Natural gas and the energy transition

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The latest Gas Mark Report from the International Energy Agency (IEA) is another reminder of natural gas’s place at the centre of the energy transition to Net Zero.

The challenge is to ensure decision-makers and civil society see it has such. This is an opportunity for responsible energy firms, investing in the transition and natural gas, to communicate the economic, social value and environmental value they create.

Natural gas has lower emissions than coal and oil, so as we de-carbonise the energy mix, it makes sense to reduce output from coal first, and switch to natural gas as renewables come on stream. Unfortunately, there has been insufficient investment in natural gas production, with the consequence that the use of coal in power generation is rising, not falling. This is because it is by far the cheapest energy source and in times of shortage it comes online first.

The IEA says that natural gas consumption recovered by 4.6% in 2021, more than twice the pace at which it declined the previous year. Its forecast is that natural gas consumption is set to grow further to a record 4,148 bcm by volume in 2022. Prices in Europe and Asia hit a record high at the end of 2021.

Pipeline deliveries from Russia into Europe declined during 2021, but overall global trade in natural gas, pipeline and LNG, grew at a record 9% as high prices encouraged flows into Asia and Europe.

The IEA believes high prices and volatility will continue to be an issue during 2022. It said: “Gas supply adequacy could emerge as a concern for the medium term on a combination of recent LNG project delays, the relatively small number of new LNG final investment decisions (FIDs) in 2020-2021 and a structural decline in upstream spending since the early 2010s.”

There are signs that the policy environment for investment may be loosening. The EU has recently indicated that it will include natural as a sustainable fuel in its taxonomy of environmentally sustainable economic activities and Sen. John Kerry, the US Climate Envoy, has said that natural gas allied with carbon capture and storage should be seen as a “bridge fuel.”

In the UK, the Prime Minister and the chancellor recently endorsed “the continuing transitional need for gas”. Soon the consultation of Climate Compatibility Certificates for new North Sea Projects will be concluded by regulators and this too might increase investment. Policy makers have to weigh energy poverty and energy security in the balance alongside Net Zero.

A stunning diplomatic achievement

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The EU and UK agreement could ignite a dramatic economic recovery, as long as we rediscover timeless and useful principles

As somebody who always refused to accept the false “No Deal v 2nd Referendum” narrative which somehow took hold in the last four years, I am personally delighted by the new Trade and Co-Operation Agreement between Britain and the European Union.

It is a stunning diplomatic achievement and of great credit to the negotiators on both sides. This is especially so when you consider their difficult remit, the complexity of the issues and the dispiriting backdrop of the last few years. Boris Johnson and Lord Frost, Britain’s chief negotiator, are right when they say, “it should be a moment for national renewal.”

That said, whether it is or not depends on how things work and evolve in practice – the agreement is governed by some 19 committees – and what we as a country choose to do with our new found, sovereign freedom. I have to confess to being more ambivalent about that point and I am not alone. A recent poll by IPSOS Mori found that only 11% of Brits think the economy will have recovered next year, the lowest of any OECD economy. Thank goodness that we have such a productive and innovative private sector, capable of getting things moving.

In structure, ETCA loosely emulates the Norwegian pillar of the European Economic Agreement: collaborative access to the single market on a zero quota, zero tariff basis as long as we go along, broadly, with the rules, including in relation to the environment, labour relations and state aid. If we don’t and there is a disagreement, there will be an arbitration procedure which may culminate in that area of the agreement being “rebalanced” and tariffs imposed.

The situation is vaguer for financial services. By March 2021, the two sides intend to negotiate a memorandum of understanding for regulatory co-operation in financial services to be accompanied by, “equivalence decisions” with the EU. In the meantime, most City firms have set up branches or subsidiaries in the EU to enable business to flow.

In return for these looser arrangements, including an end to freedom of movement, we have given up certain things. The first is to participate in EU rule-making and the second, the superior protection of the Court of the European Free Trade Association, where judges are nominated exclusively by the EFTA members like Norway and Iceland. The EU-UK tribunal is more ad-hoc, as in a traditional international agreement. The tribunal’s members will be split into three with a third comprising  EU judges or equivalent, some of whom will no doubt be connected to the European Court of Justice; the second third will be from the UK and the final third will be independent.

However, these and other flaws, such as the uncertainty about Gibraltar’s status, are mere details compared to the really big point: we have a comprehensive agreement with the EU which should give us amicable access to each other’s markets and engender a spirit of co-operation and mutuality, while also disembarking us from the runaway train of “ever closer Union” enshrined in the Treaty of Rome. Businesses and individuals are inventive and adaptable. Goodwill, workarounds, technology and good custom and practice should help mitigate or overcome any shortcomings.

