The cynicism is unjustified – Hydrogen is the key to a clean transport future

The world’s largest free trade deal fundamentally re-shaped the future of Transportation – and no one noticed.

In December of 2017, the EU and Japan announced that they had agreed the terms of a vast international free trade deal. The deal, still subject to final approvals in the EU and from the Japanese diet, will create a combined economic free trade area of 600mn people worth 30% of GDP. But while the focus has been on the changes to agriculture, sustainability and regulatory alignment, a key provision has slipped almost unnoticed from the public eye. A regulatory drawbridge for hydrogen vehicles has been created.

In one of the most startling changes, barely noticed by the press, the EU have been allowed to sell hydrogen cars straight into the Japanese market, bypassing stringent legislation for Japanese specialist steel and labelling standards. In addition, the EU has agreed that “Furthermore, EU manufacturers that are not yet as far advanced in the development of this technology of the future can, thanks to the specific and much lighter conditions, import hydrogen fueled cars for testing and validation purposes and use the Japanese infrastructure of hydrogen filling stations to fine-tune their cars.”

Why does this matter? It matters because (arguably) the world’s most technologically advanced nation has bet big that the future of transportation will be Hydrogen and it is now luring all the world’s largest automakers to build out their R&D and manufacturing within Japan.

Hydrogen cars:

In 2020, Japan will host the Olympic games and the vehicles of those games will be hydrogen fueled. The aim is to put 40,000 hydrogen fuel cell vehicles (HFCVs) onto the roads by 2020, including over 160 charging spots. However global current sales of HFCVs are low, with only 1,600 sold in H1 of 2017. In part this is because the vehicle selection remains limited and the cheapest versions…are not that cheap. As a result, there are no shortage of critics. Elon Musk is famous for deriding the chances of hydrogen vehicles, a view widely shared amongst the lithium battery bulls.  However, with its ability to re-charge a car in under 5 minutes and its exceptional long range, the battle for vehicle dominance is far from over.

In only 5 years’ the global electric vehicle fleet has risen from ~50k cars to over 2mn worldwide, driven by government subsidies and falling costs as production increased. Analysts believe those same drivers could transform the hydrogen market too. In early 2017, Honda and GM announced targets for mass production of HFCVs by 2020, while Toyota, Honda, Hyundai, BMW and Daimler have committed $10.7 billion into research and development of hydrogen-based products over the next five years. There are now even a range of apps that can show you all the planned and current Hydrogen re-fueling points, like this one.

Granted, I am a confessed Hydrogen fan and have been so for a while. So in the interests of fairness, I also leave an attached rebuttal of the case for Hydrogen cars here, though it is a little dated. But regardless of whether Hydrogen will transform the light vehicle car market, there are plenty of other sectors where Hydrogen technology is likely to transform our transportation system.

De-carbonizing transport:

Depending on the source, transportation accounts for between 14% and 23% of global greenhouse gas emissions (GHGs). This sector is also growing rapidly, as aspiring middle class citizens seek to travel more and to own their own forms of transport. Ride-sharing, urbanization and automated driving all offer potential avenues in the longer term, however poor urban planning, under-educated regulators and significant cost challenges will ensure that these solutions are unable to meaningfully reduce emissions until 2040 if not later. Moreover, they only deal with the simplest solution of all, light duty vehicles.

Using IEA estimates from the Global Tracking framework, a joint World Bank and IEA publication, global renewable transport numbers remain a significant concern for efforts to de-carbonise the global energy system. According to the IEA, Electric vehicles must reach 160mn by 2030 to meet the 2 degrees target set at Paris and over 200mn to reach the below 2 degrees target. In other words, the world has to manufacture and sell at least 158mn EVs in 13 years globally, mostly fueled by clean electricity and with sufficient grid infrastructure to handle re-charging.

Achieving the Paris commitments for light duty electric vehicles alone should put pause to the idea that we can electrify shipping, aviation, rail and heavy freight with batteries as well meeting the Paris commitments for electric light duty vehicles. The only credible alternatives are hydrogen, LNG or CNG.

Compare and contrast: the new Tesla truck with the Nikola Two. The Tesla truck will have a maximum range of 300-500 miles and will require 30 minutes of full charge to add 400miles. It will also require the equivalent demand from the grid of 3,000 – 4,000 UK homes when it is charging. That is per truck…In contrast, the Nikola Two can cover 800 – 1,200 miles with a 15 minute re-fuel time. The bigger brother of the Nikola Two, the Nikola One, has similar statistics but has received $2.3bn in pre-orders, totaling over 8k. Nikola isn’t the only company in the field either. Toyota has its own project, called “Project portal”, while Kenworth is examining HFCV options as well.

