The Political Economy of Brexit; London Will Adapt.

Everyone is trying to second guess the negotiating strategy of Theresa May, and how the EU will respond. No country should be more concerned about this than Ireland, the only EU country to share a border with the UK. Next week, the Irish government will host an all Ireland civic dialogue.  Political economy considerations have never been more important.

In hindsight Brexit might be conceived as a long-term inevitability, which can be traced back to the structural fault-lines of EU enlargement, and the free movement of peoples into Europe’s largest ‘open’ labour market. Helen Thompson, a professor at Cambridge has suggested as such:

  1. The euro crisis politicized the city of London, which became the default offshore finance centre for euro clearing.
  2. EU enlargement, and then the euro crisis, turned Britain into Europe’s employer of last resort, turning it into an offshore labour market.
  3. This spurred and politicised a latent immigration concern within large swathes of public opinion, and the electorate.
  4. Very quickly, the euro crisis, and the response to it, not least the Fiscal Compact Treaty, exposed the future of Europe as a two tier Union: between the Euro area, and the rest of the EU.
  5. The balance of power (i.e. the rise of Germany) changed and weakened Britain, who were increasingly “outside” the EU process, despite being the employer of last resort for the euro area.

In terms of the political economy of Brexit, the biggest risks don’t really pertain to the city of London (who’s core priority will be to allow some sort of system for the free movement of workers within their sector). The city’s strengths, paradoxically, make it a source of weakness. The Conservative government are confident London’s financial service based economy will adapt. This is much less the case with medium-tech trade and manufacturing (think Nissan and car manufacturing).

For all sectors of Britain’s political economy, a Norway style deal is probably preferable (European Economic Area). Theresa May, and political elites, are not likely to push for this, as it implies complete free movement, and won’t wash electorally. However, Theresa May will want access to tariff free trade, primarily to ensure that the North of England is not badly effected, and that firms such as Nissan in Sunderland don’t pull out and move to Spain. Manufacturing has more to lose than Finance.

This implies that Theresa May will push for a customs union – tariff free – allowing imports for British based manufacturing supply chains. The question then is whether it is a customs union for everything? Theresa May could opt out of agriculture, and then use this as a bargaining card in negotiating other international trade deals, outside the EU.

The question of free movement will be determined by how Teresa May considers Ireland. If she gives priority to maintaining free movement within Ireland (north and south), which I think she will, then this implies there will be no visa controls at the British borders. Hence, it is probable that Theresa May will aim to get a series of sectoral deals – and allow for the free movement of people within sectors, particularly ICT and Finance. This is what ultimately matters for the city of London.

Those most affected within the City of London will be legal services. British lawyers, who predominately rent off the finance sector, will no longer have a hearing on mergers and acquisitions within EU law. But I can’t see Theresa May negotiating a strategy to ensure British lawyers have access to EU courts. What she will want to ensure, on behalf of business and finance elites, is that the city remains a magnet for high-skilled talent. This could be achieved with sectoral deals.

Britain’s main bargaining card is that their consumption-oriented economy, and open labour market, in addition to a high-tech cluster in London, has carried the employment burden of the Eurozone’s labour market woes, in addition to absorbing so much labour from central and eastern Europe. Germany has done little, if anything, to increase domestic demand, to compensate this. So it’s worth asking, absent the liberal-oriented British economy, where will unemployed EU workers go?

 

Kilkenomics 2016

The Kilkenomics festival programme is live here. Speakers include Dan Ariely, Mark Blyth, Diane Coyle, Bill Emmott, Tim Harford, Wolfgang Munchau, Stephanie Kelton, Deirdre McCloskey, Martin Sandbu, Kimberly Scarf, Nassim Taleb and Linda Yueh. Quite a number of this blog’s contributors will be there over the weekend. I know I’m looking forward to it.

A dynamic model of financial balances for the United Kingdom

[Attention conservation notice: Rampant self-promotion]

Irish economy readers might be interested in this work. Together with colleagues at the Bank of England we’ve built a model of financial balances for the United Kingdom. The basic question we’re trying to answer is: how can large open economies deal with persistent imbalances now and into the future? This is the first model of its kind for the UK and something we hope to build on in the future. We summarise the findings in this Bank Underground blog.

 

McHale steps down as IFAC Chair

John was the first chair of Ireland’s fiscal advisory council, and he can take a share of the credit for the development of IFAC in terms of its analytical capability as well as the organisation supporting the Council members as his term ends. The Irish Times carries the details here.

Supply Curves Explained

Numberless ‘experts’ have misunderstood the government’s mortgage deposit subsidy. It’s all about the supply elasticity, as Michael Noonan helpfully explained to the Irish Examiner on Tuesday.

“The economists are saying we should have concentrated on the supply side. When there’s a demand for something, it leads to increased supply. If we can give deposits to people there will be an increased supply. The [building] industry will move to supply the extra demand.

To give you an example: When it was done previously, the first [car] scrappage scheme was introduced by Ruairi Quinn back in the 1990s. The theory then was the motor-car business was on the flat of its back — no cars being sold. So, with the scrappage scheme, people were given money and that money expressed itself in demand for new cars and a lot of new cars were sold. So, when there is demand backed by cash, supply responds and that’s the theory of it.”

So you whistle up some guy in Germany and he ships over 100,000 houses, at yesterday’s price.

Why didn’t I think of this ? Does Philip Lane read the Examiner?