It’s the economy, stupid
Small exporters in Britain are suffering due to the risk of Brexit reports the Times.
Companies are less confident about their prospects than at any time in the past three years, amid fears about the global economy and uncertainty about Britain’s place in Europe.
London First say that staying in will boost London by £13.9 billion and several thousand jobs reports City AM.
Previous roundups have mentioned the risk Brexit poses to the pound. Goldman Sachs are now advising to expect a 20% crash in the pound’s value if we leave (Guardian).
Immigration
Business Insider UK reports analysis by HSBC of why Brexit cannot reduce immigration into the UK:
Less than half of inward migration comes from the EU so any government committed to reducing immigration may need a wider policy than just EU exit.
Also, the UK could only restrict EU migration if it took a very hard approach to exit, ie if it were less integrated than Switzerland and did not join the EEA.
Where I live in East Kent, the presence of migrant camps in Pas-de-Calais is a major local issue, as it is nationally. The PM’s comments yesterday that Brexit might lead to such camps in southern England attracted considerable attention across the press.
The Mail reported the remarks from the angle of fierce Tory infighting.
A Q&A format article in the New Statesman concludes that the UK border would likely move make from France in the event of Brexit.
Growth and Inflation
Finance Blog The Corner has news from Barclays that the bank sees the referendum and Brexit as damaging the economy.
We believe that uncertainty on the timing of the UK referendum on EU membership and its outcome will have a temporary negative impact on the UK’s economic activity, mostly through lower private investment. We expect growth to slow to 1.9% in 2016 from 2.2% in 2015 . We base our forecasts on the UK remaining a part of the EU , but should it vote to leave, uncertainties would persist beyond 2016 and economic activity could be hurt for a more protracted period.
The FT reports an estimate that Brexit would increase inflation by 4%.
Remain to fight crime
Rob Wainwright, head of Europol, says that Brexit would make us less safe from crime and terrorism, BBC (Video).
How you win or lose EU referenda: keep big business at arm’s length
An interesting article in the Telegraph discusses, among other things, Ece Atikan’s new book that examines a number of EU related referenda. He found that:
- Pro-EU sides (usually the side the government wants to win) often start with a lead that is too easily squandered.
- Pro-EU sides lose if they are too closely associated with big business (e.g Volvo in Sweden’s referendum on the Euro)
- Anti-EU campaigns tend to only succeed if they have a figurehead to rally around.
In-fighting between Outers
The BBC has summarised the contestants to become official IN and OUT campaigns, how they will be designated and the consequences.
There appears to be more intense rivalry between different OUT campaigns than on our side. There is an interesting debate to be had about whether inernal competition makes a cause stronger or weaker overall.
The Telegraph suggests that the PM may try to play the different OUT campaigns off against each other.
TV deabtes
Digby Jones is calling for three TV debate for the referendum reports the Telegraph.
Corbyn cave-IN
The Express is very cross that Jeremy Corbyn has been persuaded to support IN.
* Antony Hook was #2 on the South East European list in 2014, is the English Party's representative on the Federal Executive and produces this sites EU Referendum Roundup.
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36 Comments
Our trade deficit with the EU has more than doubled since 2011 (from £39bn to £89bn) while our deficit with the rest of the world has shrunk (by £20bn to £36bn) over the same period, and is falling even excluding the effect of oil.
Anyone care to comment?
Thanks RC,
It just goes to show that the EU’S trade agreements with other parts of the world are benefiting UK business.
It will be a nightmare if we have to leave and spend years making new agreements from scratch.
If the EU is solely responsible for the UK’s trading performance, following your logic, it shows that our membership of the EU must on the other hand be harming UK businesses.
Why is it that our deficit is overwhelmingly with the EU and that the increase in our deficit since 2011 has come solely and exclusively from our trade with EU countries?
@antony
Better for who antony?
Better for business does not automatically mean better for everyone, you understand this right?
If the powers that be had cared about how opening up Eastern Europe with no transition plans in place would affect less well off communities (especially when it came to issues like housing, schooling and jobs) we wouldn’t be in this situation.
@RC,
I would agree with with Antony if his implied point of the deficit in trade with the EU being offset by an equal surplus in our trade with the rest of the world (apart from the EU) was correct. Except it isn’t though. The UK as whole is still in deficit to the ROW (including the EU) to the extent of about 5% of GDP.