The UK Parliament will ratify the deal in the next few days. The EU process will take until mid-February. That might prove to be more difficult as the explicit purpose of the European Parliament is to replace a “Europe of nations” with something new. It is a draft treaty and MEPs and EU member states might demand additional clauses, perhaps in relation to governance, to be re-presented to the British.

Assuming that the ratification process goes according to plan, the resulting certainty over the biggest legal and commercial issue facing the British economy for several decades, should finally enable investors and businesses to put substantial amounts of money to work here. For nearly five years, business investment has been flatlining, even retail investors (many of whom presumably voted for Brexit) have been withdrawing money and investing in global opportunities. The FTSE 100 has been the worst performing global stock index.

The amount of money that may potentially be deployed into the UK is truly gargantuan. According to Bank of America, global fund managers are a record “underweight” of the UK in their portfolios. Vast sums of money have been printed and borrowed by Central Banks and Governments, including by our own. Much of it is sitting in bank accounts, earning pitiful interest or held in cash or near cash of one kind or another by both businesses and households in the UK and elsewhere.

Before we get too carried away, what are the risks to this rosy scenario? Leaving aside the ongoing virus (where we must hope the vaccines work their magic), there are two.

The first is our old friend inflation, dormant since the 1980s. It stands to reason that when large parts of the economy are subject to legal restrictions and are idled, turning on the money geyser will cause a surge in prices. Unless the Government can move fast to get Covid under control, to open up the economy and also to create the appropriate structures for money to be invested by the private sector into new assets and opportunities (such as infrastructure and flotations of companies on the London Stock Exchange) the great flood of money will be wasted in pointless speculation in, say, house prices and consumption.

The consequent inflation could only be arrested by a sudden rise in interest rates, turning the Brexit boom to bust.

The second risk is something more subtle: the need for a process of economic and institutional reform which restores orderly, reasonable law and decision-making and efficiency to the British state. The worry is that, despite all the rhetoric about “global Britain” and trade secretary Liz Truss signing free trade deals at a heroic pace, the Conservative Party has apparently lost the moderate, practical, business-minded, Scottish Enlightenment mindset of Pitt, Peel, Thatcher and Blair and instead embraced a sort of madcap nationalist and socialist thinking, which I (ironically) call “NatSoc economics”.  Let us hope this is temporary.

If our future is really to be found not in the stars, but in ourselves, we must, as a country, start by rediscovering established commercial principles.

 

 

We all fall down, then get up again

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Helpful lessons from the plague of 1665.

Sometimes history can take us out of ourselves and put the present in perspective.

It is hard not to be very worried about where Britain is headed as a country after arguably 20 years of catastrophic mistakes by a succession of administrations, including this one led by Boris Johnson.

But rather than dwell on that obvious and gloomy point, which I am sure most sensible people (and investors) are coming to share, let us swivel our gaze back 350 years to the parish records of London for inspiration.

There we can find data which demonstrates that terrible things pass, life changes and an orderly democratic society is usually self-correcting.

Thomas Cromwell, that effective man of business for Henry VIII, introduced compulsory birth, deaths and marriage registers for every parish in 1538. Lord Burleigh tightened the rules in 1597, appointing Diocesan registrars to inspect the accuracy of the books, and in 1653 in an Act Touching Marriages and the Registering thereof; and also touching Births and Burials, Oliver Cromwell put the system on a statutory footing, overseen by Magistrates.

From this accurate data (reproduced by the Wellcome Trust), here is what we learn of the progress of the Plague of 1665-6. It began in May, it peaked over the summer, there was a second (but much lower) peak, but by the following February it was deemed safe enough for the court to return to Westminster.

 

The progress of the disease is gruesomely narrated by Samuel Pepys, in his diary. Interestingly, periwigs were deemed to be a source of transmission and wig manufacturers’ sales collapsed.

What are the lessons we are hesitantly to deduce from this evidence?

First, that even the most deadly viruses work their way through populations and at some point, everybody who is likely to get infected and, sadly, to die, will have done so.

Second, accurate detailed, local data – of which there was almost none at the press conference by the medical and scientific advisers this week (coincidentally timed to overshadow the online Labour conference) – is imperative to monitoring progress.

Third, orderly democratic law-making is a vital institutional underpinning of any successful society. That, currently, is suspended in Britain and needs to be restored.

Finally, the 1665 plague together with losses in a silly war with the Dutch, provided the backdrop to the fall of Charles II’s Lord Chancellor, the Earl of Clarendon. He did not get it himself but became seriously ill with gout and was deemed to be an increasingly incompetent liability. In 1667, he was impeached for breaching Habeus Corpus by sending prisoners out of the country to Jersey without trial, in violation of long-established law. In his prime, Clarendon had been brilliant and helped orchestrate the Restoration, but by the end it was King Charles II himself who signed his banishment.

