Tuesday, 31 May 2016

Economics of EU

"Hold Your Nose And Vote Remain" Aye Right

Having almost totally ignored the politics of the EU, particularly the question of sovereignty, the Referendum campaign has been dominated by the so-called economics of what will happen if we stay in the EU or leave the EU. Unfortunately, the distortions and downright lies have left most people more confused than ever. I spent fourteen years teaching economics and then more than thirty years in the financial services industry. I don't believe economics has earned the title of "the dismal science" nor do I believe that if we laid all the economists in the world end to end, they still wouldn't come to a conclusion, but unfortunately it can lend itself to being misused and distorted by those who seek personal advantage by doing so. Before looking in detail at the Scottish economy and its interaction with the EU, it is as well to highlight certain claims which are made daily and which are presented as self-evident truths which are not to be questioned.

1. Economic forecasting
The most important thing to remember about economic forecast models is that forecasts are based on assumptions and, that given certain circumstances, some of which may be totally unrealistic, there will be a series of outcomes. It is not an exact science because if the assumptions are changed, the outcomes will also change. Indeed, models can produce required outcomes providing the proper assumptions are made. Change the assumptions and the outcomes will also change. No economics lecturer worth his/her salt, would ever begin a lecture without the classic, "assume ceteris paribus" or "all other things remaining equal". In other words, when the Treasury made the prediction that by 2030, every family in the UK would be £4,300 per annum worse off, if we left the EU, what they did not explain, was that this depended on their assumptions AND that whatever shocks may visit the economy during that period, the authorities would effect no change in policy. Of course that is totally unrealistic, as is the claim that forecasts of economic outcomes in fourteen years from now can possibly be accurate. Even more ludicrous was Alistair Darling's prediction that for those children born between 2012 and 2014, there would be a loss of £145,820 over their lifetime (75 years perhaps?) if we left the EU. When Chancellor he could not forecast interest rates six months ahead.

We could perhaps be more sympathetic to those who are prepared to swallow this piffle, if the Treasury, the CBI, the IMF, the Office for Budget Responsibility and the Institute for Fiscal Studies all had exemplary records for accurate economic forecasting - but they don't. A little over a month ago the Office for Budget Responsibility forecast a 2015-2016 budget deficit of £72.4 bn. Less than four WEEKS later the actual figure was £74 bn - a £1.6 bn under-estimate over less than four weeks. In 1989 the Treasury "Red Book" predicted that three years later 1992-1993, the government would have a small surplus. In the event, it carried the largest peacetime deficit on record. All of the above august bodies and the SNP, clamoured for the UK to join the Exchange Rate Mechanism, which Margaret Thatcher finally did in October 1990. At the SNP's annual conference the year before, the SNP debated a resolution calling on the Tory government to join the ERM. I was totally opposed because I knew it was the first step towards a single currency but, knowing that asking Conference to reject the motion would fail, I successfully moved an amendment to the effect that the SNP would oppose any move towards a single currency. Within two years, the strain of keeping the UK in the ERM caused major problems, including raising interest rates to 15% on 15th September 1992. Despite appeals from the above named organisations to remain in, accompanied by dire warnings of the consequences if the UK left the ERM, Chancellor Norman Lamont was forced to take the UK out of the ERM the next day, 16th September 1992.

Instead of the catastrophe predicted, the FTSE jumped 130 points the next day and by a total of 8% in the first two days after leaving the ERM which survived only another eighteen months before collapsing completely. The next decade or more was one of almost uninterrupted economic growth for the UK. As a IFA, I managed a great deal of clients' money, much of it invested in equities. For some months before the crash of 2008, I began to feel rather twitchy about the markets. Suddenly the money for mortgages began to be less available, there was a slowing down of what had been an unsustainable rise in house prices, certain funds began to look a bit wobbly. I spoke to a number of clients about taking them out of equities, which we did, thereby saving them a great deal of money when the markets crashed.  None of the organisations above saw the crash coming, or if they did, they did nothing about it, no warnings were given, no attempts made to soften the blow. Given their track record - and the few incidents outlined only scratches the surface of their failures - why should we listen to them now, as they regale us with their forecasts of tragedy if we leave the EU?