So if the UK as whole is in deficit someone has to fund that deficit by borrowing. It can either be the UK government or it can be everyone else (or a mixture of both) who do the borrowing. That deficit is the source of all our budgetary and debt problems in both the public and private sector.
The UK still has the pound so it is not quite correct to ‘blame’ the EU as a whole for the trade deficit and so creating our debt problems. Nevertheless certain prominent EU countries, like Germany, are still individually responsible for the economic woes of many of their trading partners due to their mercantilism. They simple export their unemployment and debt problems elsewhere.
RC-where do you get such exact figures from. Are they published by our Government Office for National Statistics ? How is extra-EEC trade through ports like Rotterdam accounted for ? Is the UK economy completely dependant upon the EU selling cars and whatever to it ?
@Victor,
I’m not sure where RC gets his figures from but they look about right. I’d slightly disagree with him, though, that the EU itself is responsible. Germany is pretty good at publishing its own stats:
UK Purchases from Germany: €79.2 billion
UK Sales to Germany: €38.5 billion
(figures for the 2014)
There are arguments either way on the question of the EU, but I’d say it would very much in Germany’s interest to look after the UK after the referendum, whichever way the result went, and protect its prized customer against any possible EU retaliation.
https://www.destatis.de/EN/FactsFigures/NationalEconomyEnvironment/ForeignTrade/TradingPartners/Tables/OrderRankGermanyTradingPartners.pdf?__blob=publicationFile
They are from the Office for National Statistics
http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/december-2015/index.html
What they show is that there is a huge hole opening up in our trade with the EU, while non-EU trade is heading towards balance.
Since the main (only?) economic argument in favour of our EU membership is that it gives us advantages in accessing the European market, isn’t this now wearing rather thin?
Why can’t we just join EFTA and have a free trade agreement, which would have benefits for both parties?
My analysis is that we have built up an increasing trade deficit, mainly with northern European countries because they are locked into a euro which for them is undervalued, particularly for Germany and the Netherlands, due to the presence of the southern Europeans.
This means that instead of their currency appreciating, choking off exports and encouraging imports, they have carried on building up trade surpluses ad infinitum.
Add to that the collapse in internal demand since 2011 across large parts of the eurozone and the comparative strength of internal demand in the much faster expanding UK economy and you have an explanation for the growth of our EU trading deficit.
Hi Petermartin, your contribution to an analysis of the UK economic position must be treated with great respect. Although never now discussed the balance of payments deficit would appear to be the major contributor to the governments borrowing requirement. We should call for a proper audit of figures relying to EU and world trade with the UK including invisibles at the time of such an important vote as this.
Hi RC – also excellent insight to our problems. As an explanation to the layman it looks like the Eurozone is benefitting the exports of north European countries because of the difficulties of the southern members which is undervaluing the euro in terms of exchange with other foreign currencies ? It would appear our leaving the EU would be no solution to this problem ?
“It would appear our leaving the EU would be no solution to this problem ?”
Well, the point is, we are currently in a disadvantageous relationship with the EU in terms of trade which is worsening progressively and paying through the nose for the privilege. Not to mention the fact that we are also effectively importing other countries’ unemployment. Plus we are paying for the improvement in other countries’ infrastructure so that companies can relocate factories and jobs outside the UK.
The whole situation is just barmy.
@ Victor Grayson
“Although never now discussed the balance of payments deficit would appear to be the major contributor to the governments borrowing requirement.”
The balance of payments deficit is due to us buying more of other countries’ goods and services than they buy from us.
The government deficit is due to the government spending more than it raises in taxes.
The two are not directly linked in any way, although clearly if we have a healthy industrial sector *and* it pays corporation tax and high wages, that will boost government revenue. The connection is at best indirect.
@RC,
“The two [deficits] are not directly linked in any way”
You might like to acquaint yourself with Wynne Godley’s theory of sectoral balances before making such pronouncements.
The concept isn’t that difficult. If the UK is a whole is in deficit to the ROW then someone in the UK has to fund that deficit by borrowing. It’s usually the government!