Maple syrup: a 10 point guide to Boris Johnson’s Canada-style EU free trade proposal

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I popped along yesterday morning to the splendid Painted Hall in Greenwich (above) – itself a painterly encomium to institutional innovation and commerce – to hear the Prime Minister’s bombastic and entertaining enthusiasm for free trade and a Canada-style free trade deal with the EU.

The Cabinet in attendance rose as one to give a stirring standing ovation to their Leader, but the media, not so much. What followed was a load of dreary questions which demonstrated that the press knows almost nothing about the so-called CETA (Comprehensive Economic and Trade Agreement) with the EU. As I expect they are not alone, and also I believe I was the first person to raise the potential of CETA publicly in an article in The Times in 2016, please see my very humble and brief attempt to address this deficit:

1. Purpose

The purpose of CETA is to encourage foreign investment, to remove all tariffs on industrial goods and to progressively liberalise trade in agriculture and services. The agreement summary says: “Overall, the tariffs for 98.6% of all Canadian tariff lines and 98.7% of all EU tariff lines will ultimately be fully eliminated. This will happen at entry for 98.2% of the Canadian tariff lines and for 97.7% of the EU tariff lines. All other products identified for liberalisation will have their tariffs brought to zero within 3, 5 or 7 years.”

2. Financial services

You will hear from some quarters that CETA “doesn’t cover financial services”. This is rubbish. They have a whole section, Chapter 13. This essentially sets up an equivalence and/or mutual recognition regime. It says that “each Party shall permit a crossborder financial service supplier of the other Party, on request or notification to the relevant regulator, where required, to supply a financial service”.

3. Other services

The agreement supports the opening up of services such as maritime, telecoms and postal services, which are subject to a “negative listing process”, ie they have to be actively excluded. Presumably, this means very little change from now.

4. Professional qualifications

The agreement creates a process of mutual recognition for doctors, architects etc. Though I have noticed, for instance a renewed French hostility to British ski-instructors, partly because French ski instructors have a very rigorous qualification programme. One suspects a handful of professions might face a little more discrimination than now.

5. Regulatory co-operation

You will hear from some Brexiteers that “we won’t be rule takers from Brussels”. They are, to a degree, set to be disappointed. The CETA agreement specifically encourages regulatory convergence and compatibility via a Regulatory Co-operation Forum. When the Prime Minister says “no alignment”, what I assume he is talking about is not being automatically forced to adopt EU rules. In reality, most of our rules, especially in goods, will be the same or similar, but we will have more wiggle room than members of the EU. I have to be honest, I myself find this “rule-taking” rhetoric very boring and largely irrelevant.

6. State aid rules and competition policy

State aid is hardly mentioned in the agreement and is effectively covered by the duties of non-discrimination towards investors. Perhaps the Government would have greater freedom to bail out defunct airlines and steelmakers. However, competition policy is covered in Chapter 17. While this is a relatively brief section, the general duties to “recognise undistorted competition” and “to proscribe anti-competitive business conduct”, suggest no meaningful change to legislation in that area.

7. Lots and lots and lots of Committees

The agreement is governed by a Joint Committee, co-chaired by the Minister for Trade and the EU’s trade commissioner. They have the power to interpret the agreement and also to create new rules and processes. In turn, the Joint Committee appoints numerous other committees covering everything from financial services to copyright protection, which in turn make the rules and processes within the agreement.

8. Tribunals

If there is a disagreement, including one brought by a private sector entity, there are tribunals to settle the dispute. The Investor State Dispute Settlement (ISDS) tribunal is made up of five judges from each side and five from third party countries, who convene in specialist committees. Their job is to protect investor interests and this has proved highly controversial in left-wing circles. It is the reason that the implementation of CETA got held up and it is a continued source of grievance mentioned by French ­Gilets Jaunes protestors and NGOs.

Other tribunals may also be set up by the Joint Committee.

If the passage of CETA is anything to go by, expect there to be a row about the tribunals, including from the EU-side.

9. Ratification/agreement

The CETA agreement affects both nation state and European Union issues. It is consequently what is known as a “mixed agreement”, meaning it has to be ratified by both the EU itself and the 26 nation state members. There is provision for it to be implemented provisionally, but one risk is a small nation, such as the Republic of Ireland, blocking things up.

Another point to have in mind is that the CETA agreement is 1600 pages long and took six years to agree. In theory, the parties need do no more than find and replace the word “Canada” with the words “United Kingdom”. But I bet they don’t.

10. No Deal

What happens if no text has been agreed by December 31st? Will Britain tumble into an Australian-style relationship with the EU? Personally, I doubt it. Both sides have already committed to heads of terms via the Political Declaration. Every time No Deal comes up, both sides back down. Far more likely is a series of sector-based deals, with roll-overs for areas which are still to be agreed. In the meantime, there will be much posturing and tub-thumping from both sides.

