Brexit remains the right choice for Britain

On the 21st of February 2016 I publicly advocated for the UK electorate to vote leave in the UK’s referendum on continued membership of the European Union. Between that time and the night of the referendum, I campaigned constantly for the campaign to leave the European Union, with my final public plea published on the 21st of June 2016. On the 23rd of June 2016, 17.4 million UK nationals voted to leave the European Union; a majority of 52%.

Since that time friends and acquaintances have often asked me if I made a mistake. More importantly, many of those who listened to my views during the Brexit campaign, and who voted Leave subsequently, asked me if they have made a mistake. It is for those who listened to me and who followed my guidance that I say this clearly: Brexit remains the right choice for Britain.

Brexit myths:

I want to start by dispelling some Brexit myths that have built up since the referendum.

Firstly, I want to dispel you of the notion that the UK government is doing nothing, has developed no plans, no ideas or serious proposals for how to implement Brexit. The UK has issued extensive strategies, contingencies and proposals to work alongside the EU that cover atomic energy, a new EU trade deal, EU citizens’ rights, Northern Ireland, existing judicial proceedings, law & securityscience and innovation, Data protection for UK & EU citizens, advice for UK citizens living in the EU, advice for EU citizens living in the UKguidance on trucking, on aviation, and so on. The UK has also guaranteed UK organisations all funding they would have received from the EU until 2020 (when the EU budget was due to end anyway). When people read in the papers that the UK has done nothing and has no plan, you need to understand that this is a tactic not a description of reality.

It suits the EU negotiators to refuse to engage with the UK, to run down the clock and ignore proposals. This includes the use of technology on Northern Ireland’s border, which the EU’s own investigation showed was a feasible and practical solution. Smart and sensible ideas are being ignored by EU negotiators as part of the EU’s negotiating tactics. These tactics are brilliantly described by Yanis Varoufakis in his book on how the EU ignored extremely detailed, expertly modelled and internationally supported Greek proposals during their debt renegotiation with the EU in 2015.  In short, ignoring sensible suggestions to force an ultimatum is a tried and tested EU tactic, along with leaking and selectively quoting private conversations. This is normal and should be expected. Importantly, it should be understood that the EU is trying to create a narrative that the UK is unprepared, but this is only a cleverly fabricated narrative. It is not grounded in facts.

Secondly, I want to emphasise that the existential challenges at the heart of the European Union, namely its democratic deficit, its growing illiberal tendencies, and the failure of the EU principle of solidarity, remain unresolved. As the famous pro-European, Hungarian philosopher Ivan Krastev recently noted, the EU’s continued failure to resolve the bloc’s divisions on immigration is straining the solidarity of members and even their adherence to the EU’s Human Rights Act. The rejection of drowning refugees by Italy is one recent example of this, and Hungary’s recent anti-migrant act is another. Moreover, despite the best efforts of strongly pro-European individuals, such as Guy Verhofstadt and Emmanuel Macron, to warn of Europe’s need for reform, the only concession that has been granted to these voices has been the creation of a small EU budget (separate from the EU commission budget). However, even this proposal is less progressive than it seems, because of a German-imposed requirement for funds to be linked to acceptance of migrants, thus immediately reducing funding to countries in Eastern Europe and increasing Germany’s receipts of EU funds.

Thirdly, while it has been popular for commentators to accuse people who voted Brexit of being racist and suggesting that the country wishes to revert to a little England mentality, the facts do not support their narrative. While Austria, Hungary, Italy and Poland discuss plans for an “anti-migrant Axis”, recent polling data from June 2018, shows that UK public attitudes towards immigration in the UK were more positive than at any time since 2011, a stunning rebuke to the initial rise in hate crime that immediately followed Brexit[1].

Brexit migrants FT

Brexit migrants eurobarometer 1Brexit migrants eurobarometer 2

It is also important to dispel another Brexit myth that if the referendum were to be held again today the result would be different. The data proves otherwise. As of December 2017, polling from YouGov showed that 55% of the UK public thought that Brexit should happen, regardless of their original view on the referendum. Recent data all indicates a similar result. None of which is to say the current British government is doing a great job. It is plain for the British public to see that they are not.

Building a better Britain:

Rebuffing growing misinformation is vital, but the backbone of my belief in Brexit is distinct from these arguments. I believe in Brexit for the following reasons:

I believe Brexit remains the right choice for Britain because I believe it allows us to build a trade policy that is fairer to the British people, delivering better economic outcomes. While the US, Chinese and Indian economies boom, the UK is locked into a customs union with the slowest growing economic area on earth. As of 2017, 15 out of Britain’s top 25 trading export partners are from outside the EU, and 11 of those (including US, India, China, Australia, Japan and Canada) accounted for 36.4% of all UK exports. These trading relationships relied on the dreaded WTO rules. Amusingly, Canada has confirmed that the UK could have enhanced free trade access from the first day of Brexit. They will not be alone[2].