RC-foreign countries must be buying government bonds to provide the flow of foreign currency to finance our excess expenditure on foreign goods. RC-what effect would UK leaving EU have on the exchange rate between the pound and the euro ? I do however think that the euro currency itself was a very inadvisable project without the federal structure of the USA.
@ Peter Martin.
“You might like to acquaint yourself with Wynne Godley’s theory of sectoral balances before making such pronouncements. The concept isn’t that difficult.”
Oh dear. This simplistic accounting definition version of economics rears its head again. It’s always misused.
“If the UK is a whole is in deficit to the ROW then someone in the UK has to fund that deficit by borrowing. It’s usually the government!”
Government borrowing is likely to be from both UK and overseas investors, but it is not the cause of the trade deficit.
As a disproof of your theory, it is entirely possible to have a public sector deficit and a balance of payments surplus. This is currently the case with Italy.
Just because sectoral balances mean that by definition what the public sector borrows, the private sector must lend doesn’t say anything about the geographical distribution of that borrowing and lending.
@ Victor Grayson
“RC-what effect would UK leaving EU have on the exchange rate between the pound and the euro ?”
Well, as stated elsewhere, it would lead to the depreciation of the pound, making our exports more competitive and imports more expensive.
Leaving the EU would mean we had another £10bn a year to invest in our own infrastructure, training, research etc. to become more competitive in international markets, plus not subsidising our competitors’ infrastructure.
@RC
“As a disproof of your theory, it is entirely possible to have a public sector deficit and a balance of payments surplus. This is currently the case with Italy.”
Firstly, it isn’t my theory. It was developed by Prof Wynne Godley. I’m sure Keynes was quite well aware of the relationship between public debt and trade debt too, but he just seemed to assume it as a given, and I haven’t found anywhere that he spelled it out in quite the detail he could have.
Secondly, your statement isn’t a disproof of the theory. The theory in its simplest form says the surplus of all sectors (often three but can be any division of sectors we care to choose) has to sum to zero. So if the public sector is in deficit and the ROW is in deficit (same as a surplus from an Italian POV) then the domestic Italian sector must be in surplus.
In other words, if euros are coming into the Italian economy from net exports and the govt is net spending euros into the same economy they have to end up somewhere. The bank accounts of Italian citizens.
Italy of course uses the euro so doesn’t have the same fiscal space to operate as the UK government. Their economy isn’t in great shape so you do need to be careful not to hold them up as an shining example for us all to follow.
@RC
“Government borrowing is likely to be from both UK and overseas investors, but it is not the cause of the trade deficit.”
You’re correct insofar as it is very difficult to ascribe cause and effect to anything about the sectoral balance equation. Some would say its more an identity than an equation because mathematically we tend to put the dependent variable on the left hand side and the independent variables on the right so there is often an inbuilt assumption of causality with any ‘equation’.
Nevertheless there’s enough information in the sectoral balances for us to be able to say that if we do want to reduce the Govt’s deficit we can’t just assume all other factors remain equal as we cut spending and raise taxes. Neither is that going to produce the right causal relationship. We do have to tackle the trade deficit too and that does mean
reducing the value of pound.
Hi Peter, forgive me but I find this discussion interesting. The exchange rate between the pound and the euro has depreciated by 8.5% over the past six months. From figures that I can garner the eurozone is running an average balance of payments surplus per month of 22 billion euros (Germany 15.6bn, Holland 4.2 bn all others 2.2bn). The UK is running a monthly trade deficit of 9.7bn- the biggest in the EU. Also as Anthony says the EU is massively increasing its trade with China, South Korea, and the USA. This idea that we could trade better with the rest of the world if we were outside the the EU seems spurious and an excuse for our poor performance.
Also Peter, what proportion of the monthly government borrowing requirement do you think is attributable to the balance of payments deficit ?
@Victor Grayson
“Also Peter, what proportion of the monthly government borrowing requirement do you think is attributable to the balance of payments deficit ?”
None of it, because none can be attributed. There is no causal link.
“This idea that we could trade better with the rest of the world if we were outside the the EU seems spurious and an excuse for our poor performance”
There is a genuine underlying weakness in our trading performance (in goods at least) which is definitely not to do with our membership of the EU. But given that we are much closer to balance in our trade with the rest of the world, paying substantial amounts for membership of the EU where our trading position is both poor and rapidly weakening seems to defy common sense.