Conclusion

In the end, trade and commerce are private sector phenomena, arising from fundamental human concepts such as consumer demand, mutual interest and comparative advantage. The role of Governments and regulators is to create the framework to enable this to happen and to enforce standards. But in the modern era, governed as it is by the General Agreement on Tariff and Trade, even if states cannot reach full agreement it will not mean everything grinds to a halt. Firms and individuals will adapt.

There are thousands of small, detailed items to be sorted in our future relationship with the EU. But it will prove to be a dynamic process and unless something specifically affects your industry, then the best advice may be to ignore most of the negativity in the media and elsewhere and to get on with the business of a flourishing life.

 

 

 

The Establishment is having an optimism reshuffle

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All change at the BBC, the FT and the Sunday Times

For me, there have been two notable cultural trends of the last three years in the West. First, a howling negativity emanating from what one might describe as the bourgeois intelligentsia; and second, the traditional Establishment being stuck like rabbits in the headlights, panicking and not knowing what to do.

One can blame this on Brexit and the election of Donald Trump or Greta Thunberg. But it goes much deeper than individuals and traces its roots to the financial crisis, the rise of social media and too many highly indebted people at university, to name a few.

Is all this suddenly changing?

Pessimism is so 2019

Daniel Hannan, the retiring Conservative MEP and Telegraph columnist, quoted the historian Lord Macaulay the other day at his leaving-do. “On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?” Pessimism is not new, but progress is the way to bet.

I was struck also by an interview on the BBC Radio 4 Today programme this morning with Professor Sophie Scott, director of the Institute of Cognitive Neuroscience at University College London and Professor Julia Lohmann, a Finnish academic who also runs a design practice called the Department of Seaweed, which develops emissions and toxin absorbing seaweed products.

Professor Scott reminded us all that humankind are social primates, and “People change more frequently if you engage them in a positive way. Our social interactions matter.” You can listen here, at 2hr 55 mins (just after a piece on the perils of Coronavirus) LINK

Adam Smith

This should not be a surprise to followers of Adam Smith, whose Theory of Moral Sentiments is built upon exactly that insight. Man is essentially a collaborative animal and “we shudder and tremble” at what “our brother feels upon the rack”. Negativity and hysteria are usually overdone and unhelpful, if not psychologically damaging, and certainly harm relationships and the ability to co-operate.

Democratic societies, which are necessarily discursive, do not usually run off cliffs. Occasionally, one has a calamitous 1914 cliff-running situation, but even those just serve to reinforce social dynamics of positive behaviour and spontaneous organisation. Usually, in a dynamic society, if we see a threat or challenge we collectively organise to do something about it, after first making a mess and fuss over things.

All change

Which leads us to my next observation. After three years of stasis, the Establishment is having a major reshuffle. In the space of a few days we have a new editor of the Financial Times, a new editor of the Sunday Times, a search for a new BBC director general and for the CEO of Sainsbury’s and for a director at the Office of Budget Responsibility, and a new interim head of the Financial Conduct Authority. Expect this to gain further momentum with the imminent Cabinet reshuffle and a new Labour leader.

What will be the collective ethos of these new leaders? Will they wag their fingers disapprovingly at us and teach us we are all doomed due to the climate emergency and a plague from China? Or embrace a more optimistic, practical style and philosophy? Optimism v Pessimism currently is a great dividing line in society but empirical observation suggests that, in the long term, sensible people should be cautiously optimistic.

 

 

Cobham shows UK M&A is open for business. Mostly.

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How open or protectionist is the new Government going to be towards foreign takeovers of UK companies? We received a hint before Christmas when, at 10pm on 20th December, the Secretary of State for business, Andrea Leadsom, cleared the takeover of the aerospace group Cobham by US private equity house Advent, subject to certain conditions.

The answer, apparently, is that the UK market will be open like the arrival gates at Heathrow. Open, as long as you go through the process, which might occasionally be more complicated and time consuming than expected.

The signs are that the Government will not tighten the rules further, as Theresa May intended. The rules were already tightened last year, when the threshold for an intervention on grounds of national security, media plurality, and financial stability was lowered from £70m to £1m turnover, and the definition of national security widened to include more dual use, civilian technology.

The Cobham approval received very little media coverage or analysis. But the takeover of Cobham is instructive because it shows the Government has an internal conflict. On the one hand, it wishes to encourage inward investment in the UK, on the other it wishes to protect certain politically critical assets, especially those with activities in the new Conservative constituencies in the Midlands and the North.

