Birmingham and the great hard Brexit feedback loop

At conference Theresa May announced that she will trigger Article 50 by the end of March 2017 and that a Great Repeal Bill  will be brought forward at the next Queen’s Speech. In a piece of spin Alistair Campbell would be proud of, this Bill will actually incorporate the entire acquis communitaire into British law at the same time as shredding the European Communities Act.

While some were calling for more time before pressing the big red Article 50 button (notably one Mr George Osborne of Notting Hill) in order to wait for the result of French and German elections, there is some logic in the move. First, it means the Art 50 negotiations are completed one year ahead of the expected May 2020 general election. Second, it means the UK will not be participating in the 2019 European Parliament elections – which would have been a ludicrous charade. Third, it anchors Brexit to a firm timeline – which countries such as France are equally as keen to see as Brexit campaigners here at home.

May and her senior team faithfully kept to the line that there would be no running commentary on the negotiating position. And they kept on message at the events I attended, except for Liam Fox who we all know is itching to get out of the European Customs Union and as quickly as possible and can’t hide the fact. Nevertheless, the Government’s two red lines were the same as they were before conference – control over borders, and an end to the jurisdiction of the European Court of Justice. The UK will seek the closest trading ties possible within these parameters. While HMG’s position more or less rules out EEA membership, it leaves quite a few avenues open so long as the EU 27 are in negotiating mood.

But despite this, as the conference went on a sort of hard Brexit feedback loop started to form in which the idea that the UK was going to cut and run just seemed to take on a life its own. Why all the flapping, given that there was no new announcement except for the date of the trigger of Article 50 and a pretty prosaic bit of legal tidying up? I will hazard a guess or two:

  • Team Brexit were simply more prominent at conference and they were certainly chattier in the bars and backrooms
  • The change in tone from Cameron to May was so stark and uncompromising – especially on immigration – that – rightly or wrongly - it gave a sense that she couldn’t possibly favour anything other than a hard Brexit
  • Chancellor Philip Hammond’s statement of the obvious that this ride is going to have some ups and downs seemed to be to some a huge revelation
  • And media, EU and overseas observers were visibly taken aback by how quickly and completely the Conservative party had pivoted to the brave new world of Brexit  

All this drove a sort of narrative that the Government - which remember is not offering a running commentary - didn’t really do an awful lot to assuage. After all, everyone is playing high stakes poker here. But the substance rather than the presentation is now as it was then. Nevertheless, markets put the pound under such a lot of pressure that the PM’s TV interviews last Tuesday sought to reassure the world that the UK did not want to bail completely on Europe. Ladies and Gentleman, meet Her Majesty’s Loyal Opposition – the Sterling/Dollar market:

The wild drop in Sterling’s value on thin volumes overnight on Thursday hasn’t helped the jitters. In response the Chancellor on Friday told journalists at the IMF and World Bank meetings in Washington D.C. that everything was still negotiable- including continued membership of the Customs Union. But he also noted that he expected there to be more of this turbulence in the years to come. To misquote James Carville, if I am reincarnated, I want to come back as the FX market.

Parliamentary aggro ahead for the PM

These truly are the Halcyon days of Theresa May’s leadership. She’s large in charge, enjoying stupendous support in the party base and a whopping lead in the national polls. Parliament is on recess until the autumn which means she doesn’t have blow-hard MPs to deal with.

But it can’t last – it never does. As well as the deeply controversial matter of Article 50 negotiations, there’s some extremely tough domestic calls to be made in the months ahead… Heathrow, Hinkley, HS2 and the Autumn Statement. These will create winners and losers and I guess that, given the state of Her Majesty’s Loyal Opposition, some of the worst aggro will come from her own benches.

