I have regularly been asked for a breakdown of the finance and economics around the concept of the UK leaving the European Union. Perhaps the easiest part is to say that it is the European Union as some have been saying Europe which of course will remain about 22 miles from Dover in Kent whatever happens! As ever I will avoid the politics and stick to the numbers we can get something of a handle on. There are also a lot of areas which are contentious and the reason for that is we simply do not know some of the factors which will be in play. Let me illustrate by this published by the Open University magazine Conversationalist.
It opens by parroting the words of Chancellor Osborne.
George Osborne has said that mortgage rates will rise if there’s an Out vote.
It then argues that the higher risks of Brexit would mean this situation will happen.
This translates into higher borrowing costs for the UK government, and higher costs of capital for UK businesses.
Furthermore an outflow of capital will put pressure on many areas of the economy. Oh and aping “the pound would collapse” rhetoric of Yes Prime Minister we are told this.
The consensus forecasts are that the exchange rate would fall from its current value of around £1 for €1.27 to something more like parity with the euro. The latest forecast from the National Institute of Economic and Social Research think tank is of a 20% fall in the value of sterling
Such forecasts are fascinating. Has anybody published the track record of the NIESR in currency forecasting so we can see if they have the skills of a Druckenmiller or Soros?! I have to confess it is hard not to have a wry smile at such forecasts but on those grounds and the fact that many part of the UK establishment seem to have forgotten they want a lower UK Pound £ to help with the current account and trade deficits. Indeed it was Bank of England policy under Baron King of Lothbury although of course the promised “rebalancing” never happened.
One bit I can agree with.
Britain will face a substantial short-term economic shock if it votes to leave the EU.
The substantial may well be overdoing it and hype but there will be ch-ch-changes and a shock. Let me just deal with the higher mortgage rates point. You see and to be fair the article does mention this the Bank of England could have “an emergency interest rate cut” . If it chose it also could then use the Funding for Lending Scheme to reduce mortgage rates just like it did in the summer of 2012 and perhaps some more QE as well. After all some policymakers are heading in that direction anyway. Indeed those that are will be noting today’s data on economic growth.
Between Quarter 1 2015 and Quarter 1 2016, GDP in volume terms increased by 2.0%, revised down 0.1 percentage points from the previously published estimate……The latest Index of Services estimates show that output decreased by 0.1% between February 2016 and March 2016.
Suddenly mortgage rates are not rising and the situation is different again.
How much do we pay into the European Union?
The situation here is typically complex as the UK ONS explains.
The UK’s contribution to the EU budget changes each year as it is dependent on various factors such as: UK Gross National Income (GNI), the GNI of other EU member states and the value of the UK rebate (which is not a fixed amount, rather it is based on payments and receipts for the previous year).
In terms of numbers we have seen that the net contribution was £11.3 billion in 2013 and £9.9 billion in 2014. The 2015 numbers are still estimates but are as follows.
A 2015 initial figure used by some commentators in the debate is the £8.5 billion estimate of the UK’s 2015 contribution (which is net of the rebate and the direct payments from the EU to the public sector)…….Another estimate can be found in table H of this ONS release which includes some information on the UK’s official transactions with the EU in 2015. The figure published here is £10.6 billion; however, the information used to calculate this figure is approximate
Sadly it will not be finalised until the 29th of July when for referendum purposes it will be over a month too late. The numbers are never complete because some EU expenditure is general and not specified by country and some income such as fines is not split by country and these are around 2% of the totals.
What about trade?
This is a perennial issue for the UK economy with its seemingly endless deficits in this area where trade with the European Union is a major sub-plot. The latest ONS numbers are shown below.
In 2015, 44% of the UK’s goods and services were exported to the EU, while 53% of our imports came to the UK from the EU.
In the same year, UK exports to the EU were valued at £223.3 billion, while UK imports from the EU stood at £291.1 billion.
We rarely give ourselves credit for being a major trading nation although as I have already pointed out in accountancy terms we are regular debtors. The EU is a major trading partner and we provide some £291.1 billion of gross demand for their goods and services which is £67.8 billion in net terms. That is a lot especially to the countries in the EU which have seen particular economic difficulty such as Italy, Portugal and Greece. Indeed even countries currently in better shape such as Ireland and Spain see quite a bit of trade with the UK. And there is this.
15% of imports of goods came from Germany
From their point of view we are this.
The UK is also a relatively small export destination for EU goods, accounting for 6%-7% of total exports of other EU countries over the past eight years
I think “relatively small” is somewhat misleading as they are 27 nations so of course yes but who would want to give up 6-7% of their exports?
We have been shifting away from the EU in recent times although we have become more important to them.
Last year, goods exports to non-EU countries pulled ahead, with a 53% share of the total….The share of EU exports going to the UK has been gradually declining over the past 15 years, but it has risen marginally in the last four years.
There is also the “Rotterdam Effect” which inflates trade with the European Union via double-counting as total trade rather than value added is often used. Efforts have been made to reduce this but it still exists.
As you can see the tangible numbers tell us that the UK makes a substantial contribution to the EU budget and supplies a large amount of net demand for EU economies each year. I have often pointed out we are much better Europeans than we are given credit for. However this is a long way from the end of the story as there are a lot of factors we cannot specify. Would companies leave the UK post Brexit? What are the invisible benefits and costs of being part of the European Union? How will GDP growth change? After all even supporters of the IMF have to have had a wry smile at predicting a fall of 1.5% to 9.5%. You could drive a fleet of London buses through that! And of course that would have been appropriate for Greece but the IMF turned its “blind eye” to that.
There are costs to and risks in leaving as well as remaining in the EU. But in economic terms there are more dangers on the morning of the 24th of June if we leave. For example yes there could be problems for the Pound and the UK Gilt market and there could be a subsequent loss of trade with Europe. We do not know how much though beyond that there will be some of each. The uncertainty has been raised today by the migration figures which have been published as I cannot see how we can have any confidence in them, after all people have freedom of movement within the EU. But here they are.
In 2015, a total of 44% (277,000) of long-term immigrants to the UK were non-EU citizens, 43% (270,000) were EU citizens and 13% (83,000) were British citizens……
This is good for the age balance of the UK population and demographics but also looks to have contributed to the troubles with real wages.
So we know some of the picture but we also know that a fair bit is missing.
Meanwhile remember how we are regularly told how well things are going especially in Japan? Well someone seems to have changed the record. From Reuters.
Japanese Prime Minister Shinzo Abe warned his Group of Seven counterparts of a crisis on the scale of Lehman Brothers, Nikkei reported
Pensions and Tata Steel
Whilst on the subject of number crunching this suggestion for Tata Steel pensioners is wrong on so many levels. From the BBC.
The government is expected to propose basing the scheme’s annual increase on the Consumer Prices Index (CPI) inflation measure, which is usually below the current Retail Prices Index (RPI) measure.
This is a stealth cut to benefits by around 1% per annum which soon mounts up. It is therefore a breach of contract which presumably they hope to get away with because pensioners will not understand it. Even worse it sets a precedent.
So as Dawn Penn reminds us.
No no no