Brexit economies

I believe Brexit will also make Britain’s immigration policy fairer. For immigration it remains fundamentally unjust that a doctor, engineer or an experienced entrepreneur will find it harder to work in the UK if they come from the USA, Canada, Chile, Japan or Colombia than an 18-year-old from France, Estonia, Portugal or Austria. Moreover, despite having a free-movement area with the EU, data from the UN overwhelmingly shows that British citizens would rather live in Australia, Canada and the USA than any country in Europe[3]. UN data shows that more Brits have chosen to live in Australia than all of Western Europe combined.

UK immigrants

Brexit allows the UK to correct these imbalances and create an immigration system based on reciprocity that allows British citizens to live and work where they actually are trying to go, whilst building trade bridges with nations that are growing. Dynamic ideas to addressing these opportunities of new immigration systems and free trade deals include the potential of the UK joining regional free trade groupings such as NAFTA and the TPP, while others have also floated the idea of a new Australia, Canada, New Zealand UK free trade zone (CANZUK). I would suggest that the UK should explore new trade and visa options with dynamic regional markets such as the Pacific Alliance in Latin America too.

Lastly, I believe in Brexit because of the phenomenal role it has played in restoring British democracy. While the traditional major political parties in France, Germany, Italy, Austria, Greece, Spain and the Netherlands have almost all collapsed, or seen their share of the vote significantly cut, the British main parties have rebounded to their highest combined share of the vote in almost 30 years. It is not hard to see why. In the 2000’s Europe grew up with a political obsession for “middle-way” politics, a convenient euphemism for technocratic governance and offering voters no real choice. It was common to hear the refrain “they are all the same”, and why bother voting? The electorate didn’t see the point in voting, and UK voter turnout fell below 70% for the first time since the advent of universal franchise. It appears that if people are not offered a chance to vote for what matters to them, they turn to parties that will offer them that choice. Across Europe the radical left and fascist right-wing parties have surged. Many of them are now in government. Brexit has stopped all of this. The far-right is almost entirely annihilated in polling (with the only revival recently due to the risk of a soft Brexit), the Labour party is the largest political movement in Europe and the UK’s election turnout is at its highest in over 20 years.

Closing Comments:

Before I finish, I also want to address the recent news surrounding Brexit. It is clear that the Conservative cabinet is deeply divided by it, but reassuringly so is the nation and so are the Labour party. It can seem concerning to see bickering at a public level from the Cabinet, but the very fact that there are disagreements and strongly held views attests to the fact that the current UK government is reflecting a broader sway of stakeholder interests than it is credited with. The current UK white paper is a demonstration of this. While ensuring the UK leaves the Single Market and the Customs Union, it also ensures that the UK regulatory framework is aligned on goods with the EU so that businesses do not face disruption. Clearly this deal does not suit all parties, but this is the point of compromise.

The resignations of Boris Johnson and David Davis are less controversial than the press would like them to be. The fact that they were staggered suggests an attempt to avoid triggering a crisis of confidence and a leadership challenge, as has been affirmed by David Davis. Secondly, it leaves Theresa May free to pursue a plan she believes in without cabinet members who do not endorse that plan. The greater risk does not come from the resignations but rather any further attempts by naïve and reckless cabinet members like Phillip Hammond to pretend that the Conservatives can repeal Brexit and escape without being destroyed and permanently dividing the nation. As the FT recently put it, the Conservative party is the party of Brexit.

It is easy to become disheartened by Brexit when the headlines often seem full of gloom, but it is important to take a step back. For every well-timed fear story like the Airbus threat to leave the UK, there are stories like Boeing committing to further UK spending and Australia awarding BAE UK massive defence export contracts. For every threat of jobs leaving London, like the 5,000 threatened finance roles, there are new commitments by companies like Facebook to employ up to 800 new staff, with office space for 6,000. The news will always try to showcase a clickbait headline, but if you can, try and ignore the noise.

