Brexit

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How bad can it get?

The Bank of England’s (BoE) £65bn inoculation fund does not seem to have protected the bond markets against the impact of LizKwasi-22. Indeed the virus seems to be spreading. Yesterday the Bank announced the fund would also be used to purchase high grade corporate bonds and this morning index linked government bonds have been included in the vaccination programme after what the FT called a brutal collapse in their values.

Is there a risk the BoE will be unable to act as market maker of last resort? Will the Chancellor have to bring his statement forward yet again? His credibility is sinking with the values in the bond market.

If gilt values are not stabilising what is happening to the pension’s liability driven investment (LDI) strategies? Is LizKwasi-22 mutating in other parts of the financial system which so far have not displayed any symptoms?

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Trading Down

As our government wrestles with Covid-19 (C-19) and seems to be losing, of which more later, the issue of Brexit is starting to rumble again. At the end of this month is the deadline for a draft trade agreement to have been out in place and for the application for an extension of the transition period beyond 31 December 2020 if needed.

Government Ministers are clear no extension will be applied for or agreed if proposed by the EU. They reassure us that Europe really does want a deal with its largest trading partner but that they will only do so at the last minute.

Trade and economics are complex subjects and Ministers seem very confident the EU will see the light but if they do not  that the UK will go forward to trade in the wider world successfully anyway. Maybe.

It is true that the UK is a major trading partner of the EU. It comes third after the US and China and does some €511bn of imports and exports amounting to 12.6% of the EU’s total trade. Looking the other way the EU is a major trading partner of the UK accounting for 45% of our exports and 53% of our imports. Just based on these numbers it looks likely to be more painful for us than for them but hey trade and economics is complex. I have no doubt Ministers have a good grasp of the real balance of advantage.

One reason we do so much trade with the EU of course is because it is close to us. The friction of distance means there is a strong correlation between distance and scale of trade. As Father Ted explained to Dougal, long way away, small; close up, large. It is certain we will not stop trading with Europe on the 31 December if there is no deal its just that the terms of trade will be so much the worse for us both. Worse for the 48% of our trade with Europe and worse for the 12.6% of their trade with us.

However, we will be bringing back sovereignty to the UK. Of course this is a UK which C-19 has exposed as anything but United. The differing approaches to management of C-19 particularly the move out of lock down has thrown into relief the distinctions between the “devolved authorities” which are increasingly looking like separate nations.

This might be dismissed as cosmetic but it has a powerful impact on the sense of national unity when people are thinking about cross border difference between England and Wales. It reinforces a process that has been in progress for some years which threatens the long term unity of the UK.

On a more positive note… for the EU. The ordo liberalism of Germany’s financial elite seems to have started to crack. C-19 and the economic collapse it has spawned across Europe has infected the swabian housewife. As the economic consequence started to become clear Germany moved to put in place €150bn of new borrowing and a fiscal stimulus of €130bn to combat the impact within the country.

More significantly perhaps for the long term future of the European project Germany worked closely with France to secure €500bn of common EU debt to provide grants, not loans, to support C-19 hit EU countries economies.

All this might be seen as part of a process of deeper monetary and fiscal integration which may ultimately lead to a United States of Europe. Certainly the perception of an EU supporting its weaker members in their hour of need is a much more attractive proposition than one which kicks its weaker members (Greece) when they are down.

There is probably an inverse relationship between the volume and veracity of nationalist rhetoric. However, if there were  promoters of Brexit who were little Englanders they may well get exactly what they wished for. Sadly little England may well be next door to, but outside of, one of the largest and most powerful trading blocks in the world. 

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Brexit – the end of the beginning.