Looking at the aviation space, Hydrogen fuel cell planes have already been developed and successfully tested, including the HY4 passenger craft. The plane already has a range of 1,500 kilometers and expansions for a 19 passenger plane are underway. By contrast, experts from WIRED estimated that electric batteries will take until 2045 to have a commercially viable battery plane available. Even in the smaller plane segment, the current record distance set for an EV plane is 300 miles in a two seater plane, largely modelled on a glider technology.

In freight, Alstrom and Hydrogenics already have tested Hydrogen on trains in Germany, while Ontario is looking at Hydrogen trains to replace the current rolling stock on the GO rail network. Aside from promoting local businesses, the trains are almost silent and emit none of the harmful particles associated with diesel or other fuel sources. There clearly will remain a role for electrification of urbanized rail, but even in a small landmass like the UK, the costs of electrifying entire train lines have forced planners to move towards mixed fuel and electrification trains. In this regard, Hydrogen is likely to compliment electrification for long distance commuter trains. The UK is already considering this option.

Then we have shipping. The maritime industry is one of the worst sources of pollution in coastal cities, with cities like Hong Kong calculating that 50% of all locally produced air pollution comes from the maritime industry. In Norway, parts of Canada and the USA, various attempts to introduce LNG bunkering have produced significant results in reducing maritime emissions, with Vice estimating 20% less CO2 emissions per ship, but hydrogen is likely to be the next major frontier. So far both Viking Cruises and Royal Caribbean have committed to procuring hydrogen powered ships, while Norway’s Fiskerstrand Holding AS is building a hydrogen ferry and the Port of San Francisco is mulling a $5mn investment in a Hydrogen fueling station. They are unlikely to be the last movers.

But perhaps the most surprising thing about Hydrogen now is its wider application in more niche services. For Amazon, hydrogen fuel cells have allowed the firm to revolutionize its warehousing forklifts, so much so that the company invested $70mn into a fuel cell company called Plug Power, while Walmart reacted with its own investment of $80mn in the same firm. Why? Well according the leading US body NREL, hydrogen fuel cell forklifts are at least 10% cheaper than alternatives over a 10 year investment. But the effect is not limited to forklifts. Amazon now uses Hydrogen powered drones in its warehouses to monitor inventory. With a flight time of two hours, compared to 30 minutes for a comparable electric powered drone, Pincs aerial drones offer savings of up to 5% of the total inventory stock.

Final comments:

On our current global trajectory there is almost zero chance of the world reaching its Paris climate commitments, let alone the wider level of agreement needed to reduce CO2 emissions below the two degrees limit by the middle of the century.

Our energy system is going through the most rapid transformation in its history. It is going to be messy, complicated and littered with failures. It is going to cost more than it may have done had we guessed everything right at the start, and for decades there will be debates around this subject. But one thing is clear. Without hydrogen in transportation, there is no clear evidence that we can save our planet.

In 2003 to 2004, the UK government overwhelmingly backed the idea that Hydrogen would be a key fuel of the future. Like most new ideas, the hype came early and failed to deliver. In product innovation this is often the case. The dot.com boom was preceded by the explosion of the internet almost a decade later, with the worlds largest companies all being tech stocks. Electric vehicles themselves were considered the car of the future….in the 1900’s!! Yet it took over 100 years to become the new focus of policymakers hopes for a clean transportation future.

Hydrogen has had a lot of bad press, some of its deserved. But if we are serious about climate change, investors need to drop the cynicism and engage with the technology.

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So you work at the World Bank….what does it actually do?

The World Bank Group is one of the largest, oldest and best known international institutions today, yet few people can  tell you what it does. So what actually is it and why should non-policy members of the public care?

The World Bank is an agency headquartered in Washington DC, which was founded after World War Two. While it is frequently referred to as “The World Bank”, this also adds to the confusion around what the institution is and does. The “World Bank Group”, is a body of financial institutions whose job is to provide financial solutions and consulting services to the banks shareholders. It’s shareholders are sovereign nations who commit financial support to the bank in exchange for shares. The greater the financial commitment, the greater the shareholding and voting rights held.

It is not a “bank” in the classical sense, nor does it provide services to the “world”.

The World Bank was originally created as one entity, the International Bank for Reconstruction and Development (IBRD). This remains the core entity when people talk about “The World Bank”. When the IBRD was created, its aim was to help rebuild nations (largely European) who had been devastated by World War Two, whilst also providing financing for the worlds poorest countries to support economic development. To achieve these roles, the bank tried to solve a single issue for these two categories of nations: the lack of international finance available.