Lastly we should not be afraid of a “no-deal Brexit”. Such an event would cost the EU over £100 billion, creating a continent wide recession, with the most severe impact being felt in Ireland and Germany. Given the growing anger and division in Europe over the increased EU contributions required by the EU’s wealthier states (Germany’s contribution will increase 16%) and how the shortfall in funding should be addressed, combined with the on-going battles over asylum, immigration and law & order, the EU would be suicidal to refuse to offer concessions in the face of a ‘no deal’. The path has been challenging and we are not out of the woods yet, so one should steel one’s nerves and prepare to witness continued anti-Brexit campaigning right until the eleventh hour. Just remember – Brexit is the best choice for the future of Britain.

 

 

[1] For further great information and graphics on how the UK is considerably more tolerant towards immigration than the majority of EU members, check out the Eurobarometer scores from April 2018: https://ec.europa.eu/home-affairs/news/results-special-eurobarometer-integration-immigrants-european-union_en

[2] There has been a significant effort by the EU to scare Britons about the challenges of trading from outside the single market and relying on WTO rules. Lets put this in context: The EU’s average tariff rate for countries like the US, Canada, etc, was 2.3% on goods as of 2013 (spoiler: it has not increased since), while for cars the EU recently proposed reducing global car tariffs to zero. While many organisations have highlighted the importance of non-tariff barriers, i.e. different product rules & standards, it is worth noting that batteries (for electric vehicles), micro-chips for phone, computers and tablets, as well as basic raw materials, all enter the EU from non-EU members. In short it may increase some short term costs, but accessing a broader array of markets will make UK goods more competitive as further free trade deals are signed.

[3] To put this into context, as of 2017 the UN estimated that there were 3.8 million UK expats across the world. The largest EU locations for British nationals were Spain (308,872), Ireland (278,000 people), France (188,000), Germany (103,700) and Italy (72,000). Many of which are retired and not of working age. In the Anglosphere the largest locations were Australia (1,351,846), USA (748,206), Canada (624,411) and New Zealand (272,071).

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The renewables driven revolution in electricity pricing

Away from the public eyes, one of the most radical transformations of wholesale electricity markets in the last 100 years is occurring. Since the time of Thomas Edison, almost all the electricity that we use has come from the combustion of fuels. By releasing the latent energy in coal, gas, wood or oil, we convert latent energy into heat, and use that heat to create steam. The steam forces a magnet to spin around a set of wire coils, thus creating a current. It is this innovation in science that created the modern world, but today a growing proportion of the developed (and developing) world’s electricity no longer comes from fuels. I am of course talking about wind and solar.

When power is created from the combustion of fuels it is dispatchable. This means that it can be turned on and off whenever the owner of the power station wishes. While a Nuclear plant will often generate electricity around 92% of the time, making it effectively a constant (hence “base”) generation source, most fuel based generation sources run for much less time. In the USA, coal and gas plants often run less than 60% of the time. By contrast wind and solar are not dispatchable. Rather, their production output is variable. Wind and Solar do not require a fuel to create energy, but they cannot control when they will produce electricity. It is this contrast that is at the crux of the challenge.

To ensure a power grid has sufficient electricity for all consumers, a grid operator such as National Grid, must estimate demand and source that demand on an annual, monthly, daily, hourly and sub-hourly basis. In complex power markets like the UK, the sourcing of electricity supply comes from an auction system. This is why wholesale power prices are in upheaval.

To match supply with demand, national grid asks companies that produce electricity to make offers to supply electricity. Each company states how much electricity it can supply and the price it will accept to supply that level. These prices are then sorted from lowest to highest and national grid will accept all bids necessary until it reaches the supply level it requested. This is called “Merit Order Dispatch”.

To explain this is shown in the table below:

Electricity needed 100MW   
Clearing auction price £30/MWh  
       
Bidder name Bidding price Quantity of power offered Quantity of Power Accepted
Wind 1 £10/MWh 20MW 20MW
Solar 1 £20/MWh 20MW 20MW
Nuclear 1 £25/MWh 30MW 30MW
Gas 1 £30/MWh 30MW 30MW
Coal 1 £40/MWh 30MW 0MW

As wind and solar have no fuel, their cost to run is essentially zero. As such they can bid any price they like. For Nuclear, the cost of fuel is considerably less than building the site, so it also bids a low price. By contrast gas and coal have to buy their fuels to combust them. As shown in the table above, coal can’t compete against wind and solar on cost and so it losses the auction. Everyone else is paid the marginal cost of production, which is the amount that gas receives (£30/MWh) and they supply the grid.

