Robert Woods MBE has over 35 years’ experience in the financial services industry in both an executive and advisory capacity and has previously won the London Stock Exchange AIM Entrepreneur of the Year award. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the businesses he is connected to.
Whatever the rights and wrongs, the events of last Saturday in the House of Commons seem certain to deepen dismay and frustrations in large segments of the nation. This is torture Hades style. It has been inevitable for some time now that there will either be a second referendum and/or a general election. In the first referendum both sides deeply lamented the paucity of cogent argument. But after 3 years and three months little has changed in that regard -Brexiteers passionately demand we must leave to rid ourselves of the shackles of Europe. But fail to explain in any detail what those shackles might be. Remainers assert with the total conviction of a mediaeval soothsayer that we will be doomed! -But without setting out a well thought through and detailed explanation of why that might be.
Tariffs and regulations are put forward as a reason. But tariffs work in both directions, and if both the UK and the EU impose tariffs on each other, both will be worse off. There is choice whether a country chooses to meet anothers regulations, so need not be a barrier to trade.
My concerns are therefore more about the failure to represent the case for Brexit (and Remain) in a cogent, detailed and positive way. The media and the BBC in particular seem to spew forth interminable commentary prophesying the awful outcomes of a no deal Brexit, but there seem to be so few challenges to such assertions from the Brexit camp,. But what about the positive reasons for leaving -global trading opportunities that may act as a catalyst to revitalise British entrepreneurialism; control over immigration to enrich not burden our country; and eventually through an improved economy, improvements in our social infrastructures -infrastructures that for years have been inexorably degraded through inadequate funding.
Western economies are weak, and the UK is no exception – combined with the burden of relentless population growth (1990 c57M; 2018 c67M, and forecast 70M in ten years); and the challenge of dealing with the UK governement’s debt mountain, it was inevitable that our social infrastructures would struggle to cope.
Standing back from the myopia of Brexit, we are living through an extraordinary period in economic history. The world’s population has exploded from c3bn in 1960 to nearly 8bn now, of which well over 6bn live outside the West. That new world led by China has embraced capitalism, industrialised, and looks set to dominate the global economy.
The short term is not important. What is important is that Britain re-establishes itself as a successful nation in a fast changing world that can give our children the prospect of a bright future. We should be honest that this cannot be achieved overnight; that it will take time, perhaps many years. But perhaps that will be better than a slow, and economically painful, continuing decline in a failing Europe.
Whilst I was undecided for a while, I eventually voted Brexit believing that over the long term we would be better out of Europe, but with a measure of trepidation. Firstly, free trade in Europe has to make sense (and which was evidenced when we joined the Common Market back in the 70’s); and secondly, I have always believed that in the short term, Brexit would cause difficulties for the UK, and in a number of regards. However, I concluded that, as regrettable as the short term problems might be, they would be a price worth paying to break away from what, in my view, is a failing Eurozone in a fast changing world; and also to keep our sovereignty. The evidence for my first assertion about a failing EU is as follows:
EU Zone – economic performance
- The world is changing fast. In 1980 the 28 current EU nation states accounted for c30% of the global economy. As a consequence of poor economic performance that has lagged behind much of the rest of the world it now only accounts for c15%. It has not kept pace.
- When we joined the common market in 1973, of our worldwide exports, only c23% was to Europe. That rapidly climbed to c55% by the late 80’s. However since the development of monetary and political union, exports to the EU have fallen to c45%. I believe that is a consequence of the anaemic economic performance of the EU; combined with the fact that over that period the rest of the world has grown very much more powerfully.
- There is much evidence that the single market is failing and in ways which explain poor economic performance:
-Services not goods make up c75% of EU GDP, but the single market was designed for goods, and has not sufficiently changed to reflect this.
-c5000 national regulations exist to protect services in member states. E.g. In Denmark law firms must be 90% owned by lawyers qualified in Denmark .
– Banks make c85% of loans to companies in their own countries. 2 examples of domestic protectionism.
– Once we leave only c12M Europeans will be living and working in an EU country not their own (pop 500M) so free movement of peoples whilst a worthy political banner, has little substance after 30 years –
– 21/25 largest companies still sell goods not services. In the US 17/21 sell services – services are more profitable, easier to start up, and have higher salaries for e’ees.
-US – 5 biggest companies are tech giants with an aggregate value of c4.3trn, compared to Europe for whom the top 5 have an aggregate value of less than 1trn, (and all existed a century ago)-little dynamism.
-Europe -a splintered market – 3 times as many service cos as US; Italy has same number of firms but only 1/10th the size –inefficient and poor productivity.
-30% of Europeans work for a company with less than 10 employees -3 times the US – inefficient and poor productivity.
– Telecoms -dozens of cos but oligopoly in each country –little competition.
-Energy markets also fragmented –little competition
-The bigger a euro firm becomes the more it relies on domestic (own country) sales –but…….
-Large companies in 5 leading EU countries are keener to invest anywhere but Europe -indicates boardroom concerns about EU growth
-300 firms who provide a breakdown of foreign sales has seen an increase from 29% to 44% outside the EU.
-More than 50% of money earmarked by EU businesses for takeovers is now outside the EU
-83% of EU businesses fear administrative complexity for cross border trade – contrary to the objectives of a free market
– Digital economy is particularly damaged by red tape -c40% of websites do not sell to other member states; 77% of online sales are domestic.
-Unicorns -start ups which have remained in private ownership valued at over 1bn:
-Eu commission threatened all 28 with lawsuits if they failed to improve cross border access to services.
-However enforcement actions have halved over the last ten years(!)
- Eurozone GDP has struggled to get much above 1.5% pa for years, and has experienced an inexorable decline
EU Zone – unemployment
The economic facts of life as exemplified above translate into poor outcomes for the people of Europe:
- UK unemployment is c4.5%, that compares with the EU area rate of c7.4%% (Aug 19), and has averaged c9% since 1995.
- C1/3 of the 27 have unemployment rates of over 10%
- Youth unemployment currently stands at c14.5%, and has averaged c19% between 2000-2019
- 5 have youth unemployment of more than 20%; 16 between 10 and 20%; and only 6 at 10% or less.
UK – world trade
As stated above, when we joined the Common Market back in 1973, we only traded less than 25% of our exports with Europe. By joining the Common Market, that powerfully grew to approximately 55% of UK world exports by the time the euro was introduced to support monetary and political union. But by then the emerging markets led by China, with its voracious appetites were taking large bites out of the Wests markets, but also creating global trading opportunities. From then, our exports with the EU have declined to approximately 46%. So, notwithstanding the supposed benefits of EU membership, we have found better overseas markets outside of Europe.
With the EU Zone being at the bottom of the list of major economic blocks around the planet, there have been and will continue to be better growth opportunities outside of Europe.
For example many people deprecatingly think of the Commonwealth as harping back to a bygone Victorian era. But the Commonwealth (from a practical perspective) remains a formalised trading block encompassing 53 nation states and 2.4 billion people – 5 x the size of the EU, almost all of which are growing much faster than the EU. Australia in particular has made it clear it would welcome a new trading relationship with the UK, as have a number of others, not least the States.
This is the disappointing reality of Europe’s laudable initiative, an initiative that is sadly failing much like the chronic melting of the polar ice caps. Brexit cannot be a “quick fix” but a long game, the potential beneficiaries of which will be our children. After Saturday’s outcome the need for reasoned debate is greater than ever, as we are being sucked relentlessly into either a general election and/or a second referendum which will determine the fate of the UK for decades to come.