Outside cabinet, which is worthy of a posting of it's own, here’s my top 5 sources of Parliamentary enervation for the PM:

 1. The BeLeavers

Theresa May has a small majority. But there’s a merry band of backbenchers who have made being a gigantic pain in the arse over Europe their life’s work. The fear of the BeLeavers, which includes people like John Redwood and Bernard Jenkin (and perhaps Michael Gove now), is that though the referendum battle has been won, the war on Europe is lost. Their nightmare is that the UK continues be tied into the political structures of the EU through a messy compromise. They don’t want a long transition, they just want out. If they have any sense that the government is playing for time, they will be vicious. Of course, if the PM goes to the country and gets a bigger majority, this is less of a problem!  

2. The sacked, the demoted and the ousted

While some will gracefully and quietly go back to the back benches to chillax, others will not. The summer allows time for the slighted, the disaffected and the unhappy to lick their wounds before returning to Westminster replete with schemes, plots and wheezes. Usually a reshuffle affects a handful of people. Paul Goodman in Conservative Home reminds us quite how extensive the May overhaul has been:

Out go no fewer than 14 members of the former Prime Minister’s team: Cameron himself, George Osborne, Michael Gove, John Whittingdale, Stephen Crabb, Theresa Villiers, Mark Harper, Oliver Letwin, Greg Hands, Matthew Hancock, Anna Soubry, Robert Halfon, Tina Stowell and Andrew Feldman.

So what will all of these folks do with the time they now have on their hands?

First, there’s the memoirs. We know that DC is writing memoirs, as is former Downing Street comms chief Craig Oliver. There will no doubt be others, all wanting to present their version of events, justify decisions taken and settle the odd score.    

Second, there will the offers of ‘helpful advice’ in the opinion pages of the Daily Telegraph and on Conservative Home. For a nice example, check out Lord Maude’s advice to Chris Grayling – the Transport Secretary – on what to do about Heathrow. Mr Maude – formerly one of Cameron’s inner circle and Cabinet Office  - says the government should go for Heathrow Hub. This was not the option favoured by the Airports Commission partly on the grounds that it would cause more noise for those living near Heathrow. Including me! George Osborne is on the backbenches now, and presumably will offer expert comment on Twitter or if asked by the Financial Times. Perhaps Strictly Come Dancing beckons.

Third there are those who will seek to make mischief because, what else would you do in such circumstances? I could not possibly speculate on who those characters might be or what they will get up to – but they will surely show their independent mindedness.

3. The House of Lords

The Lords gave the government a bloody nose on several occasions in the months before the referendum, most notably on tax credits.

The question as to whether the PM has the prerogative powers to trigger article 50 is unresolved and will be heard by the courts later in the year. If the courts decide Parliament should have a role in triggering Article 50, the Lords could easily hold the passage of a Bill up (though if I were being cynical, a delay in the Lords would buy time for the Government to get its act together).

Baroness Wheatcroft, a Conservative peer, thinks the Lords should try to stall the Government invoking article 50 because it’s not clear what Brexit means. In a pithy piece of comment for the Guardian, Wheatcroft writes:  

“Brexit means Brexit,” the prime minister repeats. She might, with as much clarity, declare that “lunch means lunch”: that could translate as a sandwich al desko or a three-course feast at a top restaurant.

The very idea that the Lords could slow the process down drives the Leave camp bonkers. Could this force May to re-open Lords reform? The Strathclyde proposals for Lords reform were kicked into the long grass before the referendum. Perhaps they could be dusted off, or even expanded?

4. Jeremy Corbyn

Victory for Corbyn in the Labour leadership contest is now all but assured in September following a High Court case about something or other to do with the leadership contest which went in his direction. His people have also achieved a clean sweep in the Labour National Executive Committee. This means the Corbyn takeover of the Labour party is complete. What we don’t know is whether the PLP will finally fall in behind Corbyn or whether the Parliamentary party will split.

Tom Watson, that most impartial of observers, told the Guardian that ‘every single person I talk to on the left and right of the party thinks this [a split] is a bad idea. I’ve not had anyone muse with me about it. I’ve not had anyone gossip with me about it. I’ve not heard anyone raising it as an issue.’