@Petermartin 2001
To respond to your earlier comments, I am not “blaming the EU” as such, merely observing the verifiable facts – that the expansion of our trade deficit has come from our trade relationship with the EU and not from the rest of the world.
And I mention Italy, not as an example (because clearly it isn’t) but merely because it disproves the theory that we have a government budget deficit because of our trade deficit. When you say: “That deficit is the source of all our budgetary and debt problems in both the public and private sector,” you are putting two different concepts together in a way that is quite wrong. A government deficit does not create a trade deficit.
Nor vice versa
@RC @Victor Grayson.
I’d say we are in some agreement on the difficulty in the attribution of causality. Nevertheless that’s not to say there isn’t a link.
Another way of looking at this problem is to list our economic objectives which might be 1) Keep the pound high to make imports cheap. 2) Maintain a successful economy 3) Minimise the deficits (both government and trade)
I’d argue that we need to choose two from three and that having all three just isn’t an option.
Whether we should be in the EU is of course the debate we are having now. But, providing the UK keeps its own currency I can’t see that membership, or otherwise, will make that much economic difference. We are a key market for Germany. So it will be very much in Germany’s interest to ensure there are no economic reprisals against the UK should we vote to leave.
@ Victor Grayson,
“what proportion of the monthly government borrowing requirement do you think is attributable to the balance of payments deficit ?”
OK. Lets say the Government refused to pay out any interest on gilts or even insisted on a negative interest rate. They could do that by another round of QE if they wished. That would , all things being equal, (which is a dangerous assumption to make in economics) probably reduce the value of the pound. Imports and Exports would have to balance at a certain exchange rate.
The nation as whole would then not be in deficit to the rest of the world, so no net borrowing would be required. The government deficit would be zero if there was no net saving or desaving in the non-government sector of the domestic economy.
If the non-government sector was saving the govt has to be borrowing. And vice versa. That’s true on a penny for penny basis.
@RC@petermartin2001-although figures are very difficult to dig out it would seem that the UK receives an average of £22 billion per month and invisible earnings of about £6.7 billion per month. This inflow actually dwarfs our trade deficit ! Would we argue that it is EU membership that is facilitating this position ? The upward pressure thus created on the value of the pound must make it extremely difficult for uk exporters and manufacturing industry in general.
£22billion in foreign investment that is, sorry.
@RC @petermartin2001 @Victor Grayson
“Not to mention the fact that we are also effectively importing other countries’ unemployment. Plus we are paying for the improvement in other countries’ infrastructure so that companies can relocate factories and jobs outside the UK.”
I’ve just been reading your exchanges with interest, as someone who is fairly clueless on this can I ask you a question regarding the statement above from RC. It’s a scenario type Q.
We have a factory making chocolate (used because I like chocolate 😉 ), it sells 100 mills worth of chocolate in the UK, 50 mill to the UK and 50 mill to the ROW. The factory takes advantage of all the EU funding being made to Poland, plus their low wage costs and moves production there.
Doesn’t this mean that not only have we lost the 100 mill in exports (as it will all be exported from Poland obviously), but that we are also now importing 100 mills worth of choccy? So we would have to find 200 mills worth of other goods just to get us back to where we were in the terms of trade balance (150 mill to the EU and 50 mill to the ROW)?
@Victor Grayson,
There some information here on the current account.
http://www.tradingeconomics.com/united-kingdom/current-account
But we need to bear in mind that the figures may not be entirely accurate in any case. How does it work when someone rents out their flat in London having moved overseas? It’s just about possible to keep track of this type of currency movement, perhaps, but say we had a suitcase full of drug money shipped over to Colombia? How do we know about that?
But we don’t really need to know. If there’s a net amount of money leaving the country or even if its just being stored somewhere inside the country the money isn’t having any effect on the UK economy. It may come back if it’s put into the banking system and it ends up being used to purchase bonds. But if not, the government can just recreate it and spend it as if it had.
Of course, if it overdoes it and spends too much, or reduces taxes too much. we could end up with too much inflation. That’s all government need concern itself with. Too much inflation on the one hand or too much recession and unemployment on the other.