So what does this mean? Essentially as we build more wind and more solar, we will increase the number of electricity supply bids into the market which are below the viable level for any fuel based generation. This is why the USA’s Department of Energy wants to pay a subsidy to coal and nuclear. As wind and solar are not dispatchable, there is a concern that all dispatchable fuel sources will be unable to compete in the price auctions for the majority of the year, except for periods when electricity demand is extremely high. That would make most plants economically unviable, as they would be required to cover all of their capital costs, maintenance and staffing, based on generating electricity for less than 50% of the year. If these plants go, then what will provide the electricity when the sun goes down and the wind doesn’t blow? That is the question that energy market regulators are asking in the UK, USA, Europe and across the developed world.

To many the concept that renewables are cheaper than fuel based sources doesn’t seem correct. Indeed, most renewables remain more expensive than coal (though not in all areas and not by much), when considering the total cost of the system. But it is important to understand that wind and solar are fundamentally different in how they are financially structured and that explains the pricing disruption. Operations and maintenance of renewable power plants are minimal. Building the assets is the expensive part. As a result, Renewables always want to sell their power at any price in order to re-coup the cost of construction. By contrast a coal plant or gas plant will lose money if they try to sell electricity for below the cost of their fuel source. This gives renewables an incentive to bid almost zero, thus guaranteeing that they will be able to sell almost all their electricity they generate at any time.

This is actually worse in countries that have adopted a renewable government subsidy called a Feed-In-Tarriff (FIT). Under a FIT, the government guarantees the owner of a renewable company that they will receive a fixed price for the production of their electricity. However, the electricity has to be generated and supplied to the market in order to claim the subsidy. As a result, renewables have no incentive to put in competitive prices for auctions because they already have a fixed price.

What does all of this mean though for businesses, consumers and investors? Well for now it means that the annual average wholesale cost of electricity has fallen in countries like the UK on a constant basis. That also means that most households and industries have paid less in energy bills than would otherwise have been the case.Wholesale market

But while the costs of electricity have fallen, other costs are occurring across the system. As coal and gas plants cannot compete in the market they are forced to close the plants early and suspend new constructions. A great win for climate change, but an outcome that has cost European utilities half a trillion euros according to the economist. In California, where solar PV deployment is high, prices in the wholesale market now go negative for periods of the day. Yes that is correct. Producers effectively pay other people to take the power that is being produced. In the same is happening in Germany.

The move towards greater renewables in the electricity mix is vital. But like any great transformation there will be unintended and unanticipated consequences. The greater the growth of renewable energy, the more inevitable it will become that wholesale power markets will change. If consumers are focused that could potentially lead to longer term price stability and cost savings. But only if they know where to look.

“Brexit means Brexit” – a Translation

Following Prime Minister May’s speech on BREXIT, I have attempted to summarise and analyse the insights I have gleamed on the process over the last year below.

Immigration:

This has been one of the biggest areas of focus since BREXIT was announced, but we now have some clear outlines. First and foremost, the UK will not accept the EU’s freedom of movement, as it applies today. Instead it appears that the UK will offer its own equivalent of the American ESTA scheme, an online visa form which is approved quickly and lasts up to two years, for all EU nationals. This would mean that all European tourists, academics, artists and business people in would be able to visit the UK as easily as they can today, absent a 5 minute application online.  The second piece that we can say with a very high degree of certainty is that all EU nationals currently residing in the UK will be offered citizenship. Theresa May already offered this to the EU commission, in exchange for guaranteeing the rights of Britons living in the EU. We also know that the Home Office is pushing this approach as well. The costs and resources needed are extensive and frankly Theresa May’s government views this as an easy compromise that will encounter limited real resistance from within the UK or her party.

On work rights the picture now is also clearer. One school of thought is to create a skills based quota for each year and make it applicable for all global nationals, including the EU, which is in line with the US, Canada, Australia and other developed economies. This aims  to allow a quota of non-UK nationals to enter each year, provided they are sponsored by an employer. This is the approach championed by the Home Office under Amber Rudd (who previously supported Remain). The other option being proposed is to grant an automatic visa to any EU national who has a full-time job offer to work in the UK. This idea has been proposed by former foreign secretary William Hague. The ultimate choice is likely to be determined by the EU’s negotiating position. The automatic right to work, if an employer has made a full-time offer, allows the government to demonstrate that only “working migrants” are entering the UK, thus dispelling the pernicious lie that EU immigration is welfare driven. It also allows UK industry to recruit top talent across Europe, thus helping to address business fears about labour shortages in certain sectors (including the NHS). If implemented properly, this could even be a blueprint for the EU’s relationship with other future members, such as Turkey and Ukraine. However, if the EU appears to push for punishing exit terms and UKIP maintain the pressure on key Conservative seats, then the first option is more likely.