We lost. It is too early and raw for a postmortem. We now have to move on. I have been wrong in the past and I am sure I will be wrong in the future. I fervently hope I am wrong this time and that Brexit will not involve an acceleration of the decline of the UK, or a kick in the teeth for those who voted for it. The signs however are not good.
There has been a distinct shift in the rhetoric of late from the leading Brexiteers. The sunlit uplands of freedom to negotiate trade deals with queues of states around the world has faded. Liam Fox says we should not be obsessing about Free Trade Agreements. Mr Gove accepts that things will be “bumpy” but the real benefit of Brexit will be that we have taken back control, politicians, like him, will have no EU bureaucracy to blame for things. We need to remember that.
However, the ground is already being laid for blaming those unscrupulous Europeans for any pain that may come out of the negotiations over the next 11 months. They will be acting out of fear, ignorance, stupidity, bureaucratic arrogance,… being foreign! If we cannot retain the benefits of membership without the responsibilities where’s the fairness in that?
Democracy has provided PM Johnson with a large majority. A lot of those unprincipled MP’s who would not vote for something they felt would damage the interests of their constituents have been replaced by their constituents with those who swore an oath of loyalty to “get Brexit done’.
To be absolutely clear we should not blame democracy. Democracy is not a guarantee of good government it is an insurance against tyranny.
The country has voted to take back control. We now need to keep a close eye on where it has been taken to and what is done with it. We will be watching Mr Gove, and, as he says, the EU no longer provides a convenient hiding place.

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Boris the radical remainer.

The moment he became Prime Minister Boris Johnson became an arch remainer. His one overriding goal is to remain in 10 Downing Street. Having been selected by c150k Tory party members on the basis that he would achieve Brexit, and having the example of what happens to PM’s that fail he devised a strategy which would secure Brexit come what may.

The problems he faced were a hopelessly divided legislature, a slim majority and a pressure group within the Conservative Party who were not for compromise. In these circumstance Mr Johnson decided the strategy to achieve his goal would be, “no ifs, no buts, no-deal”. However he needed cover for what would happen if he failed by 31 October, and also, for if he succeeded.

If he failed his credibility with the electorate might be shot and in any subsequent election he would face losing votes to Mr Farage. If he succeeded and Yellowhammer came home to roost he might be fighting an election with growing queues at ports, disrupted holidays, food and drug shortages and who knows what other disruptions.

Plan A was to have a snap election and get majority to deliver Brexit. When Jeremy Corbyn refused to play the part offered to him a revised strategy was needed. This involved ensuring that the blame for; a) not securing Brexit, or b) securing Brexit would fall on others.

It is almost certain his first and final offer to the EU will not be acceptable, it is becoming increasingly clear it was never meant to be. If they had rejected it outright he would have claimed foul and that it was the fault of the EU we have crashed out. Again they refused to play ball and are considering what they know is a non-starter. At the coming summit it will become clear that it is not workable. There will then be a lot of manouvering and synthetic anger by Boris and his team trying to portray the Europeans as intransigent and unwilling to negotiate in good faith. This is a tactic we see more and more often in politics where a party will do something outrageous but attempt to hide it by accusing the other side of doing the exact same thing.

Following all the sound and fury we will get to the point where the Ben Act comes into play. Mr Johnson then faces the dilemma, should he really attempt to overcome the Ben Act, crash out of the EU and risk an election in the context of Yellowhammer, or should he manouver himself into a position where he appears to have been forced to accept an extension, then have an election where the risk is Mr Farage is able to portray him as another failed Brexit leader.

It looks as though he is opting for the latter, pinning his hopes on a “people versus parliament” election. He must have calculated the combination of die in a ditch Brexiters and more widely held Brexit fatigue will produce him a majority which he can then apply to taking the UK out of the EU in January. He is probably correct in assuming that Brexit fatigue might quickly evaporate following a no deal departure.

Like most carefully crafted battle plans, Mr Johnsons did not survive the first engagement with the enemy. People refused to behave as they were supposed to. The tactics that have survived are about attempting to threaten and bully and lie their way to Brexit. It is a moot point whether this will be successful. 

However, elections are unpredictable as Theresa May found to her cost. There is no certainty about what the election result will be. And there is no doubt it will be anything other than a Brexit election. What happens then if the popular vote is for remain candidates but the electoral result is a leave majority in parliament? Who knows?

There are only two things that I think are clear, first, Mr Johnson’s steadfast commitment to leaving Europe, second his absolute commitment to remaining in 10 Downing Street.