Why I Am Voting To Remain. Part 1 – Economics

Over the course of the next week, I am going to explain why I came to my decision to vote to remain in the European Union, in possibly 5 blog posts, separated into distinct chapters.

Like many, my mind was made up long before the campaign started – around a year ago for me.  There is plenty that I don’t like about the European Union in terms of how it organises itself so myself voting to leave was possible.  There was a decision for me to make.

The most important part of any voting decision for myself is the economy, as the economy affects almost everything that a government does.  Of utmost importance to me is a stable, open and growing economy.  I want us to maximise the potential of this country.  Not just for me, my family and my friends, but all of my countrymen – and in fact, all human beings across the world.

Before I go onto the details of the subject, I’d like to clarify two things.  Firstly I am sick of arguing about the European Union so feel free to comment – I might reply but I might not.  If you post a blatant unsubstantiated lie I will just delete it.

Secondly there is lots of bullshit out there on both sides.  I am not going to argue that western civilisation is going to end if we leave the EU, but neither are we going to win the World Cup or be given free super-powered toasters.  To my mind, there have been many blatant lies by the leave team and blatant over-exaggerations from the remain team.  I will try my best to exert a sober analysis from my viewpoint.

I may occasionally use robust language too.

Something I hear from Farage and co is that economists should not be trusted as they did not predict the crash in 2007/08.  The main reason that this was hidden from view was due to the bankers packaging up sub-prime debt with sturdy debt through such instruments as collateralised debt obligations.  This was way beyond my understanding of markets at the time, and I suspect many economists were not aware of this back in the mid-2000’s either.

Some economists did predict it, and so did I.  Albeit I was warning of a severe crash as early as 2004/05 – not realising what was going on in the world of banking.  I do have an economics degree so I have at least a pinch of credibility on this subject.

All economic reports that I have read, such as from PWC, the treasury or the IMF have stated that there will be a short-term economic shock if Brexit occurs.  Even prominent Brexit folk do not argue against this.

At best I’d suggest that we’ll scrape along with not entering a technical recession, ie growth around 0% for 6-12 months.  At worst a loss in GDP of say 6% over 6-12 months.  It will probably be somewhere in the middle, I’d suggest a 1-2% loss.  Maybe 3%.

Another main impact will be a loss in the value of Sterling.  We’ve already seen a slide in the value this week on worries of Brexit.  A vote to leave would likely see a further slide of 10-30% of the Pound, and also a smaller fall in the value of the Euro.

A credit report that I receive from a major agency stated “We also advise to factor in a further depreciation of the pound sterling, which would accelerate if the UK were to leave the EU, as the uncertainty stemming from the possibility of a Brexit is weighing on market sentiment.”

This may all seem quite abstract to you, however as we import much of what we consume, you will quickly notice increased prices on many goods – especially those from non-Euro denominated economies.  As the Euro will also likely fall in value somewhat, there should be less impact on what we import from the Eurozone.

It also means that you will have less foreign currency in your hands when you go on holiday.  I neither want more expensive goods or more expensive holidays.

The third main impact may also see a loss on the stock market – the FTSE 100 has already dropped below 6,000.  You may not care, but your pension is likely invested at least somewhat in the stock market.

On the bright side, a weaker pound would help those exporting to other countries – manufacturers for example.  And tourists – those visiting from America, for example, will have more money to spend.

Yes I am not afraid to argue where there could be positive effects of Brexit.  I’ve had to weigh up the pros and cons.

The possible increase in manufacturing/tourism could even lead to higher employment in those particular industries.

However, the likely recession would lead to job losses overall.  You may note that Labour’s Great Recession did not lead to as many job losses as other recessions, however recessions caused by financial crises tend not to involve huge increases in unemployment.  The government claim of 800,000 job losses upon Brexit is probably cock, but none of us can be certain how many jobs would be lost in a Brexit-vote economic shock.  400,000 to 500,000 job losses through the recession would be more realistic, in my view.

One industry that would likely suffer with Brexit is the financial services industry.  I can see you all crying into your mug of Yorkshire tea but financial services directly contributes around 11% of total tax take in this country.  The amount they pay in tax isn’t far off the budget of the NHS.