A merry dance

The case of Cobham was reported as simply “approved”. But on closer inspection it was much more complicated. A ballyhoo had been got up in the press, including from the original founding family and a five-month process then ensued (my summary below):

  • On 25th July 2019, the Cobham board agreed to a £4bn takeover by an Advent entity.
  • On 16th September, a general meeting of Cobham shareholders effectively accepted the offer with a 93% vote in favour.
  • On 17th September 2019, Mrs Leadsom issued an “intervention notice” under Section 67 (2) of the Enterprise Act, ordering the Competition and Markets Authority to conduct a Phase 1 inquiry.
  • On 29th October the CMA reported back, indicating it was a “relevant merger situation”.
  • On 5th November, in a written statement, Mrs Leadsom said the issues required further consideration.
  • On 11th November, Mrs Leadsom indicated that she could refer the situation to the CMA for what is known as a “Phase 2 Inquiry,” in which the CMA itself could impose conditions on both Advent and Cobham.
  • However, instead she said she was minded to accept undertakings from the companies and put these out to consultation, to be completed on 17th
  • On 20th December, the merger was approved subject to a series of fantastically complicated commitments, relating to a UK headquarters, jobs, national security and technology, outlined in a legally enforceable Deed of Covenant. There were numerous announcements in which the lawyers and civil servants had evidently been hard at work. Much of it was blacked out. It was late at night. The to-and-fro and lobbying behind the scenes would have been extensive.
  • Simultaneously, the boards of Cobham and the Advent Bidco made “post-offer undertakings” under Rule 19.5 of the Takeover Code. These, introduced in 2014, supplemented the commitments made in the Deed. These are also, supposedly, enforceable in the courts.

An open and dynamic market economy

What are we to conclude? First of all, as I said, the Government is torn about what to do in merger situations, but its overall inclination will be to agree, subject to certain commitments in relation to national security and jobs.

Second, much of this is driven by press and political reaction. The “save Cobham” campaign never really caught fire, in my view, and the Cobham family had itself sold down its stake below 2%, giving it limited standing in the debate. Critically, the Daily Mail has a new editor, Geordie Greg, who is less inclined to go over the top on such issues (at least in comparison to his predecessor, Paul Dacre) and anyway Boris Johnson is less inclined to listen than Mrs May.

In fact, the new Prime Minister, when asked about Cobham, said on the following morning: “I think it’s very important that we should have an open and dynamic market economy.

“A lot of checks have been gone through to make sure that in that particular case all the security issues that might be raised can be satisfied and the UK will continue to be a very, very creative and dynamic contributor to that section of industry and all others.”

You would not have heard Mrs May speak in those terms.

Third, despite Ministers’ inclination to approve such takeovers, we should also expect more Phase 1 investigations and conditions attached. This means the takeover process for some assets, especially in the technology and security sectors, might prove more complicated and fussy from a legal perspective.

Finally, what about the plans published in July 2018, which would have given the Secretary of State even more powers to intervene directly, bypassing the CMA, especially in relation to infrastructure and technology assets? I have yet to be told in black and white, but my strong impression is these have been quietly shelved as ancien regime.

If the Government does not get investment moving in the UK, it will fall rapidly into unpopularity, and excessively politicising mergers and acquisitions would not help. Ministers know this.

 

 

Could Jeremy Corbyn be Prime Minister by the year end?

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There is a reason the bookies now put Jeremy Corbyn as favourite to be next Prime Minister (7:2 from Ladbroke’s).

It is certainly starting to feel we are now on tramlines heading towards a General Election.

Don’t be fooled by the fact that under Conservative Party internal rules she has 12 month’s grace from the last challenge against her in December.

The Prime Minister faces weekly hurdles to staying in office. Indeed, it is pretty remarkable she is there at all given that even with the Democratic Unionist Party in tow she only has a Parliamentary majority of five. We also know what constitutional and party rules will apply if a Conservative leadership election takes place.

To remind you, the known hurdles are:

Date Event Significance

May 14th
Expected Withdrawal Agreement Bill vote
Unlikely to pass without Labour support

May 23rd
European Parliament elections
Conservatives are only on 13% in the polls

May 23rd – 4th June
Whitsun Recess		  
June 3rd Trump state visit
Plenty of opportunity for
mischief

June 6th
Peterborough by-election
A strong showing from the Brexitparty candidate is expected

June 15th
EGM of Conservative National Convention
No legal force but possibility for embarrassment

 

It is conceivable that either after Parliament passes the Withdrawal Bill with Labour support (possible but not likely) OR after heavy defeats in both the European elections and the Peterborough by-election Theresa May finally decides the game is up. The Cabinet and the 1922 Committee of backbenchers could belatedly urge her to step down.

Who or what is an “interim Prime Minister”?

This will be the first gift to Jeremy Corbyn and the Labour party.

The position of interim Prime Minister does not exist in law. Who should be Prime Minister while a new Conservative leader is chosen? Only the Queen can appoint the Prime Minister and she must choose whoever can command a majority in the House of Commons. How will the Conservative Party and, say, the Cabinet prove that its choice can command a majority while the outcome of the Conservative leadership process is unknown?

