Monday, 22 February 2016

Should I stay or should I go now.

Well it’s happening. The world has woken to the Brexit challenge. Much as the UK could not believe anyone would be dumb enough to vote Trump in, but it's becoming a frightening possibility, the US didn’t really believe that the UK could vote to leave the EU, though that is also a frightening possibility. Not so much frightening because of the terrors of what would happen if the UK leave, but more the terrors of what people think will happen should Britain leave the EU.

I know that the press is full of Brexit this weekend and I am pretty sure that Sterling is going to take a dump this week, UK corp get knee-jerk sold, comparisons to early 1980s GBP/USD levels quoted and all hell let loose, but I am not going to go on and on about Brexit other than to say three things.

1-  Cable's natural level is 1.6000.  Cheeky bids 1.20 and below will pay off..  one day.

2 - UK is not Greece so please don't draw up parallels.

3- All of this ->

First, I think Cameron missed a trick in the negotiations. He should have regularly and very visibly jetted off to Moscow refusing to tell anyone why. That would have put the heebie-jeebies up them. But we are where we are and it looks as though what we have is as far as it goes with regards to compromise.

I am not at all decided which way I am going to vote, my heart says leave and my need for security says stay, which is the card that Cameron is playing with his new sound bite 'the leap into darkness’. But leaping into darkness is very often the better alternative to going down with the ship, remaining in a burning building or staying any longer in Sandford.

Sandford. Sandford was the fictitious village in the film 'Hot Fuzz’ where the community was run by the Neighbourhood Watch committee who were a law unto themselves. They ran the village on their own terms showing no mercy to anyone who stood in their way towards - ‘the common good’. It was a village that won ‘best village' award year after year and though everything looked wonderful on the surface the murderous village committee had a cellar full of the corpses of anyone who didn't fit in. In the film an out-of-town supercop arrives to try to clean up the village and see justice done. He won. Cameron hasn’t.

Like most organisations run by committee, the EU has ended up unresponsive to emergencies as decisions are buried in consensus and consensus takes longer to achieve the more there are involved. I will now shamelessly repost something I wrote in June 2012, with the last paragraph further supported by the last three years in Syria.

The feeling that the present system is failing is picking up steam. Of course there is rarely a demand for change when the populace is vaguely contented, no matter how useless the ruling body - it's when things go wrong that the mettle of the rulers is tested. Until a couple of years ago the Euro-project had been an easy run, but complacent growth (funded by sovereign profligate spending, funded by profligate lending) together with a self-regulated administrative budget has created a "Jabba the Hutt" of a European Parliament. Bloated, self important, dictatorial, living in a luxury created at the expense of its subjects only to succumb when confronted by a "Hans Solo" of a problem that they thought was dead. They are completely useless in time of crisis.

So knowing that we cannot rely on European Central Command to make a decision in this time of stress, we look to the European states themselves to unite and provide strong leadership, combined with an ability to make difficult decisions, despite populist concerns. Worryingly, policy appears to be set by consensus rather than coalition due to a misunderstanding that 'consensus politics' are the same as 'coalition politics'. They are not. During World War II the UK ran a coalition government, however decisions were delegated to individuals who were given absolute power in their fields. Trying to run a war on consensus is impossible, yet Greece and Greater Europe are both trying to make some very difficult decisions by consensus, rather than by strong coalition. Not surprisingly they are failing miserably, leaving TMM wondering where the strong group leadership is going to come from.

While we ponder the path of Pan-European rulership as current consensus democracy is failing, we are seeing Arab nations fighting hard to move towards consensus democracy, having shed oppresive dictatorships. TMM do wonder if they will succeed, as we are beginning to surmise a tendency for the success of a democracy to be inversely proportional to the diversity of the beliefs, behaviours, interests, cultures and religions of its populace (Egypt is in danger of bypassing its newly found democracy, remaining in military control). In other words, the more balanced and numerous the make up of subgroups, the less likely consensus politics will succeed. Which is, we suppose, why the oldest "democracies" sort of cheat by becoming two or three party systems where democracy is partially obscured by an oligopoly of power sharing.

The Euro project may have wonderful PR proclaiming a new golden dream of oneness but we can't escape the fact that everyone who joins does it for themselves and never for the benefit of other countries, though of course any resulting benefits to others are trumpeted as philanthropic wonderfulness. The PIGS are in it for having their debt guaranteed (something the UK has never benefited from, nor would being outside the Eurozone), France for agriculture policies and an ability to legislate against competitors, Germany for its imbalanced trade, the Eastern countries for wealth diffusion from richer states and the smallest states for economic and political risk buffering.