Whilst we are here, the idea that if we vote to leave, £350m extra is going to be spent on the NHS is absolutely bullshit.  Firstly the original figure is a blatant lie.  Secondly it seems as though the leave side have spent that amount several times already.  But most importantly, the likely recession and subsequent loss of output will mean that there is actually less money to spend on the NHS – not more.  I repeat that most Brexit folk also expect a short-term recession.

Anyway, back to financial services.  The whole of the city will not suddenly move to Frankfurt.  There are networking and clustering effects which mean much of the city will stay put in London – unless there was a major game-changer such as HSBC leaving entirely.

One of the problems comes through passporting rights, where banking firms within countries in the EU can trade in Euros without having a branch in the Eurozone itself.  This is part of being in the EU and there is less chance of Boris Johnson being re-incarnated as a walnut than those rights continuing with Brexit.

There could therefore be large amounts of business lost to the EU just through these transactions having no choice but to happen in the EU – potentially up to 0.9% of GDP.  I appreciate that you may not care about less banking jobs in the city, but I do care about lower tax take for this country, as that directly impacts the ability of the government to provide services without borrowing or taxing more.

Trade will also not be helped by leaving the European Union.

Currently around 45% of our exports go to the European Union.  Although the percentage of total worldwide exports to the EU is currently falling, the total value traded with the EU continues to rise.  At the moment, are there no tariffs and trade moves freely.  Containers sent to France are not rigorously checked like containers sent to China would be.  So not only are there no actual charges but there are no costs in terms of extra time or paperwork that there would be to non-EU countries.

Tariffs may or may not be applied to our exported goods if we left the European Union.  I simply don’t know.  A more realistic argument would suggest tariffs in some areas, particularly those were the EU has important industries to protect.  The single market in services is not yet complete and I would argue that remaining in the European Union would assist not only in the completion of this but also in ensuring it is most beneficial to the UK.

I accept that at the moment we cannot negotiate our own trade deals.  However if we left we would have to negotiate 53 separate trade deals within 2 years otherwise we will be subject to the normal WTO tariffs applied on trade.  This would make life much more difficult and expensive for exporters and likely totally negate, if not outweigh, the potential positive impact to exporters of a weaker pound.

I highly doubt that we would be able to negotiate 53 separate trade deals on equal terms to what we enjoy through a large trading block, let alone negotiate an equal or not too negative deal with the European Union itself – remembering that we export more to Ireland than China, India and Russia together.  And all in 2 years with our limited amount of negotiators.

Any good trade negotiator from another country would see the weakness of the United Kingdom’s negotiating position and take advantage.  The idea that we will leave the EU and suddenly find ourselves with amazingly favourable deals with the rest of the world is utterly preposterous.

It is certainly possible that we would be able to negotiate full or mostly full access to the European single market, but we would have to accept and implement all regulations set, not to mention the almost certain acceptance of free movement of labour.  Plus if the EU-US trade deal happens, this will likely set the benchmark for all worldwide trade regulation.

There are also more long-term impacts of leaving the EU too.  Of course, there are always more uncertainties as you project further in advance.

The reports I’ve seen all lay out a range of possible outcomes – it is in the realms of possibility that by 2030 there could be an overall slightly long-term benefit to the UK of leaving the EU.  This could happen.  Slightly more likely but still unlikely is that it would be a total disaster with a permanent loss of GDP of up to 10% – completely disastrous.

More realistic would be a long-term negative impact in the region of 1-4% of GDP, from my assessment of the analyses but I stress that this is within a range of possibilities from a slight economic benefit to a major economic disaster.  I also stress that this is permanent – not a temporary recessionary loss of GDP.

Before we joined the European Union, Britain was known as the ‘sick man of Europe’, similar to how Greece is known as this now.  I’d argue that Margaret Thatcher had a hell of a lot of more to do with Britain once again becoming one of the major economies of the world, but it is surely no co-incidence that being part of the European Union has seen our country and economy go from strength to strength during this time.

Personally, I am not willing to take a chance on my personal economic future, or the futures of those I care about, or my country.  That is the main reason why I will never vote Labour and the main reason why I will be voting to remain.

But there are other reasons too.  Next up I will be covering sovereignty.  And hopefully in fewer words!