Following the `deal’ yesterday, there is now no serious impediment to the people of the United Kingdom voting decisively to stay in the European Union. With the new safeguards, the overwhelming onus is now on the `quitters’ to convince voters that they – the quitters - have a detailed, viable set of policies which will give the people of the UK the continued certainty of a bright future which will be both secure and economically feasible. The EU has re-committed to creating a globally competitive economy – the best chance for a prosperous UK.
Many States made difficult compromises in agreeing this deal, so it would be understandable if there were not deep disappointment were the people of the UK to reject them in a Referendum. Under Article 50 of the Lisbon Treaty, the remaining 27 would decide the exit terms they would offer to the UK. Yesterday’s deal specifies that if the UK leaves, “the set of arrangements… will cease to exist”. These arrangements are a set of promises to bend over backward to be nice to a much-valued - but rather awkward - friend. If the hand of friendship is rejected, then these arrangements could be read as the starting point for the exit terms – with potentially devastating consequences for the UK.
My comments are those of an economist, so focus on the economic and financial aspects rather than the political implications.
The “Union’s objective” of an EMU whose currency is the euro is firmly re-stated, as is the UK’s ability to stay out of the euro as long as it wishes. However, Prime Minister Cameron was explicit in his November letter to Council President Tusk “Nor are we looking for a veto over what is done in the Eurozone.” A veto was not sought so, unsurprisingly, was not given and indeed was explicitly ruled out.
The determination fully to exploit the potential of the Single Market is re-stated vigorously. Good news all round for Europe as Cameron’s letter to Tusk was unequivocal “The United Kingdom has always been a champion of making Europe more competitive”
“Legally binding”: An outstanding analysis of the legal situation was given to the House of Commons European Scrutiny Committee by Professor Sir Alan Dashwood QC. The deal seems very robust on this point as the Decision can only be repealed or amended by Common Accord of the Heads of State/Government. So our Prime Minister would have to agree.
“Respecting the powers of the central banks… including the provision of liquidity within their respective jurisdictions”. A strong re-iteration that the ECB cannot be forced to provide euros to firms in the City of London.
Section A: Economic Governance
Powerful re-statement that `non-euro members without an opt-out’ remain committed to joining the euro. (The whole thrust of the Eurozone’s economic governance system – the European Semester – will inexorably push these States into an economic condition where they will be able to join within a decade – if they have the political will.)
Confirmation that emergency measures for the euro area will not entail budgetary costs for non-members. BUT correspondingly, preserving financial stability of non-members is at their “own budgetary responsibility”.
Acknowledgment that non-euro states will not impede further integration of the Eurozone. This is clearly good news as anything else would have set up a series of damaging confrontations over time.
Discrimination against non-euro states: “any difference of treatment must be based on objective reasons”. The need for the ECB to have proper control over the creation and use of its currency to maintain `financial stability’ may well provide such reasons.
“Subject to the rules of group and consolidated supervision and resolution”. This type of Delphic language will probably be entirely impenetrable to the average politician, thus raising suspicions about deeply-buried implications. Unfortunately, the UK has form in such matters – dating back to the “hard ECU” proposal from Mrs Thatcher in the 1980’s as an alternative to full monetary union. The probable implication of this phrase relates to “group supervision” of insurance companies under Solvency 2, “consolidated supervision” of banks under CRDIV and “resolution” under BRRD.
Single Rulebook: “more uniform manner than corresponding rules to be applied by national authorities…not in banking union” This seems to be another case of inappropriately Delphic language. The situation was elegantly explained by ECB Director Sabine Lautenschlager in a recent speech. The concept of banking union is to create a level playing field for banks throughout the Eurozone (and any other states that may wish to participate.) This will be enforced by the Single Supervisory Mechanism (SSM) – under the aegis of the ECB. However, SSM supervisors are now confronted with the problems posed by a host of `national options and discretions’ that were built into CRDIV and CRR when they were negotiated by the co-legislators of Council and Parliament in 2013. The clearly stated intention of the SSM is to sweep away as many as possible of the options and discretions for states that are in the Banking Union to create a uniform and single rule book. Otherwise, there will not be an effective banking union. The SSM has no power to remove the discretion permitted to non-Eurozone members such as the UK. That is the prerogative of the EU-28’s legislators.
Section B: Competitiveness
This entire section should be music to the ears of Prime Minister Cameron – and anyone else who wishes to see a modern and competitive (thus thriving) EU economy. Moreover, it is the essence of the manifesto which Commission President Juncker was elected to implement. “The European Council highlights the enormous value of the internal market as an area without frontiers within which goods, persons, services and capital move unhindered. This constitutes one of the Union's greatest achievements”. This statement underlines why the EU attaches such importance to maintaining the freedom of movement that is implicit in the Schengen commitment.
Section D: Social Benefits and Free Movement
There is little for a financial market economist to say about this section except to note its economic insignificance.
The Prime Minister is prepared to risk the UK risk leaving the European Union to reduce the payment of in-work benefits to perhaps 235,000 EU migrants - saving £1.5 billion of expenditure (not even 0.1% of the UK’s £2,000 billion GDP). Brexit could put at risk a significant portion of the City’s tax revenue and foreign exchange earnings – each of which runs at more than £60 billion annually. Media reports suggest the savings on child benefit payments may be less than £50 million
The UK’s unemployment rate is now 5.1%. If the “235,000” were not in the UK, then the unemployment rate would be under 5% and perhaps exacerbating even further the skills shortages that are now reported as a bottle-neck for the UK’s economy. This would not be surprising as the Office for Budget Responsibility estimated in July 2015 that the medium term “Non-Accelerating Inflation Rate of Unemployment (NAIRU)” is now 5.4%.
I will be presenting my new paper “IN and OUT relations” - The future of the Eurozone and its relations with non-members at a seminar organised by the Federal Trust on 25th February.
© Graham Bishop
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