Thursday, 21 February 2019

Still missing the point on no deal

I keep tabs on Spiked Online because usually it's benchmark idiocy and that is the one function it serves. I still have some residual respect for Rob Lyons though. Finally Spiked is at least attempting to apply themselves to the issues albeit three years late. The piece is a little more sophisticated than BrexitCentral propaganda but then on recent form that is not saying very much.

Lyons argues that a no deal Brexit will not be Brexitageddon. "Most people seem to think that the UK is only just starting to plan for leaving with no deal and the EU really isn’t worrying about it at all. In reality, none of this is true. While flipping suddenly from ‘being in the EU’ on 29 March to ‘being completely out of the EU’ on 30 March would provide some headaches, there is good reason to think it won’t be an unmitigated disaster". He goes on to list the unilateral contingency measures taken by the EU.

The truth of the matter is that nobody is entirely certain how the system is going to work. We know that the UK has taken steps to offset problems with customs formalities but there is little confidence this system will work well because users of the system will be unprepared and unfamiliar with the process. 

In terms of what happens on the other side of the Channel, it helps to read properly what the EU has said. "In a no deal scenario, all relevant EU legislation on the importation and exportation of goods will apply to goods moving between the EU and the UK". The means the full array of official controls in respect of animal products and given that there is not presently a border inspection post at Calais, freight normally travelling through that route must make alternative arrangements.

On that basis we assume that the refrigerated trucks will not pass through Dover meaning that much of the anticipated logjam does not happen. Even so, that's not a bet I would make since there is a general complacency in industry and their own industry bodies are prone to getting it wrong. Assuming all went well in the event of no deal and we avoided chaos at the ports that would largely be to do with a significantly reduced volume of trade. 

As to air traffic, when concerns were first raised, few in government had even anticipated there would be problems since MPs are wholly ignorant of what the EU actually does. It was, therefore, reasonable to assume that if we walked out (as the ERG were advocating prior to the contingency instruments) then aeroplanes simply would not fly. Now that the EU is legislating for these contingency measures we can be assured of "basic connectivity" but that still cuts the industry out of the EU air services market which is a major blow to the UK sector.

It is conceivable that the initial headline impacts could be avoided. That, though, does not mean we are off the hook. There is no contingency provision for a number of regulated markets from farm animal waste to pharmaceuticals. Some of these will be affected immediately and others will run into problems in the following weeks and months. The problem is that this saturate the absorptive capacity of government, interrupting the normal functioning of the state.   

These are short to mid term issues, and Lyons correctly assumes business will adapt but gives no thought to what it is adapting to. It is adapting to a state where business has vastly inflated logistics costs, a mountain of red tape, and few participation right in the European market. Engineering and financial services especially take a hit. 

That is not the end of it though. In terminating all formal bilateral relations with the EU, much of the interagency cooperation stops dead, as do academic programmes, animal transport, maritime surveillance, anything to do with Galileo and litany of obscure and arcane issues that will require a rapid and effective response from government at a time when its capabilities are stretched to the maximum. There is then the matter of our third country agreements, only some of which can be rolled over and only on a temporary basis.

The cumulative effect of all this is unknowable. It is that exact uncertainty that will see an immediate halt to investment decisions - right about the time when we are already on the cusp of a global manufacturing recession. Investment remains on ice until a new normal is established. We not know, however, what the new normal will be, what new conditions will be demanded of us in restoring trade functionality with the EU and the rest of the world and what regulatory frameworks look like.

As much as this is going to cost business it is also going to hammer government finances putting a number of government functions on hold or scrapping them entirely. It might be more than a year before we have established even an interim normal where the UK still looks precarious due to heightened political instability.

The multinationals have already taken a number of steps to offset the impact - notably Rolls Royce moving its design approvals work to Germany and a number of Airbus functions and suppliers already switched over to continental facilities. These such corporates are unlikely to make bombshell announcements in the way that Honda has, rather they will quietly dismantle most of their peripheral business functions and abandon any future expansion plans.  