The UK has benefitted from trade agreements and seeing their competitive tax structures, whilst residing in the EU, suck in corporate HQs and global manufacturing plants, which has then sucked in European talent chasing the money (oh, and the UK has also benefited from those E111 European medical insurance cards and EU wide policy restricting the amount your phone company can rip you off whilst you are abroad). But it has lost its ability to counter EU legal impositions, with the European Court riding as a higher authority than the highest court in the UK. This is the issue that grates with me most.

I don’t want to lose trade with the EU, but if the UK remains competitive I don’t see why it should. Business follows the money and value. The rest of the world manages to trade with the EU and as a small example, despite EU regulations against solar panel imports, China still does pretty well exporting them.  (The solar panel regulations were, as my friend Paul Barwell famously stated on Bloomerg TV, “Bonkers”. But that is an aside).

It basically comes down to this. The UK is very close to saying enough is enough. This is not a negotiating stance, we are passed that now. Unlike Greece where tactics of threatening to leave were employed to demand more, the UK is thinking of leaving because they can’t get more. Likening the UK to a club member saying they are willingly to stay in the club if they can change it, is fair to a point. But the point is more that the member has given notice to the club that it wishes to leave and is giving it a chance to keep it so that all possible is seen to be done before leaving and canceling its subscription direct debit.

If the EU were FIFA then the UK is one of their biggest sponsors. Though it damages both if the sponsor leaves, if things don’t change at the top then the costs outweigh the benefits. The difference is that FIFA is changing due to pressure from their sponsors.

The divorce between the UK and EU will/would be acrimonious as the EU would have to see the UK suffer as much as possible as a lesson to other member states. As with Greece and Cyprus, examples have to be made of those who fail the EU’s bidding. But if things did go well for the UK, they could take the path of an evolving company. Dynamic staff leave the unresponsive behemoth and set up a new disruptive alternative based on fresh ideas driven by client needs. This could then be realigned in new partnerships (NAFTA would be fun) or expand by sucking in talent from the old company leaving it as a decaying shell. For a light hearted example - UK leaves, Holland joins them, followed by Denmark. Sweden and Finland (they may even suck Norway in, though Switzerland would be a coup), leaving Germany supporting the southern states until even they can’t balance the political vs economic costs and cave in. France meanwhile would have closed the Eurotunnel and a new one would be under construction from the UK to Belgium, who would have seen the writing on the wall and sold their soul to the new high bidder.

Unfortunately this referendum, as with the Scottish Independence referendum will focus on the negatives and scare tactics. Show me the positives, and no Europe, that isn't asking for concessions, it's asking to be shown the member benefits rather than the punishments for digression.

Finally, I don't give a damn which UK politicians are for or against leaving. This is a decision that is cross party, across all classes and is personal. I am not going to have my vote swung by who supports what. Unless, of course, Bob Geldof, Bono, Charlotte Church or that Di Caprio fellow express a view then I am all ears...


Slick Willy said...

Interesting piece, I fear that, as you mention, the campaign may be based in fear rather than fact.

Nic said...

I find the whole "leap into the dark" thing offensive, as though people have forgotten what we did in two world wars and that we used to run an empire all on our own. But then I have been an outtie for a long time.
Vote to get democracy back!

Anonymous said...

I agree with the the 'pour encourager les autres' response - so perhaps a difficult 5-10 years for the UK post-exit. But underestimate an unshackled Britain at your peril: that difficult period giving birth to a UK Renaissance during which it increasingly thrived, acting as a beacon to the best talent, driving more success. This outcome is not certain but is most certainly possible.

hipper said...

Great points. The fact how obnoxious and complacent these people in Jabbas palace are would be more than enough for me to vote out. I'm just thinking if that sort of people (pathologic liars and sociopaths) advocate something then the reverse must be a better alternative (excluding reverse psychology but that makes no sense here). And of course they do, since it's their jobs on the line. Like you said, everyone joins only for their own benefit. But even that might not be actually completely true, because it feels sometimes that most of the smaller countries might be just following what GER/FRA are doing. So essentially it's a company with two shareholders holding majority. The smaller ones have gotten rid of their sovereignty because they obviously think it's better to give it to someone else (or the politicians are on an additional payroll, but won't go into that). Also a funny coincidence that Obama was coming to make a speech, so obviously the US has a lot at stake here and the concern of contagion is real.

Completely appreciate the concert of losing trade and EU willingness to make an "example" out of anyone leaving. They'll certainly throw as many bricks they can to prevent trade, but I also think there's currently a very undervalued potential scenario where brexit might actually trigger an event chain leading to cracks tearing in an unavoidable manner. Also since UK is a net payer, it will leave Germany and a couple of others more burden to support all those states which are in mainly for the free manna. That could be the straw and German citizen support to current event policies don't seem to be that exemplary, and the trajectory isn't certainly not getting any better. In that case there's a rapidly rising possibility of UK able to brake through making traditional bilateral relations, though that would probably coincide closer to the end of the EU star burning out.

