by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

The Brexit vote, nearly three months ago, is still causing a massive amount of noise and fury. There is very little information to back up the doom and gloom and disaster forecast by Cameron, Osborne, Carney and the rest.  While the pound is down, as well as being good for the economy, this is good for the balance of trade and is likely to cause some inflation – which is what the bank of England and other policy makers claim is needed.  Other indicators are primarily good, leaving Britain at the top of the performance charts vis-à-vis other European economies.  In spite of this, the doomsters’ scenario has not gone away, it has just been pushed further into the future.

The most significant events have been the panicky announcements from Brussels bureaucrats about what they are going to do to Britain, and more interestingly meetings of what appears to be two European blocks – north and south – where the northern block solution to every problem is more integration and moving towards political union and the southern is indicating more pragmatic approaches with more co-operation but less political integration.

Britain has had the advantage of an unwritten constitution where pragmatism and sense can prevail.  Effectively, we have a new government.  Mrs May, the new Prime Minister, has been extraordinarily courageous and clinical in re-organising the Cabinet.  Removing the Chancellor after such a long period would, if she had trailed it beforehand, have been seen as a high risk thing to do, but went off without a murmur.  It would seem that we now have a Prime Minister and Chancellor who can be regarded as safe pairs of hands and unlikely to adopt the zigzag course of the previous administration.  Bottling up the three Brexiteers in the one department also looks like a masterstroke, particularly at this stage of the nonnegotiations with Europe; as Brussels has dictated there can be no negotiation until Article 50 is flagged.  One has the feeling that Mrs May is going to think very carefully about how to manage the politics of these negotiations, which are indeed going to be incredibly complicated and technical.  The most important issues, from a negotiating point of view, are going to be dealing with technical inter-relationships of things like VAT, portable pension rights, the status of the courts and legislation, and dozens if not hundreds, of interrelating treaty obligations with the EU.

Of the two hot topics – trade and immigration – immigration has to be resolved but requires a lot of study and it is very difficult to see where and how a plan is going to evolve that is economically sensible and fair, a lot of the noise and fury on the Brexit side will have to be headed off as Britain does need immigration from an economy point of view.

On the trade front, the Remain campaign is going to be disappointed as it is highly unlikely that a trade agreement can be concluded with Europe, but not having a trade agreement will hardly have any impact on Britain’s trade!  Europe has not been able to agree on a relatively simple trade agreement, even with Canada, and has in fact never entered into any significant trade agreement with any major country.  This has not stopped world trade getting along just fine under WTO rules, and the EU’s inability to create a trade agreement with China, India or America is probably only damaging to the EU.

Freed from the EU, Britain is more likely to benefit in being free to work with the governments of the rest of the world – it will be a long haul but, left to their own devices, I am confident that business will settle down and get on very well without Brussels.

Hopefully, without the posturing of the ex-Chancellor, the Governor of the Bank of Englan will be less inclined to make statements to undermining business confidence.  It is fascinating to listen to the claims by the Governor that he had ridden to the rescue by reducing interest rates by ¼% and announcing that he will buy Bonds issued by Apple and MacDonald’s, among others, to save the British economy and solve all problems, which is bizarre but in line with the group-think of the European and Japanese Central Banks.  QE does not do what is ‘written on the can’; Japan has demonstrated this for nearly twenty years, as has Europe.  It is as efficacious as heroin – the more you get, the more you want, until there is a crisis.  When you stop taking the drug, the withdrawal symptoms will be horrible.

To some extent, one can understand the ECB’s misguided actions, their efforts to come off the QE drug at the end of 2012 was painful.  The European economy rapidly slowed down, as the plan that labour laws should be sorted out, particularly in the Club Med countries, failed to materialise.  The ECB, with its political masters in Europe, could only use the one lever it had, to drive interest rates down further and ramp up bond purchases.  This also happens to suit governments that were failing miserably to control their expenditure.

Like a drug, increasing QE is less and less effective.  The actions of the Bank of England post-Brexit are for this reason extremely worrying and will cause many more problems down the road for banking, insurance and the pensions industry.  No properly run business will change its investment plans because interest rates have gone down by ¼%.  Indeed, no bank would lend to business if this were a consideration.  On the other hand, encouraging private individuals to load up on more debt is more than irresponsible.

As an aside, I haven’t met anybody who can explain why the Bank of England buying the commercial Paper of large multi-national companies is going to help the UK economy.

Posted by Aimée Allam