Why It Feels like the Brexit Vote Never Happened - Vivek Kaul's Diary
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Why It Feels like the Brexit Vote Never Happened

Dec 13, 2017

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The war is over, but the battle has only just begun. That's the summary of Prime Minister Theresa May's agreement with the EU.

We now know how much we'll pay the EU... well, approximately how much. What's a few billion here and there?

And we know there will be some sort of regulatory alignment between Northern Ireland and the EU, and the UK and Northern Ireland.

This seems an odd sort of milestone to mark. It's an agreement to agree by agreeing on half the deal. The half where Britain pays some amount of money and follows EU rules to some extent.

Theresa May might as well have negotiated by just saying "yes" to the divorce bill many months ago. And then got on with the actual issue of trade relations.

Just like in a divorce, the negotiation process is an extreme reminder for why you want to get divorced in the first place. The UK's regular fiscal contribution got turned into a lump sum and it has to agree to the EU's negotiating procedure. It feels like the Brexit vote never happened.

Anyone who claimed that negotiating with the EU from outside the EU would lead to a better outcome must be feeling smug.

Anyway, after many months of intense negotiations, neither the €40-45 billion bill, nor the agreement over regulatory alignment are very clear.

In fact, what does "regulatory alignment" actually mean? Arlene Foster, the Democratic Unionist party leader who almost sabotaged the deal, doesn't know what it means, she said. But she agreed in the end because "We ran out of time, essentially."

The term seems to mean that the UK government can make up its own regulatory regime, as long as it's in synch with the EU. If it wants to make up alternative ones, it has to be agreed by the EU. In other words, it's Brexit as and when the EU allows it.

The trade-offs here are worth remembering.

A lack of regulatory alignment with the EU means we don't get access to its market and trade. Because it's impossible for British firms to make things to the EU standards, or vice versa... isn't it...?

Too much regulatory alignment and we're in EU purgatory. Stuck with its rules, but without the powers and influence of being part of the EU.

So where along the spectrum did May's negotiations get us? Nobody is quite sure. The ambiguity we're left with allows politicians to get on with their lives, while the rest of us are left to deal with the uncertainty.

The more I try to read and understand the negotiation breakthrough, the less of a breakthrough it becomes.

Then again, it seems the EU and UK governments have found something to agree on: there should be loads of rules, whatever they are.

It looks like Brexit will prove to be the typical political solution to a problem. Lots of compromise, leaving nobody happy, but everyone equally miserable. Perhaps that's the EU's motto.

The landed gentry versus the kindness of strangers

In June, Bank of England governor Mark Carney explained that Britain's financial deficit means we're reliant on "the kindness of strangers".

The genius here is that his simple phrase refers to something so complex and full of terminology, nobody ever bothers to dig into it. It's the governor of the Bank of England who said it, after all. Who would challenge him?

His own staff, as it turns out. But first, a quick explanation of what he meant.

The governor assumed that our current account deficit shows foreigners invest a great deal in UK businesses and assets. Far more than Britons invests overseas.

Without foreign money, we'd be poorer, less productive, our government would have to pay more interest and the pound would tumble. In other words, we'll experience an impressive economic shock under Brexit.

He was right about the pound, but not much else

It turns out that our country has been undermined by foreigners pulling their money out for years now. Stephen Burgess and Rachana Shanbhogue from the Bank of England explained:

  • In fact, between 2012 and 2016, there was no kindness at all: the UK current account deficit over that period amounted to £480bn, while foreign flows into the country were -£82bn (Table A). In other words, non-residents actually ran down their holdings of UK assets, rather than helping to fund the deficit.

Then how did the Bank of England governor get it so wrong?

The big deficit actually comes from British people selling their foreign investments. The way the two economists rephrased their boss' comment really is brilliant:

  • "Rather than a pauper relying on the charity of strangers, the UK is more like a member of the landed gentry, using its past foreign investment to fund its lifestyle of excess."

And you though economists don't have an imagination!

So the governor got it wrong. But the best part here is how this information came out.

You can find the detailed analysis on the Bank Underground blog. It's a blog for Bank of England staff to make their own views known - what they really think. The post was titled: "A prince not a pauper: the truth behind the UK's current account deficit".

Shanbhogue now works for The Economist magazine...

Until next time,

Please note: This article was first published in Capital & Conflict on 11th December 2017.

Having seen the true nature of the investment banking business in 2008 from inside Wall Street's most notorious bank, Nick decided to find somewhere he could give honest, hard-hitting and profitable investment advice in an ethical way instead. Nick has worked in financial publishing since 2010 as the editor of the Daily Reckoning Australia, the retirement themed Money for Life Letter, and Strategic Investment Australia. He joined Southbank Investment Research in 2015 as editor of Exponential Investor. Nick holds degrees in Finance, Economics and Law from the prestigious Bond University, is a qualified Financial Advisor in Australia.

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