Eddie said...

Nice reference to The Clash.

I found this comment from Butttonwood quite interesting since it sounded reasonably balanced:

vlade said...

I hear you on it being a hard call. That said, those who blame Germany are only half right, as it's also Britain's fault.

Historically, Britain prospered when it paid close attention to the continent, and when it didn't it was floundering. There were ups in Britain's history, often very closely followed by the downs, when UK (shorthand for England and then Britain) moved from a continental superpower to a 3rd rank country. Yes, UK was a third rank country say just before Elisabethan times, and then again in mid 1600s, and then at best a second rank country in parts of 18th century, and again in 1950s.

But that's past, and we can't change that. Looking to the future, there's a few points to be made too.
If UK stays in EU, but it doesn't engage with it MUCH more (say internally building a coalition of UK, Nordics, Dutch, maybe Poles and Czechs as an opposite pole to Germany who doesn't want to act and France who doesn't know how to), I actually believe that EU will fail within a decade or so, because it will get more complacent with the current state, and the need for reform will be even less urgent.

If UK leaves EU, I see two outcomes for EU itself. Again, it will take the hint, and gets reforming. In which case, UK could be stranded and ostracized outside. The "more sovereignty" stuff is just a talk. Swiss and Norwegians have whole swathes of legislation driven by their need to trade with EU, and can't really influence it by much. As long as UK wants to trade with EU, some (and it's actually quite a bit) legislation will follow EU's. The idea that UK magically becomes a superhub for all things innovative and better onece it leaves EU is just hubris. It _may_ happen, but it will take time and commitment, and I'd say that it will take at least 10 years, possibly more. This is probably the worst-case scenario for UK, as it will leave and be stranded on its own.

On the other hand, if EU doesn't reform, and just staggers from crisis to crisis, it's likely to be dead within a decade again.

So we got four scenarios (stay in EU do nothing - bad, stay in EU but be much more active there - good; leave EU and EU reforms - bad, leave EU and EU fails - good). I'd say that actually the worst long-term scenario is the first one, stay and accept that what DC brought in is the maximum reform. IF UK stays in EU, it needs to really act consistently with caring about EU. I.e. if you want to be in the club, you'd not just have the drinks and complain about the quality of the service, but do something about it.

IF UK leaves, it still needs to engage with Europe closely. Forget about US, there's no "special relationship" (the fact that Churchill believed that meant he bankrupted UK. But then, FDR believed in special relationship with Stalin, and look what it did to Central and Eastern Europe). US will always do what it believes is in its own interest, even more so if either Sanders or Trump are elected. Same goes for China - believing anything else is just pure hubris.

In other words, UK will have to spend a lot more of diplomatic effort in Europe either way to be successful. Neither side of the debate acknowledges it, and this is what makes the vote really hard for me. The leavers purport (similar to the Scottish referendum) that the act of leaving will be salvation on its own. The stayers say "all will be the same".

From that perspective, I'm leaning very slightly towards "stay", because I doubt that the requisite diplomatic effort will be made regardless of how the vote goes. Thus I believe EU will fail on its own pretty soon (within a decade is my estimate), and this would be a better way to get out than jumping out. Of course, the danger is EU zombifies, but UK can always leave later - there's nothing which says that if we say in this year, we can't say out in two years hence. Once we're there, the need for the closer sensible engagement with Europe will hopefully be obvious.

Polemic said...

Vlade - thanks for an exceedingly well analysed comment. I just hope, but sadly doubt, each voter puts in such attention before they decide which way to go.

Polemic said...

Eddie . thanks and well spotted on The Clash. Nearly included the youtube of it but thought I'd leave the ref to the cognoscenti

Polemic said...

Hipper this is worth a read too

vlade said...

Thanks for your kind words - re-reading what I wrote seems actually to be more than a bit confused (as for example, I show preference for what I say earlier on is the worst long-term scenario, after calling something else worst-case scenario). I blame the post limits :).

So, to make it (hopefully) a bit more concise and consistent.

(1)I believe that for UK to succeed long term, it has to get involved in Europe much more than it is.
(2)I see no evidence that the current lot of politicians (in/out) agree with me.
(3)I do not believe that EU can reform w/o a sharp prod by a stick, which may be too late (prodding a corpse).

Based on (1)and(2), I do not believe that UK can realise the potential outside of being outside EU, and (3)there's a sizeable risk that Brexit would shock EU into reforming, which would make it even harder on UK (imagine UK on its own, having to deal with efficient EU, or even efficient EU comprising say of Germany and it's like-minded countries. And maybe France to keep EUR weak).

