Tag Archive for: george trefgarne

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

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

800 years of interest rates. Did high interest rates set off the Wars of the Roses or even Game of Thrones?

Here is a light historical distraction, for those who take a long-term view.

We are currently in the midst of the third longest secular bull market in bonds ever (at 36 years), beaten only by one from 1441 to 1481 (40 years) and the record of 1605-1672 (67 years).

I know this because the Bank of England has just published a fascinating blog , and Staff Working Paper Eight Centuries of the Risk Free Rate.

The highest ever developed market real risk free rate, of 23%, apparently occurred in 1453 with the siege of Constantinople, when it finally fell to the Ottomans. The 26-year old Sultan Mehmed II had already conquered the important silver mines of the Balkans and there were fears he would disrupt Venetian trade. Only the subsequent arrival of gold and silver from the New World really ended the specie drought.

These ultra-high interest rates put our own history into some perspective, especially the Wars of the Roses.

1453 was also the year when Henry VI’s weak reign descended into the chaos with the loss of his French possessions after the Battle of Castillon. Like the siege at Constantinople, the losers at Castillon were for the first time bombarded into submission by artillery.

With the loss of its French possessions, the English crown also lost a substantial portion of its revenues, especially the tonnage and poundage on wine shipments from the Dordogne and Gironde rivers.
The financial situation was made worse by Henry’s lavish of devout tastes: spending much of his dwindling revenues on his foundations of King’s College, Cambridge, and Eton College. One might facetiously argue that those establishments continue to cause political trouble 700 years later.

No wonder a terrible civil war ensued. Everyone, including the King, was skint.

The data set has been culled and amalgamated from various sources, commencing with Prestiti perpetuals issued by the Republic of Venice. The first open market quotations are from 1285, when Prestiti apparently yielded 6.625%.

This year’s record low yields are not unprecedented. In the first quarter of 1946, US Treasuries yielded a similar 1.4%. Real yields were also a negative 5.3% due to a repurchase programme.

The Wars of the Roses are famously the inspiration for George R.R. Martin’s Game of Thrones. Although he does not mention yields, the fact the crown is heavily in debt to the Iron Bank is a backdrop to the plot and Queen Cersei is contemptuous of money lenders. I wonder if there was a bear market in bonds in Westeros too?

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