2. EU Funding Of Scottish Projects
Get into a discussion with any Scottish Nationalist or SNP supporter about how much Scotland is subsidised by the English taxpayer and how impossible it would be for Scotland to afford to be independent and maintain its current standard of living, and you will have a fight on your hands. To traditional Nationalists, the economics are irrelevant but even the economic Nationalists will argue till the kye come hame, that Scotland has the potential to be a prosperous country, well able to provide a decent society, with or without oil. Their reaction to the charge that Scotland cannot afford to be independent, is open derision and frequently, hostility. For some strange reason, when it comes to membership of the EU, the SNP and its supporters adopt the same position as Unionists did in the Referendum on Scottish Independence. Whereas it was argued that Scotland could break up a Union that had lasted for over 300 years, with little or no problem anent trade, currency and so on; leaving the EU - after membership of just over 40 years - will cause absolute mayhem. According to the SNP, over 336,000 Scottish jobs depend on trade with the EU. While it is not specifically stated, the suggestion is there, that to leave the EU would mean the loss of both trade AND the jobs. When that very same argument was made by Unionists during the Scottish referendum, the SNP and independence supporters quite rightly dismissed it as utter tripe.

The Spice Report of 15th October 2015, entitled "The Impact of EU Membership on Scotland", notes that the Scottish Government claims over 336,000 Scots jobs are directly linked to trade with the EU. Several times over recent weeks, as the referendum campaign has gathered momentum, Scottish Government representatives and other Remain campaigners, have stated quite bluntly that in the event of the UK - as a whole - voting to leave the EU, those jobs would be in danger of being lost. Whether or not that would be likely will be looked at below, but the first thing to note is that the Spice Report differs quite radically, in its estimates of Scots jobs linked to EU trade, from the estimates made by the SNP and Remain, of the number of Scots jobs which are linked to trade with the EU. Spice calculates that the number of Scots jobs which can be directly linked to trade with the EU, is 81,000, a figure which almost doubles to 150,000 when the multiplier effect is taken into consideration and jobs indirectly linked, are also included. That is fewer than half the total of the Scottish Government's calculations and the very least that needs to be done, is a comparison of the methodology employed by both parties .

As well as the implied threat of lost jobs if Scotland left the EU, there is the threat of lost funding We are all familiar with the signs which now appear all over Scotland, "Funded by the EU", which suggests that not only are Scots subsidised by England, which the SNP and independence supporters vehemently deny, we are also subsidised by the EU, which the SNP and independence supporters see as something for which Scots should be grateful. While the SNP can produce figures for Scottish contributions to the UK Treasury, in order to boost their case for independence, they are strangely reluctant to discuss or state Scotland's contribution to the EU. They have a great deal to say about what funds are provided by the EU in terms of research at Scottish universities, or how much Scottish farmers depend on EU funds for their annual subsidies, without ever mentioning Scotland's contribution to the EU. In the SNP's EU Website the party claims that Scotland's Net contribution to the EU is £8 per head per annum, but the value of investment from EU companies is worth £1,225 per head. In The National of May 27th 2016, the CEO of Business for Scotland claims that for every £1 Scotland contributes to the EU, we get £20 back. Neither the SNP nor the CEO explain how they arrived at those figures but it is suspiciously similar to the way The Treasury managed to conclude every person in the UK would be £4,300 worse off by 2030 if we left the EU and that calculation was greeted with derision right across the board. Even in its heyday in its relationship with the EU, Eire managed to get only £6 for every £1 spent. The Spice Report shows that between 2007 and 2013, Scotland made a NET contribution to the EU of £1.6 billion. In other words, just to avoid confusion, Scotland paid £1.6 billion more to the EU than we got back.

The claims which have been made by the Remain campaign, on the economic consequences of Brexit have now become so ludicrous, that the bulk of their claims are now simply dismissed by an electorate totally scunnered by the entire charade. The SNP insists they want nothing to do with the Tory-led campaign to Remain, preferring to make what they have deemed to be "the positive, progressive case" for staying in the EU. Unfortunately, there has been little or no evidence of it as we have yet to hear from the SNP, any political case, let alone a positive political case for surrendering sovereignty to a political union which all agree is centralist, undemocratic and corrupt. Despite claiming the EU badly needs reform, the SNP's ambitions for reform are so minimal they could be introduced without Treaty change, which the SNP sees as neither "advisable nor desirable". The SNP website also claims "just under half -42%- of Scotland's trade was with the EU in 2014, which amounted to £11.6 billion in cash terms". It must be the first time that 42% of something has been described as "just under half" of the whole. It should also be noted that only 42% of Scottish trade was conducted with the EU in 2014 worth £11.6 billion, whereas Fig 3 shows that 46% of trade worth £12.9 billion was conducted in 2013. The downward trend of Scottish trade with the EU is therefore continuing and, if the current problems in the Eurozone in particular and the EU generally, are not successfully addressed, that downward trend will continue, whether or not we stay in. Only ten of the EU members accounted for over 90% of the EU's trade with Scotland in 2014 and eight of those ten, are in the Eurozone (see Fig3).

