David versus Goliath. How’s It Going So Far?

The Uk is less than 4% of world's economy

Yesterday there was a press conference after the third round of UK/EU negotiations.  The two speakers were David Davis leading negotiations for the UK and Michel Barnier, chief negotiator for the EU.

Barnier said there had not been “any decisive progress on any principal subjects.”  Davis retorted that “some concrete progress had been achieved”.  Who should we believe? 

Will negotiations break down completely?  Is that the UK government’s secret agenda, as some people are now suggesting?  That would force the hardest type of Brexit.

Let’s take a step back and put this all into context.  

In the lead-up to the Brexit referendum, we were told the UK is the fifth largest economy in the world.  What they didn’t say was that the UK is more usefully rgarded as second in the second division, with less than 4% of the world’s economy.  That’s after EU27, US, China and Japan.   Nor did they say that by 2050 the UK is likely to be around 10th, as emerging economies with much larger populations such as India overtake us.  

Here is an interesting analysis from the World EconomicForum, using data from the World Bank, including this graphic:

This clearly shows just how small the UK is in the international picture, and how small by comparison to the rest of the EU.  It really is David versus Goliath.  Not only with the EU but with the US and China.  With Japan too, where Theresa May was earlier this week, hearing that Japan want a free-trade deal with the EU first.  I wonder why?

The key problem with the VoteLeave stance before the referendum and the Government’s stance now is that the UK would be able to negotiate as equals with these larger economies.  Unfortunately that’s not how the real world works.

France’s economy is a similar size to the UK’s.  Imagine hypothetically if France had been the country trying to leave the EU, with the UK still in it.  Wouldn’t we expect the EU to strongly represent the UK and the others in the EU27?   David Davis has asked the EU to adopt “flexibility and imagination”.  What would we have granted to France?  David is effectively asking the EU to cross well-known red lines, notably for the UK to have the benefits of EU and Single Market membership without any of the obligations (“having our cake and eat it”).  Would we have granted that to France?  Of course not.  So why is David expecting the EU to do so for the UK?  Is he doing so solely to blame the EU for the ultra-hard Brexit he’s really seeking?

The UK is David against Goliath, but the UK does have two key things to offer the negotiations:

• A significant trade surplus for the EU, where the EU exports much more to the UK than the UK exports back.  Many jobs in the EU depend on this, so it’s important for the cross-border trade to continue
• The money the UK can pay into the EU’s coffers.  Not £350m a week as on the bus, but more like £120m net after rebates and what the UK otherwise gets back.

Conservative MPs like John Redwood have suggested the UK should pay nothing to the EU in future, nor anything now as part of any ‘divorce settlement’.  He’s also personally looked me in the eye and told me the trade surplus is enough to get the EU to agree to the UK’s demands.  It’s clear now, as it always has been, that he is woefully mistaken.  

So should we believe Barnier or Davis?  Will negotiations break down completely?  The EU by their sheer size frankly holds all the cards.  The little snipes by Davis are little more than David against Goliath.  If Goliath thinks there has not been “any decisive progress on any principal subjects” then in real terms there has not been any decisive progress. Negotiations could easily break down completely should the UK continue on its current path.

WHAT ABOUT PUBLIC OPINION?

Whilst the likes of the Daily Mail are exhorting today that the negotiation problems mean it is still right to leave the EU, public opinion is changing.  Increasing evidence.  For example, a holiday cottage owner in France has reported that all but one of the UK visitors over the summer who voted Leave are now regretting it, in some cases to the point of tears.

A core reason is the exchange rate.  For the Euro, sterling is still 15% down on the average rate leading up to the Referendum, and 10% down for the US dollar.  That means more expensive holidays on the continent, more expensive produce imported from Holland, and much more besides.  Inflation is rising above target level, and fixed incomes are being squeezed.  People simply won't tolerate a reduction in living standards

Some Remainers suggest that Sterling’s depreciation was correcting an over-valuation.  A small over-valuation perhaps, but the Economist last October suggested a US dollar rate of around 1.43, which is where it was on average in the weeks leading up to the Referendum.  

Let’s be clear.  The pound now buys less.  Much less.  That is due to the Brexit vote.  

For the US dollar, a 10% drop to 1.29 since the 1.43 average before the Referedum:

Similar for the Euro.  With a 15% drop to 1.08 from about 1.28 before the Referendum:

And it doesn’t stop there.  This article by a City Fund Manager suggests a “fall in sterling that we would see in response “ to a Hard Brexit.  Such as if the UK crashes out of the EU should negotiations fail. 

That’s more pain. A weaker exchange rate is the sign of a weaker economy.  Not only can people buy less, there will be less money for the NHS and other public services.

Was a David versus Goliath battle what 52% of UK voters were expecting last year?  Or had they been led to believe that negotiaitons would be easy?  Yes they had.

When will the majority of people in the UK turn against the Government?

THE WAY FORWARD

The Brexit “Withdrawal” Bill starts it’s 2-day debate in the Commons next Thursday 7th.   Is this the chance for MPs to recognise the problem and rebel?  How?   Let’sdiscuss that separately.  Another blog post will follow.