@ Victor,
Another way to look at this is to consider the creation of a new currency. Say the Greeks decided they were going to have a New Drachma or whatever they wanted to call it.
In the first year they’d have to spend say 100 million ND into their economy to pay all their soldiers and civil servants etc. They’d get back 70 million in tax. Government Deficit = 30 million. Greek Assets = 30 million.
Say the next year they spent another 100 million. They got back 80 million in tax. The Greeks had a BOP deficit of 10 million with their overseas suppliers of goods and services and other hidden money transfers.
Govt Deficit = 20 million Surplus of Greek People = 10 million. Overseas Surplus 10 million.
Total Debt of Greek Govt = 50 million. Total assets of Greek people = 40 million. Overseas assets 10 million.
All to the new lepta!
@Chris_sh
I’m not sure I follow your arithemetic, but generally speaking, the production of anything in the economy is a net cost and is inflationary. The importation of anything is a net benefit and is deflationary.
So if a 100 million industry relocates itself offshore then we have more capacity in the economy than we used to, so the Government can net spend to make up the difference if the currency doesn’t change in value.
If no government intervened in the FX markets then imports and exports would always balance in every country. But the importers like the UK and USA intervene to keep their currenies up (by selling bonds) and the big exporters like Switzerland and China intervene to keep them down. Germany uses the euro to the same effect.
So if the government lost a big industry this way it would either have to sell more bonds, and deficit spend the proceeds into the economy, or let the currency fall to a lower level.
Hi Chris-sh, that’s a great question that you asked and a great answer from Peter. Our exporting jobs abroad would only seem to make any sense if we had higher value jobs to replace them with such as clean energy technology etc. Otherwise the only benefit would be to shareholders in the form of increased profit/dividends, which would become part of our invisible earnings. If we are only moving to McDonalds type jobs then that’s why we’ve got this huge trade deficit.
Hi Peter
thanks for the reply, I think I get what you’re saying, time will tell 😀
Hi Victor
thanks for the reply, I would agree 110% that we need a high technology sector with strong R&D, but I would also say that I believe we still also need a strong “bread and butter” manufacturing base as well, imho there are 2 good reasons for this:
1. The high tech sector can be great in good times, but not so good in bad as many high value items become a luxury buy if money is tight (e.g. no more gadgets/deferred projects), where as people will still buy the mundane items of life, e.g. washing powder, needing to replace a washing machine etc.
2. You have no guarantee on how long high tech/high value items are going remain in that group. An example of this is memory chips, when home computing was starting to take off in the 1990s memory was a high value item, I remember buying a 4MB simm for over £100 in about 1994, by 1996 the price had plummeted. The link below will illustrate what I mean, 1994 shows a price of $32/MByte, 1996 showed a price of $5.25/MByte and we are now at around $0.0037/MByte. http://www.jcmit.com/memoryprice.htm
But like I say, I’m not an expert and it’s just a layman’s opinion.
Hi Chris-sh, the economic costs and benefits of us being in the EU seem to be so difficult to weigh up without detailed accurate information. And even then it would seem to be just a matter of opinion as to what’s best for us. I do remember though that before we joined the old common market our economy was struggling and things seemed to improve once we were in. However when he kept vetoing our application De Gaulle used to say that the uk economy was different from mainstream European and he may have been correct !
Hi Victor
You’re not wrong about that, there are so many variables that I don’t think anyone knows what would happen in either scenario.
I would guess that people will just stop listening to the various economic arguments eventually and go with their gut.
Victor and Chris_sh,
I don’t think it is a good idea for government to try to pick winners and losers in terms of what is needed for the UK economy. Singapore tries to do that, and with some success, but I’d have less confidence in British politicians. It could be that high tech electronics is the way to go, but there’s a lot of other countries thinking that too. Maybe medical technology and the pharmaceutical industry is a better option?
The British government should either make a decision to balance imports and exports by having an exchange rate policy that sees that happen, or it has to accept that it needs to recycle the proceeds of bond sales back into the economy by deficit spending.
That’s not that hard to understand. But its hard to find any politician in any party who can get that right. So what hope have they for knowing what the world economy will look like in the next twenty years?
@Peter
” So what hope have they for knowing what the world economy will look like in the next twenty years?”
Amen to that 😀