The best solution would be for Mrs May herself to stay on as “interim” Prime Minister, having indicated her intention to resign later, after a leadership election has been concluded. But suppose she does not agree to this? And suppose that the Opposition Parties, not unreasonably, don’t support her staying in office while the Conservative Party conducts a prolonged leadership poll? They would be entirely justified in calling a vote of confidence.

Avoiding a Vote of Confidence

The House of Commons has to be sitting for there to be a Vote of Confidence. As the Government controls the Order Paper, there are various ruses it can use to avoid Parliament sitting. It can, for instance, simply say there is no business or Prorogue Parliament or put it into Recess. This is easier than it appears because there is virtually no legislation in the pipeline and the current session of Parliament – delineated by a Queen’s Speech – has already been extended.

However, one cannot help feeling that these are just the sort of antics which the Stuart Kings resorted to in order to avoid Parliament sitting- and look what happened to them.

The Conservative leadership rules

These are the second gift to Jeremy Corbyn.

The Parliamentary element of the leadership process is run by the 1922 Committee. Previously, it has allowed a week for candidates to come forward and held votes on Tuesdays and Thursdays. At each round, the weakest drops out until there are just two left. They then supposedly hold hustings up and down the country and the 150,000 odd party members vote a few weeks later.

Presumably, there is an opportunity to speed things up a bit. But even if common sense and speedy and efficient systems prevail, it is doubtful the process could be truncated to less than 4-6 weeks.

Furthermore, holding such a process in August would plainly be problematic.

A General Election

A Labour vote of confidence as soon as the leadership contest concludes, if not before, must surely be a certainty. Can we be sure that any one of the dozen or so leadership candidates would win such a vote? If, say, Boris Johnson won, several MPs are on record as saying they would leave the party and refuse to serve. Mr Corbyn would be able to make some good points about the spectacle and legitimacy of the whole process.

The deadline for the current extension to Article 50 expires on 31st October. That will be looming into view by the end of the summer holidays and dominating the political discussion by then. Surely nobody is going to be wanting to hold an election immediately before it or during it?

The only realistic window for an election is September. If, and it is a big if, the Conservative party does decide to change leader, commencing in June, the precariousness of the Parliamentary arithmetic and the inevitable hue and cry about the requirement for a fresh mandate means that must be the way to bet.

Who would win? I don’t know, but a simplistic reading of the current polls, plugged into the Electoral Calculus model, forecasts a potentially unstable Labour/SNP coalition with a majority of around 15. As for Brexit, would it be implemented at all by such a Government?

Conclusion

Put together the complexities of changing Prime Minister, and you can see it is hard to do so without running the risk of the whole process blowing up spectacularly. Inertia therefore remains Mrs May’s most powerful friend. Against that, whichever way you look at it, she has a majority of five and the clouds of defeat swirling around her could well erupt into a storm soon after the 75th anniversary of the D-Day Landings.

Theresa May is a genius – discuss?

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There, that has caught your eye.

We are accustomed to thinking that Brexit has degenerated into a shambles and Mrs May’s strategy of “kicking the can down the road” has been a disastrous humiliation. That is certainly a valid point of view. But from her own narrow self-interested perspective she remains in Downing Street and has avoided taking any of the many final decisions which might coalesce opposition to her.

That strategy marked up another success overnight when the European Council agreed an Article 50 extension until October 31st.

At Boscobel we have continuously resisted the Government’s claim that the country faced a binary choice of Theresa May’s deal or No Deal, as we believed Parliament would approve neither. That continues to be our advice.

A leadership contest?

This morning, the Today Programme was full of disinterested speculation that Mrs May will now be “forced to step down”. That is a possibility. But the fact is there is no legal or constitutional mechanism to remove her from office in the short term. And unlike most politicians she seems utterly immune to the daily hue and cry of the media, Parliament or indeed other people’s views and feelings generally.

She has particular contempt for Cabinet government, one of the many important constitutional conventions our politicians have undermined in recent years. That said, given that at least five of her colleagues now have leadership campaigns up and running, she can enter a plea in mitigation.

Investor confidence

From an investor perspective, last night’s European Council decision has its merits. There is a huge amount of deferred investment, pent up in the system. There were only three IPOS on the London Stock Exchange in the first quarter, the lowest number since the financial crisis. UK companies are holding a record 35% of GDP in cash on their balance sheets.

For managers and investors with capital to allocate and who can ignore the media, the Brexit pause should be an opportunity to make incremental decisions. Very large decisions may still be put off, as the acute political uncertainty around the UK will continue.

What is the medium term outlook?

