enough to manage their own affairs independently if they so choose by democratic vote? But 'independence' should mean 'independence' from English subsidies or bailouts, especially after the cost to the English of the Royal Bank of Scotland's excesses since the 2007 financial crash.

9.    And what of the EU itself? Perhaps too much post-Referendum analysis has assumed that the EU is an oasis of stability, financial rectitude and economic strength, when the opposite is nearer the truth. The EU has serious problems. There may be a value in the UK being more detached from those problems. The single currency is seriously flawed and one reason for excessive youth/other unemployment approaching 40% in parts of Europe. The EU-proposed answer of "absolute political union; central control of fiscal budgets and social policies; and unlimited inter-country financial transfers" is logical, but is undemocratic with existing EU institutions and simply won't be accepted by the German, French, Dutch, Greek and other populations. The EU is stranded in 'no-man’s land', between the barbed wire, and is under fire - it cannot readily move forward, nor can it readily move back. It has as much serious soul-searching to do as the UK and it must now change. Will that change be more towards a trading bloc with greater devolved political control of member states from the centre, i.e. the type of reform favoured by the UK? With Poland and others already feeling ignored by the 6 founding member states, and organising alternative competitive meetings on the 'EU way forward', will major reorganisation and treaty change soak up the EU's focus and resources over the next 5-8 years? This will happen in parallel with Brexit and the loss of the U.K. as its second/third highest financial contributor.

10.  Economic benefits of EU bloc membership will decline relative to the problems of 'centralisation of democracy' - WTO developments, a shift to the East, the blockchain and Fintech impact on Financial Services etc.. In addition, 'passporting' regulations for banks from 2018, based on current EU rules of "permanent regulatory equivalence", will enable UK banks to operate in Europe for certain key activities, unless these are now further 'fiddled' by the EU.

 4 Predictions

 1.    The Labour Party, in the absence of a unifying visionary leader, will disintegrate and realign.

2.    The Scots will eventually get another independence vote, but the key issue (for them and others) will be "who pays for them in future." The English, in tight fiscal times, will be happy for the Scots to depart if they wish, with a clean break, and for the EU to pay and be responsible for bailing out the Scots the next time.

3.    There will be a very messy UK General Election in 2020, during a period of UK economic struggle, along with the western world still being in 'intensive care' after the 2007/8 financial crash. The Election may come much earlier, if the Electoral Commission rules against the Tory party for excessive expenses in 20 marginal seats and if the Tories opt for a quick General Election while the Labour Party remains in disarray in a civil war between factions. However, the key will be how the UK economy and population react to any radical new economic and fiscal policies and trade initiatives.

4.    Slow-burning problems within the EU will spark into larger fires, including repeated Greek bailouts, Italian banking crises, Euro imbalances creating greater youth and other unemployment, migration flash-points, and splits within the bloc. A 'New Europe' will emerge in 2022-2027. The EU bloc trading economics will become less beneficial and EU politics more problematical, at a time when key communities in Europe seek devolution and more involvement in local decision-making. Brexit may be seen historically as the 'game-changer'?

I will close with two quotes and ask you who made them, and how recently:

Quote 1

"Above and beyond the concept of the nation state, the idea of a new community will transform the living space given us all by history into a new spiritual realm.....The new Europe of solidarity and cooperation among all its peoples, a Europe without unemployment, without monetary crises....will find an assured foundation and rapidly increasing prosperity once national barriers are removed."

Quote 2

"The people of Europe understand increasingly that the great issues dividing us, when compared with those which will emerge and will be resolved between continents, are nothing but trivial family feuds.....I am convinced that in 50 years, Europeans will not be thinking in terms of separate countries."

For the last word, let us borrow from the Chinese........We live in interesting and truly historic times.