Corbyn is nothing if not dogged and perhaps Labour might start looking like a credible party of opposition again in the months ahead.

5. SNP

The SNP have a major strategic question of their own to wrestle with: whether to go for another independence referendum or not. Having made a big play early on, Nicola Sturgeon must decide whether to roll the dice once Article 50 is triggered. In the meantime, the SNP group in Westminster – which has over 50 MPs - remains a coherent and disciplined caucus. There have been times in recent weeks where the SNP has asked the toughest questions in Parliament.  

Tweet of the Day

On the news Andy Burnham has been selected as Labour’s candidate for the Manchester mayoralty.

Monetary policy has reached the end of the line

So here we are, eight years after Lehman Brothers, and the Bank of England is cutting rates and printing money. How depressing that the monetary system is still being contorted like this. But the alternative - inaction - is probably worse.  

By coincidence, yesterday marked the ninth anniversary of the definitive monetary policy rant: Jim Cramer's epic 2007 diatribe coruscating the Fed for having 'no idea'. He blasted Bernanke for 'being an academic' and called Bill Poole (head of the St Louis Fed at the time) 'shameful'. In his rant, Cramer sets out precisely what is about to follow if the Fed does not take immediate action. Fed minutes published later noted that Cramer's warning was laughed off. This was one a full year before Lehman Brothers went bang. 

Watch the whole thing though it really kicks off about 90 seconds in:   

No time to be an academic...open the window, cut the rate

How times change. There was no chance Carney and the Bank were going to leave themselves open to the charge of being complacent. So the monetary bazooka has been fired once again even through the Bank knows that it might not make that much difference. This was about sending a message more than anything else. 

While the rate cut to 0.25 per cent was expected, the scale of unconventional monetary policy measures, including a new lending scheme for banks and gilt and corporate bond purchases is eye opening. Together the measures will add £170 bn/ $224 bn to the BoE's balance sheet which to me suggests to me the Bank is pretty worried. The Bank hopes that its targeted measures will support the real economy as opposed to inflating asset values. 

Yeah right.... Boing!:

Project fear redux

Will this be a short-lived post-Brexit blip, or - as the Bank suggests - a longer term reduction in the growth potential of the economy? 

It cannot be denied that the Markit PMI numbers on services have been absolutely piss-poor. The Bank's growth forecast for next year has been reduced to 0.8 percent, down from 2.3 percent. The 2018 forecast has dropped from to 1.8 percent from 2.3 percent. 

Mark Carney has already said that we have pretty much reached the edge of monetary policy. That means it is now down to the Chancellor to pursue a fiscal stimulus if he wants to stimulate growth in the economy. But Philip Hammond is going to have a real bear of a time with the public finances if growth falls off that sharply. This is a real bind. 

So now the post-Brexit rubber really hits the road and we'll find out if project fear is actually project reality or not. I hope that it is a blip - but the data don't appear to look good at the moment and we won't be able to rely on monetary policy to dig us out of the hole.

Bernard Means Brexit

Theresa May’s mantra that ‘Brexit Means Brexit’ (BMB) is a very clever form of words. It signals action. It signals resolution.  But until the government defines Brexit, this tautologous formulation means very little. In itself, all it really says is that we aren’t remaining a member of the EU. That leaves very many doors open and only one firmly closed.

Since ‘BMB’ was coined, Theresa May has said that the UK will seek a bespoke British relationship with the EU but remains open-minded about what that might look like. This rules out an off the peg model such as EEA membership (it’s politically unacceptable as it would require the maintenance of free movement).

So BMB now means a few things:  

  • we aren’t staying in the EU
  • we aren’t going to be a member of the EEA
  • and we already know we can’t be Switzerland

That’s actually quite a lot of stuff ruled out already. However, a new kind of British model guarantees neither quick exit or a clean break from the EU and it does suggest fiendishly complex negotiations. This makes some on the Leave side extremely suspicious indeed.