This then has a ripple effect through the economy. If you're not paying graduate engineers a decent salary then everyone from the local BMW garage to the mobile dog grooming parlour takes a hit. So does the sandwich shops, the local pubs and the wider high street. Not forgetting that many of these high skill jobs in Airbus and Rolls Royce are contingent on authorisations not covered by EU contingency measures so we will see job losses even in the first week since many of them are employed on a contractor basis - as is much of the defence/aerospace sector.

Unemployment tends to be a trailing indicator so it will be a while before we get the complete picture but the losses will snowball down the months. Pretty soon local authorities are screaming for cash as the housing benefit claims double and triple. That money has to come from somewhere. 

Now you could afford to take a punt on something as mindless as no deal if you at least had an idea of what you are going to replace those jobs with and an idea of how to offset the loss of a £270bn a year trade relationship. Being that we already have a number of FTAs via the EU with most of our relevant trade partners, the "fwee twade" delusions of Mr Rees-Mogg are not going to save us, nor are the crackpot theories of Professor Minford - which will more than likely destroy British agriculture and take a lot of tourism with it.

So when looked at as a whole, given the rapid drop in tax receipts, major devaluations, a downgrade of our credit rating, a wave of bankruptcies and major decline in living standards, even if we manage to keep the ports running smoothly, by most people's definition that is a catastrophe. But then Lyons gets around that by glibly redefining the word.
It makes one wonder if people have forgotten the meaning of the word ‘catastrophe’. What’s happening in Venezuela is a catastrophe; not being able to make ratatouille because there are no courgettes on the shelves is not a catastrophe. Maybe they have been watching the excellent Channel 4 sitcom Catastrophe, in which an American man and an Irish woman have a six-day fling in London, only for her to discover later on that she is pregnant. He moves over to the UK and marries her so they can raise the child together. A major hassle and a life-changing situation. The result is that they are generally happy, both end up in well-paid jobs, they have some more children and live in a nice house that most Londoners would sell their granny to own. If that’s a catastrophe, I’m looking forward to No Deal.
You have to hand it to Spiked. They always find a way to take boorish crassness to a new level. Certainly I do not anticipate foraging for scraps from a bin or eating the dog, but if, say, you're a design engineer with a large mortgage and car payments to make and a family to support, and you're told that morning that your job no longer exists and all the similar companies in the region are in the same boat, that's a major catastrophe for them. Generally these things lead to long term unemployment and family breakup.

If you're a farmer having to then dump your export stock on the local market for a fraction of price, knowing that the next batch of livestock is not commercially viable and you have to sell your land for less than it's currently mortgaged for, then that's a catastrophe too. If you run a feed mill and the local livestock sector is done for then so are you. If you run a farm services company then you're also pretty stuffed.

As to what happens in the banking sector, the City is optimistic that it is resilient but from what we have seen, there is a grave complacency and longer term, they are exposed to the wave of defaulting loans and mortgages. This is going to have serious ramifications for pensions and savings and car insurance, the latter then inhibiting individual mobility. 

Being that there are few areas of commerce and regulation that are not in some way influenced by or dependent on EU membership, the absence of a replacement relationship means that the secondary effects could be far greater than the disruption of Brexit day. We are likely to see major inflation which will in turn force rationing of some medicines and NHS services.

In respect of the scope and breadth of the problems, ensuring the ports do not fall into chaos is really only the bare minimum - and for all the noise made about it, even this government in its current state of dysfunction ought to be able to get a grip on it. That, though, is far from mission accomplished nor does it prove that the warnings were "project fear". The little that it does accomplish is essentially window dressing for a failure of government that will see the UK slide in every known league table. You are, of course, entitled to pick your own definition of a catastrophe, but by my reckoning, this qualifies with room to spare.  

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