We are reminded daily that the EU is a market of over 500 million people, but over 90% of Scotland's trade with the EU is conducted with approximately half of that number and the economic conditions which exist in the countries which make up the other half, don't offer much hope of any increase in trade any time soon. In fact, those who intend to vote Remain because they fear taking a "leap in the dark" by voting Leave, will find that staying in constitutes an even bigger leap in the dark because the EU has no idea of how it will repair the damage which has been done by the austerity policies forced on the Eurozone members.

Unemployment in the EU.
For trade to take place between countries, there has to be a long term balance between trading partners, each of which has to be able to bring something to the table. In the long term a balance has to be struck so that one trading partner is not constantly disadvantaged. In a large trading block like the EU, most members will have a surplus with some members and a deficit with others but in the EU, 24 of the 27 other member states have a trading surplus with the UK, with a similar pattern with Scotland. Thus, trading advantage is very much with the other member states, which is another reason they cannot afford to stop trading if we leave. As trading in services has advanced very little in the EU, 94% of Scotland's insurance products are sold in the rest of the UK, therefore the threats of what might happen to Scotland's financial sector are largely unfounded.

It is always possible to change trading patterns if a country suffers from a long-term trading imbalance or disadvantage and the balance of payments includes trade in "invisibles" ie services such as financial products. A trade imbalance can therefore be countered by trade in invisibles, which has been the situation in the UK for generations. However, when trade in services is restricted as it is in the EU, new trading partners have to be found, which is exactly what has been happening in Scotland as well as the UK as a whole. Fig 3 shows how the long term trend has been for trade with the EU to diminish over time and while Scotland shows an increase in trade with the EU between 2012 and 2013, the figure for 2014 shows trade with the EU had fallen to 42%. Remain tell us that as we have access to a market of over 500 million, it has to be in our interest to stay but it has already been shown the reality is that only 10 countries, with just under half of that 500 million, take 90% of Scotland's trade. For that to change the economies of the EU members will have to improve.

At the end of 2015 unemployment in the 28 members of the EU was 9.1%, the lowest level since July 2009, while in the Eurozone it was 10.5%, the lowest level since October 2011. Unemployment in the UK in the same period was 5.1% and 5% in the USA. This means that in the EU28, there were 22.16 million people unemployed, 16.935 million of them in the Eurozone (eurostat Jan 2016). Unfortunately, the average figures disguise the real nature of unemployment in the EU, with 14 states with levels over 8.3%, with seven of those with rates from 9% - 12.5% and Croatia - 15.1%, Spain - 21.4% and Greece 24%. Over 60% of Italy's 11.3% unemployed, have been without work for over one year while 70% of Greece's unemployed have shared the same fate. We hear a great deal of the opportunities the EU offers to Scotland's youth (under 25) but it has been noted above, the relatively small number of Scottish students studying in the EU. Unemployment levels for the under 25 age group in the EU, suggest that opportunities for Scotland's young people will also be limited. Youth unemployment in EU28 averaged 20% or 4.6 million, of which 3.2 million or 22.5% were in the Eurozone. Averages again hide the worst cases of Italy - 38%, Croatia - 45%, Spain - 47.5% and Greece - 49.5%.

When it can be shown that perhaps the EU is not quite the land of milk and honey that the propaganda suggests, Remain, the SNP and their supporters take refuge in the claim we need the EU to protect us from the dastardly Tories, who it seems, are set to govern in the UK for all eternity. The claim is that if it were not for the EU, workers' and women's rights would be abolished by the Tories, as an act of revenge and to please their neo-liberal financial backers and, of course, if it were not for the EU, those rights would not have existed in the first place. Not surprisingly, they have little or nothing to say about the way workers' and women's rights were trampled over in Greece, Eire, Spain and Portugal or the riots which have taken place in France, Belgium and other member states to stop their governments abolishing some of those rights. All we hear from the self-styled, alleged "Left" is, "Hold your nose and vote Remain".

Conscious that this is beginning to run on a bit, I will examine the possible consequences of coming out of the EU, with possible alternatives for when we are out, in the next instalment. However, just for the record:- Right to Holiday Pay was introduced in the UK under the Holiday Pay Act of 1938. UK workers have a right to 5.6 weeks holiday, in the EU it is 4 weeks. Maternity Leave:- UK law provides for 52 weeks, the second highest in the EU, where the minimum is 14 weeks. Maternity Pay:- the EU does not give pregnant women any minimum pay level during maternity leave. UK provides 90% of pay for 6 weeks and £140 pw for the next 33 weeks. Equal Pay:- UK introduced equal pay in 1970, before we joined the EU. Discrimination:- UK introduced race discrimination 1965, sex discrimination 1975, before the EU. Wages:- EU has no minimum wage law and only 18 members out of 28 have a minimum wage. UK has one of the highest minimum wages in the world.


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