Tuesday, January 15, 2019

Matt Ridley: The Pros and Cons of No Deal


Suppose Britain leaves the EU on March 29 with no deal, just a series of last-minute fixes on things such as aviation and data. And suppose it proves to be a fairly damp squib, with a handful of problems, talked up breathlessly by the BBC, but no significant shortages in shops, or disruptions to supply chains.
If that happens, there will be one big benefit to investors and businesses: certainty. Under the prime minister’s deal, we would enter a transition period, during which uncertainty would continue for at least two years, with interminable debates about backstops.

As Lord (Peter) Lilley and Brendan Chilton (of Labour Leave) put it in a new report:
  • Under the government’s draft Withdrawal Agreement, corrosive uncertainty will continue for two years – or even longer – about the basis of our future trading and other links to the EU.
  • Whether companies find leaving with no Withdrawal Agreement welcome or a challenge, they will know where they stand and start investing again to take advantage of opportunities or to cope with problems.
  • It will also put an end to Britain’s disproportionate political focus on the Brexit process and we can concentrate on other priorities and on making positive use of the powers we regain from the EU.
A second advantage would be that we would save money. The £39 billion exit fine is not, as diehard Remainers often argue, a set of obligations under treaties that we would be pariahs to evade. Nearly half is continuing contributions during the transition period, which would evaporate if there were no transition period. It was made clear two years ago by a committee of the (ultra-Remain) House of Lords that almost none of the £39 billion is obligatory. It is a generous offer.
To quote Lilley and Chilton:
  • The EU authorises some spending commitments on programmes extending several years ahead. Britain’s net share of these outstanding commitments is put at about £18billion. There is no precedent for a country leaving an international organisation being expected to contribute to ongoing programmes initiated when it was a member71. Organisations whose income declines, whether as a result of their membership base shrinking or some other reason, have to readjust their budgets.
  • Pensions. The remainder is largely a contribution to the accrued pension liabilities of civil servants (net of repayment of our contribution to EIB capital). But the EU has always chosen to finance its pension liabilities on a pay-as-you-go basis, not on the basis of accrual of entitlements. New member states therefore pay for the actual pensions of civil servants who retired before the new country joined. Indeed, the UK has been paying towards pensions earned before we became members. To apply the pay-as-you-go principle while we the UK was a member state but then to apply the accruals basis in respect of pensions payable after we leave, is manifestly unjust. Again, there is no precedent for an organisation which funds its pensions on a pay-as-you-go to charge a leaving member on an accruals basis.
  • EIB capital. The only significant positive item is the return of the UK’s initial capital contribution to the European Investment Bank. However, the EU proposes to withhold the UK’s share of the bank’s accumulated capital which logically only built up because of the UK’s initial investment.
    To smooth the EU’s ruffled feathers, we should agree to submit the EU’s claims to arbitration by an appropriate international tribunal – with every confidence of winning.

Instead of repeating debunked stories about shortages of Mars bars, sandwiches, insulin, clean water, cut flowers, Premiership footballers, Glyndebourne sopranos — as the BBC’s Gary Lineker did at the weekend about medicines — can we discuss what might actually happen?
The medicines scare is a classic example, as Lilley and Chilton explain:
  • Stories about potential shortages of medicines seem to have originated in the belief that there would be difficulty in authorising drugs when the European Medical Agency left the UK. Once the UK government made clear that we would continue to recognise drugs authorised by the EMA the original basis evaporated.
  • The story then morphed into fears of unspecified supply problems26, notably of Insulin – given credence by the PM without any explanation of why there might be problems.
    Insulin is supplied by a Danish company – Novo Nordisk27. It is not going to withhold it. The EU is not going to ban its export28. The UK is not going to impede its import. The company is keeping four month’s supply in the UK.
  • The WTO’s Pharmaceutical Tariff Elimination Agreement automatically means that tariffs do not apply to finished medicines. The Agreement covers 10,000 medicinal products across the European Union, Canada, United States, Japan and Norway29. It covers almost 90% of the world’s pharmaceutical trade30.
Most scare stories are based on the idea that no preparations for leaving would be made, which is ludicrous. The media has a bad-news bias, as is well known. So even journalists who sympathise with no-deal carry more scare stories than reassuring one.
As Lilley and Chilton put it, “Scares about import delays are particularly ludicrous since Britain will control its own borders. Why on earth would we prevent things we need from entering our country?” Exporters to the EU worry about tariffs, but they will average 4 per cent, dwarfed by the 15 per cent fall in the exchange rate since the referendum.
To quote from the report:
  • Tariffs on UK exports to the EU will amount to £5-6 billion. This is half the UK’s net contribution to the EU of £10-12 billion. Paying £10 billion to avoid £5 billion has not been a good deal!
  • Our exporters to the EU will face an average tariff of 4% – far outweighed by the 15% improvement in competitiveness due to the exchange rate movement triggered by the referendum.
Businessmen I speak to generally say they have prepared their own companies, but worry others haven’t. That’s what many said about the Y2K Millennium Bug, a comparison drawn by Lord Lilley and Mr Chilton. The social collapse that was to follow computer failures at midnight on December 31, 1999, never materialised, even in countries that spent little on preparation. Those who said in advance the scares were exaggerated were called irresponsible.
Lilley and Chilton on the Millennium Bug:
About 100 days before the turn of the millennium, Prime Minister Tony Blair announced that he stood ready to call out the Army to cope with civil unrest caused by the economic and social collapse that might be unleashed by the Bug at midnight on 31st December 1999. Despite spending an estimated $75 billion world-wide to tackle the threat it was still feared that: planes would fall from the sky, lifts would crash down their shafts, the electricity grid might melt down, the telephone system would fail, computers would not work or go rogue and the whole financial system might collapse. The CBI (of course!) joined all political parties in warning how serious these consequences could be. Almost no-one dared suggest that this was all grossly exaggerated. Anyone who did so was accused of dangerous complacency that might undermine the national effort. Most sceptics felt it was safer to be wrong with the herd than risk the odium of suggesting the Emperor had no clothes. In the event nothing happened....
On the media:
Channel 4 produced a half-hour programme of unchallenged predictions about the horrors of a ‘no deal’ Brexit without mentioning that it saves £39billion. And, like the BBC, it has not reported the welcome news about the French authorities’ plans to avoid congestion at Calais, let alone that HMRC say they will not need to carry out additional checks at Dover.
In addition, this time the government is clearly determined to play up the supposed horrors of leaving with no Withdrawal Agreement in the hope of persuading MPs to vote for the EU’s unloved draft ‘deal’. The government is in the bizarre position of preparing to leave on WTO terms, while pretending that its preparations will be unsuccessful. In fact, talking up the horrors of ‘no-deal’ is not merely self-contradictory it is extraordinarily irresponsible. The PM’s only hope of securing any substantive changes in her draft deal depend on her convincing the EU she is prepared – in every sense – to leave on WTO terms.
This time parts of the media with a bad-news bias are failing to report anything reassuring, such as French plans to avoid congestion at Calais, or announcements from HM Revenue and Customs that they will not need to carry out additional checks at Dover.
Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com 

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