If UK stays in the EU, chances of EU breakup go up, as a potential sharp stick of (3) is removed. With EU gone, I believe there's a higher chance that UK politicians will see the need to engage on the continent more, if for nothing else than to oppose Russia who would otherwise move into the vacuum (especially if Sanders/Trump win presidency, and US would go through its periodic isolationist phase).

So, my worst worst case scenario A is UK stays in EU, EU doesn't reform and survives as is (or worse). I believe this is a very low chance scenario, and UK can always exit.

My second worst case scenario B is that UK leaves, EU reforms, and UK fails to deal with it. While the "EU reforms" is still a low chance, it's higher than A. It's unlikely that UK would be allowed back to EU anytime soon on less than humiliating terms.

Best case scenario is UK stays, and EU stresses become too much in a year or two, with EU failing, and UK realising that it needs to engage more. Danger here is EU zombification, but then UK can always leave, likely triggering EU failure in the process (and turning from villain to hero in the process).

Second best case is UK leaves, with EU disintegrating as a result. It's similar to the above, but I'd say it's less likely that UK would be seen as a hero triggering EU failure just now yet, especially if EU disintegration would be a slow process that could be blamed on UK. There's a difference if you kill someone on a life support and if you kill a zombie.

Unclear Wessels said...

The one thing I am surprised to not have seen so far, is any discussion of a possibility of the scenario where UK leaves and proactively sets up its own tent containing what are generally accepted as "good things" by all sides, namely a free trade agreement with drastically less politicised harmonisation requirements -- let's call it "EU - Without The Fuss". Doing something the second time round is usually quicker and easier because you know what not to do. Since most players in the equation (incl Norway and Switzerland) already largely conform to similar standard for trading purposes, joining EU-WTF won't involve much pain of adjustment. If someone like the Dutch jump too, the UK-Swi-Nor-Ned bloc would be a third of the size of the remaining EU in GDP terms...which would have to be reckoned with. Rebuilding/reforming the EU does not necessarily have to happen from the inside of it, in my view.

Polemic said...

Unclear.. You mean as I suggested above ?
'This could then be realigned in new partnerships (NAFTA would be fun) or expand by sucking in talent from the old company leaving it as a decaying shell. For a light hearted example - UK leaves, Holland joins them, followed by Denmark. Sweden and Finland (they may even suck Norway in, though Switzerland would be a coup), leaving Germany supporting the southern states until even they can’t balance the political vs economic costs and cave in'

Unclear Wessels said...

Indeed, exactly that. I meant to say that aside from this excellent publication, this possibility had not been floated anywhere else, at least for now. I hope we don't get stuck in the tedious hamster-wheel recurrence of FUD from the In-people and the lack of coherent plan from the Out-people for the next four months.

vlade said...

@Unclear Wessels
That falls under my "more engagement in Europe", which UK singularly failed to do so far, and would be pre-requisite for any good outcome. I suggest the reasons for that are in my point (2) - UK politicians of all colours fail to understand that we're not the empire anymore, and even when we were, political engagement was very much the part of the game (something US fails to understand now, and even China to some extent). It's when it failed UK got moved to second/third rate power.

Engagement of those with (at least potentially) similar interest and similar size (which is primarily Europe) is the best way to go forward. Instead they talk about special relationships with that or this, but that's all like whelks and whales - both sound vaguely similar and live in the sea, but that doesn't mean their interest coincide.

hipper said...

Thanks Pol. While I'm sure a lot of ppl have good reasons to be happy about EU current state it's actually pretty easy to see how it can stay alive despite being so apparently dysfunctional and incapable of planning ahead long term. Just stumbling from crisis to crisis through involuntary movements, since there really is no collective, combined and focused brain power making decisions, rather every effort to do something just disperse like light rays hitting a complex prism. The prism was designed wrong from the beginning.

It's clear that this isn't the state which it's even supposed to work but rather it was sold as a free trade zone and monetary union which then suddenly and surprisingly requires more and more integration. Like didn't they really see it coming? It's just my opinion but the founding fathers must have had a hunch about these problems and originally intended not to leave it at EMU/free trade zone, now the problem is that many actually don't want more integration. History should show extreme centralization of power and methods to control everything doesn't usually lead to anything good.

Anyway here's the analogy (note vlade was talking about zombies and for a good reason it's a popular comparison). Zombies don't "die", they just stumble forwards and the only limit comes from the body decomposing enough for physical movement to become impossible. Just going on without thought or direction:

FWIW I think brexit will become a fudge just like all Greek episodes, Scottish referendum, Catalan referendum and Irish referendums were. Nothings going to change and it's all fade if it has any market effects at all. After that they'll just push more integration and after every referendum it's more likely that any future ones will be banned.

Blogger said...

You might qualify for a new government solar energy rebate program.
Find out if you're eligble now!