UK Parliamentary Treasury Committee: a report well worth reading

On 27 May 2016, the Treasury Committee published its findings about:

• the the misleading nature of the two campaigns;
• and a coherent summary of the economic impacts (and only the economic impacts, as befits a committee scrutinising Treasury policy) of both EurIn and Brexit in both short-term and long-term.

This report is well worth reading, even though it seems to have missed the Flexcit plan.

The mass media [e.g. Guardian] mis-reported the report as being primarily a critique of the campaigns, and nothing else.  A good example of how the mass media is there to mislead and disinform its readership/viewership.

My notes about the Committee’s report complete this blog entry.

Introduction

Para.8: “The public debate is being poorly served by inconsistent, unqualified and, in some cases, misleading claims and counter-claims. Members of both the ‘leave’ and ‘remain’ camps are making such claims.”

Para 9-11: relating to the non-economic impacts of Brexit/EurIn, beyond the scope of the report.

“For many, the case for staying in or leaving turns on more than economic logic: as Arron Banks, co-founder of Leave.eu put it, “This is not about pounds and pence. It is about our democracy.” …

“Staying in or leaving the EU will also have political consequences. Indeed, for some, it would seem that the true prize of leaving the EU is the opportunities it might create to change how the country is governed …

“Many leave campaigners also hope that Brexit will be a catalyst for what they see as desirable changes to the way the EU operates, while many remain campaigners hope that a vote to stay will achieve much the same thing. …

“But neither detailed programmes of national renewal, nor likely changes to the EU’s institutional architecture–beyond the Government’s renegotiation package–have yet formed a major part of the campaign.”

Section 2 (Claims made by the campaign groups)

Section 2: all 76 paragraphs are worth reading, they cannot be easily summarised.  Good technical analysis.  Basically, any headline number blasted on the mass media from either campaign is a pack of lies.

Para 59 is a key paragraph to understand.  It shows just how complex an attempt to unbundle the compliance cost of regulation would be, especially when the UK has its nasty habit of gold-plated implementation.  The paragraph ends with, “In some cases, such as maternity rights and bank capital requirements, the UK currently regulates beyond the minimum EU standards. Realising gains from deregulation in such areas would require the Government of the day to muster support for a new domestic approach. However, as already noted, a future government would undoubtedly judge that the compliance costs of some, perhaps many, EU regulations are more than offset by the benefits.”

Para 76 demonstrates that the Committee report is imperfect.  The report is a political tool itself, of course!  Para 76 says, “What is clear from all serious studies of the economic impact of Brexit is that the UK’s future trade relationship with the rest of the EU, and with non-EU countries, matters a great deal.”  This is itself misleading, because it is equally true that the impact of EurIn on UK’s future trade relationships with the rest of the EU, and with non-EU, countries, matters a great deal too.  This is why trade is irrelevant to the referendum debate.

Section 3 (The short-term effects of leaving the EU)

Section 3 addresses the short-term risks of Brexit, studies of which assume that an economic shock shall happen and this is going to be bad news.

The Committee did not challenge this assumption, but took very weak evidence to justify the assumption (para 86; and I think the Committee has mis-used Lyons’ evidence).

Moreover, the Committee did not consider existing Bank of England policy to keep sterling competitive (i.e. massaged devaluation) viz-a-viz exports, so therefore did not consider how ludicrous it was for anybody to suggest that a) we want a low currency to facilitate exports!; and then later b) and if we Brexit our currency will go low and cause economic disaster!

Ultimately, however, section 3 paras 97-100 point directly at too many levels of uncertainty relating to fact and to timing.  In other words, any study that tries to assess the short-term economic costs and benefits of Brexit is pissing in the wind.  Such studies are therefore de facto misleading, because ultimately, no matter how reasonable their assumptions might sound, the assumptions are still guesswork without rational basis.  The Committee should have been bold enough to say this in the report.

Section 4 (The long-term risks of staying in the EU and the Government’s renegotiations)

Section 4 addresses the long-term risks of EurIn.  This is by far the most interesting section.

The Committee deconstructs the Cameron deal of 19Feb2016 (paras 101-105) concluding that enforcement of the Cameron deal is fundamental to support a EurIn vote (para 106).  But the Committee does not comment on how enforceable the deal would be, or whether the European Parliament would enact the deal into European law, or reject it on the grounds of inconsistency with the Treaty of Lisbon.

Paras 110-113 correctly identify that shoddy regulation (and poor policy choices) is the number one risk coming from a European Union whose members need to integrate in order to make their Eurozone workable.  Non-Eurozone members - including the UK - would become ‘collateral damage’ to those shoddy regulations.