Foreign Policy and Security:

At this time there has been no suggestion that the UK wishes to change its cooperation with the EU at an international level. The UK has continued its increase in troop and materiel deployments to the Baltic states, and there are no signs of a thawing between the UK and Russia (unlike the USA). At the international level the EU often operates in a broader grouping that includes Canada, Australia and Norway at institutions such as the UN, World Bank and other multi-lateral agencies. It  appears clear that the UK will simply remain within this broader grouping, albeit with less influence on the EU’s ultimate position on issues than it previously held.

Amazingly the UK has not made any attempt to link security and NATO related issues to the terms of exit. This is despite a range of arguments that suggest the UK could leverage this angle, especially in light of the changing US position on NATO. While there have been early signs that the UK intends to expand its presence once again “East of Suez” and there have been discussions to re-open UK naval bases outside of Europe. However, given the UK’s limited manpower currently across the armed forces and its shrinking maritime presence, these recent moves appear to be more symbolic of a UK “open to the world” than a sign of significant redeployments to come.

Trade

While the Prime Minister has talked about staying in the customs union, it appears more likely that the UK will leave the EU single market and customs union. Given this outcome, the game will be about Tariffs, Equivalence and Regulation.

Let’s start with Tariffs. While there remain a number of technical issues to finalise, it appears certain that the UK will become an automatic WTO member, after its exit from the EU is completed. This membership ensures that both the UK and EU have strict limits imposed on the level of tariffs they can set on each other and when they can impose tariffs. To put into perspective the current WTO tariff levels, the tariff on cars between the USA and Europe is around 3%. For some areas the tariffs are higher, for example food, but as the UK is largely an importer of goods from the EU it is unlikely that the EU would want to impose large tariffs.

However, where the EU is likely to seek a clearer split with the UK will be around regulation and Equivalence. With an exit from the single market, the UK Financial services sector are likely to lose what are called “Passporting rights”, whereby UK firms can sell financial products directly to EU consumers and businesses without needing to have a local presence. What the net effect of this will be is unclear. The immediate answer will be that costs for all financial services companies in Europe will rise and the UK will lose some staff in areas like FX trading and clearing of some Euro denominated debt. Beyond that the picture is less clear. As the cost of regulation has increased since 1997, the Financial service sector has seen considerable consolidation, leaving Europe with a smaller group of larger companies than existed before the single market. As these players have operations all over the EU, it’s unclear whether firms couldn’t simply hire a staff member and a postal address in the EU to circumvent many concerns. This approach already exists to an extent within the EU today, as it allows companies like Facebook and Google to take advantage of different tax laws, see Luxembourg and Holland.

Again, the more positive outcome for both sides would be an agreement to keep all tariffs on goods at zero and to introduce “Equivalency”. This concept means that the UK financial services sector could sell goods into Europe, like a firm based in Europe, but they would be subject to EU regulation and EU courts. Moreover, the UK would have no influence on EU regulations and firms in the UK could be prevented from doing business in Europe if they did not match EU standards.

On the broader international trade piece, it looks as though the UK priority list will be the USA, followed by Canada, Australia and New Zealand. I would also add, though it hasn’t been mentioned, that Japan would likely be high on that list too. Japan is a large investor in the UK and moreover, the UK and Japan have few sectors of extreme competition, with the UK unlikely to threaten Japan’s agriculture or electronics manufacturing, while Japan poses few threats to the UK services sector. The UK would likely use templates from the failed US-EU trade talks as the basis of terms with the US (50% of all US gains from TTIP were due to come from greater access to the UK anyway) and the UK is likely to use the current EU-Canada trade deal as its template as well.

Closing Comments:

The BREXIT process is subject to a huge amount of political brinkmanship. Should moderate EU parties do well in elections, the global economy accelerates, Theresa May remains popular in the country and Trump remains largely focused outside of Europe, then political leaders should have the breathing space to craft a reasonable and fair deal. If, however, Russia and the US increase pressure on Europe, the migrant deal with Turkey collapses and populists are successful in EU elections, a fortress mentality may set in. The EU, despite its challenges, remains extremely popular in Europe. For this reason I continue to believe that if the survival of the EU becomes more threatened, we are likely to see a youth led backlash in favour of greater EU integration.

The EU is, in the words of Romano Prodi “an unfinished project” and Europeans know this. Thus, how BREXIT plays out is not simply a story that can be told in isolation, rather, BREXIT is also the story of the European Union. Will it become what its fathers dreamed of, a full political union of nations, or will it unwind to an early form. Time will tell.