Exhibit A:

Bernard Jenkin MP, a prominent BeLeaver, has a  piece in the FT today  which displays the classic symptoms of new condition Brexita Nervosa. This is the fear that, having won the referendum battle, the Leave vision will be scuppered by a PM and Chancellor who never wanted to leave, aided and abetted by a Parliamentary majority that pays lip service to Brexit but thinks it’s a bloody stupid thing to be doing. Jenkin argues that there really isn’t any discussion to be had about how Brexit should happen at all. For him, Brexit means we should just get the hell out of Dodge as quickly as possible (i.e. months) and sort out the details later once we have heroically thrown off the shackles of EU membership.   

What explains this almost childlike impatience to get out? And why his out-of-hand rejection of any substantive transitional arrangements? It all suggests to me that he is worried that they are going to be stitched up like kippers if this goes on for too long. This I find fascinating, especially given that prominent leavers lead DIT, Dexit and the FCO. Perhaps the fear is that once Theresa May gets immigration under control,  the public loses interest in Brexit. Five or six or seven years into a long, dull and extremely technical negotiation who will be paying attention any more? Perhaps in the interim one or more of the three Brexit Horsemen – Davis, Fox and Johnson – will no longer be in position (not a bad bet given their histories)? And maybe Theresa May will have a very much larger majority, and won’t have to worry quite so much about unruly back benchers.

And bit by bit it all loses impetus.  Brexit might mean Brexit. But perhaps it won’t be what Brexit means to Bernard. 

Brexit Day 35: Trade banter

Very few people in London talk trade. It’s been outsourced to Brussels for such a long time that nobody has paid the slightest bit of attention to it.  Well that’s all changed now. Yesterday’s blog on Fox, the US and the EUCU prompted quite a bit of email traffic and it’s worth sharing some of what people sent.

From a friend who works on international tax issues for a living:

‘Doesn't the very creation of Fox's department signal that international trade deals will be done, i.e. that we must leave EUCU? If we remain in EUCU, we cannot negotiate a single tariff down ourselves, so the entire department would be completely pointless.’

Extremely good point, well made. I personally think Fox’s view totally stands to reason. But in the messy compromises that are bound follow, will there be room for intellectual purity? And, while I deeply hope this is not the case, we’ve had pointless departments before...

Department of Administrative Affairs

Department of Administrative Affairs

Then, from a former DC colleague who points out that perhaps I should pay more attention to what’s going on in the real world:

‘At this point in the election, there isn’t a single person sticking their neck out for trade deals of any sorts. Just look at the signs below from the DNC that were everywhere opening night… Obama’s party has completely chucked his signature pivot to Asia out the window.

And the GOP isn’t nudging much either – McConnell has almost already eliminated the chance of TPP getting passed during a lame duck after the election, and who knows what happens then? Both Clinton and Kaine have flip-flopped on their tacit support of any trade deal, so if they win they’ll want a massive rewrite.

And who knows about The Donald?…at this point he’s more likely to want to get a trade deal with his new BFF’s over in the Kremlin. The GOP – the party of big business and free trade has all of a sudden gone isolationist on trade thanks to Trump. So at this juncture we have both parties completely against them, and their electorates whipped in line. I just don’t see at this juncture how either Clinton or Trump can pivot in January and start new negotiations on anything.

While I’d like to think that a deal with the UK could be in the works, both parties are collectively shooting themselves in the foot over any future YUUUGE deals’

We have managed to time Brexit for the moment when appetite for trade liberalisation in the West is basically in the toilet. This is a formidable challenge for the UK.  And as a further reminder of the real world,  I was also forwarded Alan Beattie’s FT piece about Britain’s route to WTO membership by a former diplomat who has worked on trade deals with the following comment:

‘Are you aware that the UK is not/not a member of the WTO by itself? But only as part of the EU and so post-Brexit wouldn't even get WTO deal access to the EU/international markets’

I was feeling optimistic yesterday so I replied that I thought we would get sufficient transitional arrangements from the EU to give us time to sort out the WTO stuff. The response:

‘I like your faith in the WTO. It's possibly worse than the EU for useless negotiations that never go anywhere.’