  • The UK will almost certainly participate in the European Parliamentary elections, with candidates to be selected in the next couple of weeks. The polls suggest this will be a disaster for the Conservatives.
  • The franchise could be critical, as EU citizens resident in the UK will be entitled to vote. They have been treated appallingly by the political and bureaucratic process and are difficult to poll. One suspects, without evidence, they will vote for remain parties such as ChangeUK.
  • Relative to the hard core Remainers, at the top of which sit the eminence grises of New Labour, notably Tony Blair, the Brexiteers (especially the European Research Group in Parliament) are in disarray.
  • Experience of life suggests the longer and more frequently something big is delayed, the more likely it is to lose momentum altogether. We should start to contemplate the possibility that Brexit may never happen, or not unless the mandate is refreshed by a Second Referendum.

In EFTA, it would be in a working free trade agreement, but outside the jurisdiction of the European Court of Justice, the Common Agricultural Policy, the Fisheries Policy and the Customs Union. We would enjoy rights of consultation and veto over new laws, as they applied to us.

At Boscobel, we have supported a campaign for the so-called Norway solution. It is now commonplace in Parliament that there are, in fact, two pillars of European treaties, holding up a common-roof called the European Economic Area. The EU political treaties make up one pillar, but there is another made up of the European Free Trade Association. It still makes sense for the UK to leave the political institutions of the EU and move into EFTA.

For this policy to work it would require something to shift. But that tinkling sound you can hear is just the can being kicked down the road. Again.

The EEA is a Brexit life boat for the City and the economy

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The revelation [in the Telegraph on Saturday 9th March 2019] from George Eustice, the ex-fisheries minister, that Britain’s ambassador to Norway, was primed to hand in a letter giving notice that Britain was leaving the European Economic Area (EEA) single market treaty last March, but was mysteriously ordered by the Foreign Office not to do so, is the best news about Brexit for months, especially for the City and the wider economy.

The reason is very simple. If Brexit goes belly up, we can leave the EU, but still stay in the single market, for the simple reason we haven’t yet given the required notice to leave.

The EEA delivers Brexit. It is a working free trade agreement with the EU, but outside it. It is outside the Customs Union, the Common Agricultural Policy, the Commons Fisheries Policy and the jurisdiction of the European Court of Justice, and enables us to bring in controls over freedom of movement.

The EEA is a separate treaty to the EU Treaties. We are signatories in our own right, and we can make it operative by applying to join Norway, Lichtenstein and Iceland in the related European Free Trade Association. This Brexit option is continuously dodged by the Government, because it is excessively worried that the national controls over freedom of movement in the EEA are not sufficient.

The City’s misconceptions

One thing you will hear about the EEA is that the City doesn’t want it because we would be a “rule-taker” from Brussels, as the Bank of England Governor Mark Carney said before the Treasury Select Committee in December 2018. Until about a year ago, the City wanted to stay in the single market, because it would keep its market-passporting rights, but now the consensus has now shifted.

However, it is notable that when you ask City figures why? a whole load of misconceptions pop out.

It is not true we would be a “mere rule taker” in the EEA.  Nor is it true that the Bank of England would have to take orders from the European Supervisory Agencies during a crisis, jeopardising financial stability.

How laws are made in the EEA

Less than a third of EU directives are single market ones, appropriate for the EEA.

There are three stages to law-making in the EEA. First, the European Commission comes up with some legislation which, much of the time, originates in global standards bodies on which EFTA nations sit independently. The EFTA nations then have a right to be consulted by the EU at a technical level. This is the “decision shaping process”. EFTA states do not have a vote at this stage.

Second, once a directive has become EU law it is passed on to the EEA Joint Committee, on which representatives of the EU and the EFTA states sit, for incorporation into the agreement. Its decisions must be unanimous and at this stage, the EFTA nations can delay, adapt or veto legislation either by claiming it is not “relevant” to EEA nations, or that it triggers constitutional requirements. Failure to implement the directive outright (reservation, in the jargon) results in the relevant area of the EEA agreement being suspended.

Finally, if agreed, the directive must be implemented by Parliament. If it is rejected or mangled out of shape, then the EFTA Surveillance Authority (the body which effectively polices the rules in EFTA) can bring an infringement action before the EFTA Court. Both institutions would have substantial British representation, as it would be the biggest member. Minor differences are usually overlooked by both sides.

Rows of this kind are very rare. This is because law-making in the EEA is much more collaborative than in the EU. It is effectively a form of “equivalence” in rule-making which the City has said it ultimately wants from Brexit. The EFTA Court is a more pragmatic institution than the ECJ. There is no ideological principle “of ever closer union” to follow.

Those pieces of onerous EU legislation about which one hears the most City complaints, like MIFD2 (covering find managers), or Solvency II (covering insurers), could have been revised or in extremis rejected. The latter course would, admittedly, have resulted in a massive row. But it does mean there are more sovereign protections in the EEA than we have currently as an EU member, adopting unedited rules in their entirety, as we would do also during the “implementation period” in Theresa May’s deal.