Para 119 sums the political reality very well indeed:

“The pursuit of further economic and financial integration within the Eurozone, including the development of a banking union, could threaten the UK’s influence over how single market regulation develops, its access to EU financial markets, and the flexibility of its financial regulators to respond to risks. It is the single most significant risk to continued membership, and the Government was right to make it a focus of their renegotiation.”

So, if Britain votes EurIn and the European Parliament rejects the deal, then what does UKGov do?  Hold another referendum in one year’s time?  The Committee doesn’t say.

At least UKGov has finally realised that it cannot hold up the European Union’s integration train (para 120).  This is good news.  All UKGov needs to do is to protect UK economy from the negative consequences of the EU’s subsequent policy choices relating to the Eurozone.  But there’s no clear evidence that UKGov can, or will (paras 121-122) and a clear need for UKGov to keep on supporting the regulatory frontline, to ensure no encroachment or Eurozone integration by stealth (para 123).

Almost as a bootnote, the Committee noted that UKGov’s approach to welfare, minimum wage and immigration is as dysfunctional as ever (paras 136-137).

Section 5 (The long-term impact of leaving the EU: the economic relationship between the UK and the EU)

Section 5 assesses the long-term impacts of Brexit.

This is a disappointing section, because it tries to re-invent the wheel that is already well-designed in the Flexcit plan.  That said, section 5 focuses on financial services, beyond the scope of the Flexcit plan.

The Committee correctly identifies that if UK wants access to the Single Market, then it has to obey the rules of the Single Market, whether or not it stays or leaves the European Union.  But there is a catch.  Compliance with Single Market rules is insufficient.  The other 27 countries must unanimously agree to open the Single Market in any way to a non-EU member (para 149).  I would expect 26 of them to be rational, even the Greek government, but I would expect the French government to play politics even at the cost to its own economy.  Remember that France torpedoed the transatlantic trade deal to protect its own agricultural sector, which the EU protects generally (para 162).

The Committee correctly identifies that the Single Market has stagnated, particularly for services.  For services, barriers to trade continue to thrive (para 171-172).

Overall, section 5 sets out regulatory challenges, none of which should ever be allowed to escalate into show-stoppers.  Section 5 amounts to a list of negotiating points, but falls short of realising that even if Europe says no, Europe would still need to trade in financial services beyond its borders.  Take insurance as one example: European insurers cover their local markets (often national, sometimes European, typically ‘general liability’ and ‘pension scheme’ insurance, new risks such as ‘cyber’ insurance is very hit-and-miss).  But what have European insurers got to offer outside of Europe?  Would their own national/European regulations allow them to do so?  And how reasonable is the enforcement of an insurance contract under UK law compared to non-UK law?

Section 6 (The long-term impact of leaving the EU: the economic relationship between the UK and the rest of the world)

Section 6, like section 5, is disappointing, but at least offers some additional evidence about the additional workload of UKGov in the event of Brexit.  This at least goes in the same direction as the Flexcit plan.

Paras 224-226 point to the slowness of EU trade deals, and how that lack of speed is potentially a threat to UK interests, particularly in respect of trade in services.  UK therefore finds itself held back by a sort-of European solidarity.

Is breaking the game worth it?  The Committee seems to understand the question: it writes, “Were the UK to vote to remain in the EU on 23 June, it should be a priority of the Government to seek to exert greater influence on the efficiency and quality of EU trade negotiations, which are currently unduly protracted, even considering the need to get 28 Member States to reach agreement.”

And in para 233, the nub of the issue: “But [UK] eliminating tariffs would leave very little incentive for non-EU countries [to engage in trade deal negotiations], and particularly emerging markets that export large volumes of manufactured goods to the UK, to grant preferential access to their goods and services markets.”  My emphasis added.  “Preferential access” means “selective protectionism”.  Nice to have, but is it really necessary?  A country exporting to UK needs to be paid, so if it obstructs opportunities to the UK to fund payments in the exporters’ own currency, then the exporting country would have negotiated a deal that chops its own nose to spite its face.  That would be irrational.  So again, trade looks irrelevant in this referendum debate.

Section 7 (The conduct of the Committee’s inquiry)

Para 240: “It is highly unsatisfactory that the Committee was unable to scrutinise the Government’s analysis of the short-term economic impact of Brexit in time to consider its findings in this Report. The delay in the Treasury’s publication is inconsistent with the commitment made to the Committee by the Chancellor. It is to be hoped that scrutiny and transparency have not in this case been subordinated to the imperatives of the Number 10 ‘media grid’.”

The contempt in which UKGov holds the demos and its elected representatives is crystal clear.