Tag Archive for: Economics

A stunning diplomatic achievement

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.



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

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.


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.




A New Centre Party, local elections and markets

The local elections on May 3rd may prove to be unusually exciting, both from a political and market perspective.

Jeremy Corbyn launched Labour’s campaign today and made clear his ambition is to seize flagship Conservative boroughs in London, including Kensington & Chelsea, Westminster, Wandsworth and Barnett.

I highlighted this risk in a piece for the CapX website in early January. On the face of it, Labour are well placed effectively to gain total dominance of London following the party’s dramatic performance in the capital city in last year’s General Election. Labour already holds 20 of London’s 32 boroughs, compared to the Conservatives’ eight.

In Battersea, where I live, we got a taster last summer when the amiable Conservative MP Jane Ellison was ousted by a Corbynite firebrand called Marsha De Cordova.

There are a host of reasons for the Labour London surge: stamp duty, Brexit, people tiring of austerity, housing, Grenfell and Theresa May’s comments about the “citizens of nowhere” who live in the metropolis. We can now add to this the surge in knife crime, which despite London Mayor Sadiq Khan’s inadequacies, is being pinned on the Conservatives due to police cuts and Theresa May’s opposition to stop and search by the police.

Only around 35% of the electorate typically manages to summon the enthusiasm to vote in local elections, but there are reasons to think this time could be more interesting.

Investor sentiment and a New Centre Party

Political risk is currently a major influence on investor decisions. Just look at South Africa, where the removal of Jacob Zuma as President in February has since contributed to a five per cent rally in the rand.

The latest survey by Bank of America Merrill Lynch of global fund managers found that a record net 42% were underweight UK equities, mainly because of the related political risks of Brexit and Mr Corbyn’s socialist policies.

Whatever the outcome in May, the local elections bring forward the possibility of a Labour split and the creation of a so-called New Centre Party. Such a split, dividing the left and centre-left vote, would theoretically make a pure Corbyn Government much less likely and, ergo, potentially lead to a rally in the pound and UK equities.

This was trailed in the Observer at the weekend with a peculiar story claiming that a former Labour donor had pledged £50m to create such an entity. You need to understand how politicians think. Political parties don’t split during elections – it is far too complicated – but they can do so afterwards as the success and blame is shared around.

Markets rally in two out of three scenarios

There are three scenarios we can imagine.

First, if Corbyn does well and achieves his objectives of seizing flagship Tory London boroughs, it will arguably enhance his control over the Labour party and further weaken Mrs May. In which case, one can see investors turning even more negative on the UK.

Second, Corbyn does well, but this actually puts the fear into Blairite Labour MPs who these days largely represent provincial seats in the Midlands and the North, like Yvette Cooper (Normanton Pontefract and Castleford) or Dan Jarvis (Barnsley).

They see Corbynism as a London phenomenon and feel so politically tortured by his leadership that a triumph by him in London could finally alienate them. It is hard to estimate how much they loathe Mr Corbyn and all his policies and people. Some of them could finally go their own way.

Third, Corbyn does worse than expected. Given the elevated expectations, this is now a possibility. There is a hint of hubris to Labour’s approach to London and the row about anti-semitism in the party could well act as a deterrent to many of the small ‘l’ liberal voters the party attracted at the general election. To this misstep we must now add his apparent willingness to indulge not only President Putin of Russia but President Assad of Syria.

In recent weeks, according to YouGov, Mr Corbyn’s personal approval rating has plunged to a net minus 25% from plus 8% in December.

Corbyn hubris and Barnett

Of the roughly 270,000 Jewish people who live in the UK, about 160,000 live in London. According to the Board of Deputies, about one in five, or 54,000, live in Barnett alone. It would be a very peculiar thing if Barnett voted for a Labour council as Mr Corbyn seems to hope. Speaking for myself, I will vote for an open and tolerant society every time and so, I trust, will my neighbours.

In this scenario, where Corbyn surprisingly blows it in London, Blairites could feel emboldened to split. Again, UK assets could rally on the basis that the threat of a Corbyn government is receding.

Finally, we should not assume that Theresa May’s position is secure. Her Majority in Parliament is waifer thin. This explains the Government’s tortoise like approach to everything except managing Brexit. We cannot forecast, we can only debate surprises.

Imagine how other people feel

One of the great achievements of the Enlightenment was a sense of other. Instead of thinking only of ourselves, or our tribe or locality, European societies began to think philosophically about other people and their rights and duties. Although religion was a motivator, this respect for others became a doctrine in its own right.

Here is hoping that, after the disputatiousness of 2017 and a further decline into a bizarre negativity in public and social discourse, we can renew our respect for other people, their feelings and their proper selves.

I was very struck earlier in the year by an impromptu speech US Defence Secretary Jim Mattis gave in Jordon. He told US soldiers, to “just hold the line”, because Americans “need to get back to respecting one another, and showing it.”

Adam Smith, book of the year
It is for this reason my book of the year is Adam Smith’s other great work, The Theory of Moral Sentiments. This was published in 1759, 17 years before his more famous Wealth of Nations. It is deceptively simple, arguing that sympathy for other people is the basis of all morality.

The historian Simon Schama has gone so far as to argue that it provided the intellectual underpinnings which made the Acts of Union between England, Scotland and Ireland work.

The reason The Theory of Moral Sentiment is my book of the year is twofold. First, by coincidence, the thoughtful Conservative MP and transport minister, Jesse Norman, is publishing a biography of Smith in 2018, which he says will put particular emphasis on Smith as a moral philosopher and not just as an economist. It is intended to sit alongside his recent biography of Edmund Burke (a friend of Smith).

Secondly, it is my firm belief that the great task of our time is to bring the country back together: to respect one another, to compromise and to calm the hysterical and obstructive public rhetoric we find on Brexit, but also numerous other issues. All this has been amplified by social media which, in my opinion, needs regulating. Nor do the continuing rumpuses in Parliament help.

Prosperity UK
In April this year, it was my privilege to help organise the Prosperity UK conference in Westminster, which brought 600 business people, bankers, politicians, academics and journalists from all sides of the debate to look beyond the Referendum to how we might make a success of Brexit.

I was easily the least distinguished person on the advisory board, which was co-chaired by Sir Paul Marshall and Lord Hill of Oareford, and included the Marquis of Salisbury, Lord Wolfson (CEO of Next), Sir John Peace (chairman of Burberry and Midlands Engine), Baroness Stroud (CEO of the Legatum Institute), Anthony Clake (a partner at Marshall Wace), Professor Sir Steve Smith, Vice-Chancellor of the University of Exeter and Professor Colin Riordan, Vice-Chancellor of Cardiff University.

I am glad to say it was a great success and, partly because the amazing goodwill and positivity in the room was sadly dissipated by the election, another conference on global trade is being planned in March, together with some more bespoke regional events. Alex Hickman, an entrepreneur, has been appointed Director and has been leading the effort. The website is HERE

A quote from The Theory of Moral Sentiments
I am sure I am not the only person to think we are never going to get anywhere as a country if we go on arguing with one another.

Adam Smith would agree. Here is a quote from The Theory of Moral Sentiments:

As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations. Neither can that faculty help us to this any other way, than by representing to us what would be our own, if we were in his case. It is the impressions of our own senses only, not those of his, which our imaginations copy. By the imagination we place ourselves in his situation, we conceive ourselves enduring all the same torments, we enter as it were into his body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us, and we then tremble and shudder at the thought of what he feels.

In other words, lets cheer up, and show some fellow-feeling, to each other and to our friends and neighbours in Europe and across the world.

Happy Christmas.

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