Optimism fading again. 

Brexit Day 34: 'Rendez-vous for beginning of demanding task'

Customs union: What does the Fox say?

The Flying Fox  flew to the US. I am not surprised he’s made it an early priority; apart from the US being a global powerhouse, he loves America and he loves the idea of the Anglosphere. Washington D.C. is one cool city these days and who wouldn’t enjoy spending time there? On Monday, Fox met Commerce Secretary Penny Pritzker, U.S. Trade Representative Mike Froman and business leaders at the U.S. Chamber of Commerce, to talk about a future trade relationship. The US is making somewhat helpful noises about trade with the UK (especially since TTIP is going to the dogs) – but the Americans make a fair point: you can’t seriously talk turkey, or even chlorinated chicken, until the UK settles on its future trading relationship with the EU. Which sets up a sweet segue about what that relationship might look like...

On another leg of his tour, in Chicago, Liam Fox said that the UK should leave the EU customs union (EUCU) as part of Brexit.

Sorry, what the hell is the EUCU? Is that like another thing that we didn’t know about?

Afraid so. The Single Market – a term we all chuck about willy-nilly - is a construct. An edifice built from lots of different elements. One of the ‘things’ that underpins the single market is the EUCU. This allows tariff free trade within the club (which adds Andorra, Monaco, San Marino and Turkey to the EU member states), but sets common tariffs on anything coming in from outside. The EU negotiates on behalf of all members of the EUCU at the WTO.

One point that Leavers make - which I sympathise with - is that the EU is set up as a walled garden, not an outward looking trading bloc. Trade inside the club is fairly impressively open, but trade with the outside world not so much. Arguably that’s precisely the point of it. However, part of the Brexit dividend promised by Leavers is that leaving the shackles of the EU will allow the UK to go ahead and negotiate lots of trade deals with the rest of the world which is where global economic growth is being generated. The UK will not have the freedom to do this if it is still tied to external tariffs set by the EUCU. Ergo, Fox argues, we must leave it.

Note, for services which is the engine room of the UK economy, the issue is not tariffs, but non-tariff barriers, such as mutual recognition of standards and regulation. But that's for another blog  

For whom does Fox speak when he says such things?

When Liam Fox suggests that we should leave the EUCU is he speaking for Her Majesty’s Government, or is he flying a kite? The FT described it thus:

Erm, so that’s, just like your opinion Liam.

Parker and Allen write that the Treasury is considering its options on the matter, and that the Chancellor has an open mind.  The final decision maker, as ever will be the PM.

Important point here: when we listen to Davis, Fox and Johnson speak in the weeks ahead in relation to Brexit, you cannot assume necessarily that what they say is settled policy. They may be speaking as bearers of the Leave flame or to keep everyone guessing about the UK's position. I guess if anyone oversteps the mark they will be in for a bollocking from Number 10. There is such a thing as collective responsibility. 

May’s magical mystery tour

The PM has visited Scotland, Wales, Germany, France, Ireland and Italy so far. This will be followed on Thursday by a trip to Slovakia (EU presidency holders) and Poland, where she will hold discussions with prime ministers Robert Fico and Beata Szydlo.

A quick note on Ireland. This is shaping up to be a royal pain for the Government and is another way in which exit from one union creates problems for our own union. Enda Kenny has chucked the idea of a referendum on united Ireland out there a couple of times recently. That’s not a suggestion you make lightly given all the baggage that comes with it. There’s also a problem about what to do about that land border. There appears to be agreement that there will be no hard border and no customs posts. But how could that work in the context of what Liam Fox has been saying on the customs union? Could we really have an entirely porous border with an EU member state?  

Michel Barnier has been appointed the European Commission’s lead on the Brexit negotiations. He’s a player. And he’s French. And he did the DG MARKT Commissioner gig during the financial crisis. So he knows his oignons.