The Bank of England in charge

What about the idea that the EEA would jeopardise the ability of the Bank of England to police financial stability? This is also a misconception. The Bank would have dozens of representatives on the EFTA Surveillance Authority. EU supervisory agencies do have powers to send draft directions to the EFTA Surveillance Authority. But just as now, the Bank of England could veto a direction which “impinges on fiscal responsibilities” (ie nearly everything).

For those who care about economic growth, the EEA is the best way out of the Brexit impasse. Not only would it deliver certainty and sovereign legislative flexibility, it would allow business investment and market activity to recover. Sterling would regain its strength. Given the chronic low valuations of UK assets, there might even be a Trump-style boom.

The opportunity

Joining Norway in EFTA would also bring the world’s largest international financial centre alongside the world’s largest $1 trillion sovereign wealth fund, which Norway has thriftily accumulated from its North Sea oil revenues (incidentally, this has a disappointing average annual return of 5%, I am sure the City’s expertise could help increase that). This is a strategic opportunity for both sides. The EEA has cross party support, including from Tory MP Bim Afolami and Labour MP Seema Malhotra, both of whom used to work in financial services and co-signed a letter to the Financial Times.

Falling back on the EEA is the best Brexit life-boat to hand. It isn’t perfect, but it works. It would remove most of the political and legal uncertainty hanging over the UK.  Why not give it a go? If it does turn out that it is insufficiently flexible and the EU does use the EEA treaty to make us a mere “rule taker”, as its detractors fear, then we can move into a new arrangement and our ambassador in Oslo can hand in that departure letter, which we know has already been drafted.

This article was first published on the Reaction website

Busting the latest Brexit myths

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Theresa May has told the House of Commons that she will now bring forward three votes:

  • March 12th vote on her new revised deal
  • March 13th if that doesn’t pass a vote for No Deal
  • March 14th if that doesn’t pass a vote to extend Article 50

The pound has risen to its highest levels for nearly two years on the news, to over €1.16 and $1.32 respectively.

However, the news has also triggered the usual cacophony of over-the-top commentary. Here is a brief myth-busting guide.

Myth one – No Deal is “off the table”

While No Deal is clearly much less likely, it is still open to the House of Commons to vote for it and, in any case, a request to extend Article 50 will have to be approved unanimously by the 27 members of the EU Council. The EU might choose to hold our feet to the fire. Furthermore, a short extension may just move the cliff-edge.

Myth two – Mrs May’s deal is off

Geoffrey Cox, the Attorney General, is in Brussels negotiating some revisions to the Backstop. I don’t know him personally, but my legal friends all have supreme confidence in him. If he does come back with something, it may pass in the House of Commons. (I am glad I got 100:1 on him being next Prime Minister just before Christmas.)

Myth three – this is all a ruse to stop Brexit

Such is the level of mistrust, numerous people no longer believe each other. However, it is my firm conviction that there is a majority in the House of Commons for what one might describe as “a soft Brexit” of some kind, but with an exitable Irish Backstop.

Myth four – the EU want to trap us into staying in

Not true. If the UK is still in the EU by July, we will have to run candidates in the European Parliament elections, or the Parliament will be inquorate. This, in turn, would upturn the selection for the next President of the EU Commission. The EU does not want that to happen. It does not want British candidates in the Parliament, joining the populist mob. They would probably like to keep us in a customs union though.

Myth five – one more heave and we can be like Singapore

The European Research Group is not unanimous. Some have been hoping that by pushing the UK into a No Deal scenario, it could become a free trading entrepot, just like Singapore. Singapore is a wonderful, admirable place but there has never been a majority in this country, still less among Brexit voters (many of whom are Labour supporters), for such a low-tax, low-regulation move. Others wanted to go for a Canada Plus deal, which is more attractive but does not answer the question of what to do on March 29th.

Myth six – we are on the way to a second referendum

There is no majority in Parliament for a second referendum. Open Europe estimates that the majority against one is 46. Labour has a real problem in that many of its safe seats are for a second referendum; but the top 45 marginals it is targeting in England and Wales are 78% Leave voting; and the top 25 it is defending are 72% Leave voting.

Myth seven – Norway is dead

Some will know that I published a short book called Norway then Canada last year, arguing that, as a plan B, we should fall back on our existing membership of the European Economic Area (the separate single market treaty) as a first step when we leave the EU. This gained some traction for a few weeks but then fell victim to a barrage from the Brexiteers and Remainers who ran a “kill Norway strategy”.

However, a blog just published on the UK Constitutional Law site reminds us that the Government has not only failed to put the legislation before Parliament to pull us out of the EEA, even if it did it probably would not pass. If all else fails, we can still fall back on it.

Labour is close to supporting EEA membership, but for some reason it wants to stay in a customs union, which is a red rag to Brexiteers.

Sooner or later the politicians will burn themselves out and when they do they will have two options: vote for Mrs May’s deal as adapted by Geoffrey Cox, or go for an EEA-based option.

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