Brexit: the hard and the soft facts and the myths

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As part of Project Fear David Cameron threatened that he would trigger Article 50 immediately if there was a Brexit majority in the referendum. At the time this was interpreted as a “Hard Brexit”. Theresa May has gone for the “Soft Brexit” which means that after 10 months of careful negotiation the UK will trigger Article 50 by March 2017. There should be no further reference to “Hard Brexit” as this is as soft as it gets.

Although we are well into the discussion stage of leaving we still hear siren voices telling us to reverse our decision and stay in the EU. Clutching at straws there is a strong lobby saying that we cannot exit until it has been debated in Parliament and voted for by our elected representatives. This is in spite of the fact that the referendum was undertaken to tell our elected representatives the will of the people. In one sense it should be a nod through for Parliament, but a lot of people are concerned that if this decision is left to our elected representatives then it will be overturned as every piece of weak news about the UK economy is attributed to the decision made to Brexit and all but a few politicians are likely to be led by their own self-interest. Already politicians are blowing-off steam about how more evidence has now come to light that Brexit will be bad for the UK economy and in the best interests of their electorate they feel they must now vote against Brexit. A politician`s life is short and full of risk and most of them will fall off the gravy train long before their working life is over and it is nice for them to think there is another lucrative gravy train to jump aboard and this incentivises many of them to justify a volte face.

As well as the politicians, the backroom bureaucrats are missing the point about leaving the EU. I spoke to several top members of HM Customs and Excise who are off to Luxembourg this week to unravel hundreds of pages of trade agreements before they can restart the process of renegotiation. I asked them why we are not just scrapping all trade agreements which interfere with price or quantity and why we are not offering free trade across the world. Starting with a clean slate will allow us to deal, case by case, with any problems that manifest themselves. There was a stunned silence. This approach could apply equally to all EU countries with whom we will continue to trade freely and if the EU does not want to play the free trade game then they need to look at the cautionary tale below.

  1. The chocolate, cheese and wine myth.

Today Nick Clegg has pointed out that the price of EU cheese, chocolate and wine will soar if we go for a “Hard Brexit”. I think we need to ask the consumer about this. As there are many substitutes for EU cheese I can see a win/win for the UK cheesemakers. Wines from around the world including England are as good if not superior to EU wines and Swiss chocolate is my favourite. So what will actually happen is that EU producers will be forced out of the UK market or they will have to absorb the tariff. EU producers will in turn put pressure on the EU policymakers to remove all tariffs as the only people who lose in this situation are producers in EU countries.

  1. The falling value of sterling myth.

Remove all the noise about Brexit and it has been clear for some time that sterling is destined to fall and continue falling in value. I explained this before Brexit in my blog “Current account deficit on the balance of payments is the most damming statistic”. At present this deficit is 7.6% of our GDP and the market will bring down the value of the currency, as did the lowering of Bank Rate by the Bank of England, until our export prices are sufficiently low and import prices sufficiently high to rebalance our external account. Daily fluctuations are determined by rumour, manipulation and misinterpretation of current statistics. However in the long run it is the current balance deficit that points the currency in a downward direction and the sooner it happens the quicker the problem is resolved. If fear pushed the currency lower quicker after Brexit then we need to look upon this as good news.

  1. A Brexit induced rise in inflation myth.

As Friedman said inflation is always and everywhere a monetary phenomenon. Inflation is more units of a currency used in the same number of transactions. A falling pound, rising import prices,  higher food or oil prices only change relative prices. For the average level of prices to rise there must have been a preceding growth in monetary demand. The prices described above are only symptoms of the inflation caused by the Bank of England`s monetary policy more than a year ago.

  1. Brexit and the Stock Market boom myth.

Brexiteers have claimed the Stock Market boom as a success but, as much as I would like to, the real advantages to economic growth of Brexit are sometime ahead. Asset prices hitting a peak is just the inverse relationship between interest rates and asset values. The Bank of England lowering interest rates has caused asset prices to rise and it will be reversed when interest rates start to rise. Brexit has had nothing to do with asset bubbles they are the result of a misguided Central Bank policy as I explained on my blog in “A reappraisal of interest rates and market interest rates”

So the good news is that there is no bad news since we voted to Brexit and the sooner we stop talking about it and trigger a soft exit the better for the future of the UK economy and its people.

John Hearn 17/10/16

 

 

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