While most of the original financing was from the American government, the banks day-to-day lending is actually financed by institutional investors such as pension funds, insurance companies, endowments and central banks. The bank provides loans to its country members, by raising debt itself in the form of loan notes (aka bonds). As all the country members of the World Bank provide a guarantee to investors that any bond issued by the bank will always be repaid, the World Bank notes are consistently AAA rated (which indicates that default is theoretically close to 0%). This allows the bank to borrow money at the same rate as the US federal government.

The IBRD uses the money that it raises in financial markets to provide “concessionary loans” to the banks members. These loans are concessionary because they are at a lower interest rate than the country would be able to secure for itself in the global market (assuming it could even raise the money). But in order to access this much cheaper source of financing, the country which receives the financing must agree to a series of conditions about how the money can be used. In recent years, the World Bank has been criticized heavily for these “conditions” which it sets on borrowers, especially given that most countries that currently borrow from the Bank are seen as developing, post-colonial nations. But this has not always been so. In fact, one of the earliest and largest bank loans actually went to France, shortly followed by Belgium and other European nations who desperately needed US dollars in order to import food and basic goods from the USA after WWII. The Banks first ever loan went to Chile.

The second entity referred to as the “World Bank” is called IDA, the International Development Agency. Founded after the IBRD, the aim of IDA is to provide loans on an even more generous set of financing terms than the IBRD can. Understandably this makes IDA a very attractive option for impoverished governments and so its financing is restricted to only the world’s poorest countries.

As a further contrast between the work of IDA and the IBRD, the loans made by IDA can be considered “loss making”. This is because the interest paid is so low, and the duration of the bond is so long, that when counting for inflation the loan is effectively a grant (i.e. free money). The IBRD is totally different. The loans from the IBRD will all generate a profit for the Bank (i.e. the return exceeds the cost of the IBRD’s own borrowing, plus staffing costs for the project). Therefore, the IBRD provides a subsidy to IDA, so that all the money made by the bank is re-invested in providing either grants to the poorest nations in the world or more low-cost financing for other developing nations.

While the IBRD and IDA represent the core of what we call “The World Bank” today, there are three other entities that are also “World Bank Group” and which deserve a brief explanation.

The first is the International Finance Corporation (IFC). This entity provides direct investment into companies, not to governments. Its sole purpose is to promote the creation of a dynamic private sector inside developing world economies. It does this by issuing loans to companies in emerging markets, sometimes making direct equity investments in funds and even providing what is called “anchor financing” for private equity/venture capital funds, who solely invest in these markets.

The second is the Multilateral Investment Guarantee Agency (MIGA). MIGA’s job is not to make investments of any kind. Rather, its job is to provide guarantees to banks and investors who are looking at projects and businesses in developing markets. The most famous of MIGA’s products is its political risk insurance. This is where MIGA will guarantee that a company’s asset or investment, will not be taken (“appropriated”) once it has been made/brought to the developing country. As an example, if Rio Tinto builds a mine in the Democratic Republic of Congo for $1bn, MIGA will ensure that if the Congolese government nationalises the mine, Rio Tinto will get all of its investment back.

The last is the International Centre for Settlement of Investment. This body acts as a negotiation tool between developing countries and large multinationals, where there may be a disagreement over the implementation of a pre-agreed contract or a concern that either party is not acting in good faith.

While these descriptions are probably too long already, they provide only a snapshot of what the bank itself does.

In sum, the Banks various entities ensure that over $60bn a year is directly invested in developing countries. But that is only the Banks direct contribution. Given that the Bank usually co-invests with the private sector and host governments, the true figure is likely to be between $100-$200bn, depending on which assumptions one makes. All together Multilateral Development Banks, including the EBRD, IDB, ADB, AfRD and the World Bank, provide over $300bn of financial assistance to help countries develop.

Today global investment in emerging markets is roughly 1/3rd of what is is needed annually ($1trn funded against $3trn required in Asia alone). The World Bank clearly cannot do all of that on its own. But for all of its challenges and the valid criticisms raised, the bank is one of the most valuable assets for fighting poverty in the International system.

Hopefully you can now say you know a little more about it.

Germany’s election will decide the EU’s future

This September has been awash with commentary regarding the future of Europe. From Macron’s address on a future EU finance ministry, to President Juncker’s call for a new EU blueprint, Theresa May’s Florence speech and the upcoming German election result, it is clear that the tectonic plates are shifting. But in what direction and what does this all mean.

The EU’s political consensus is fracturing. The Brexit referendum has demonstrated that EU membership is not permanent and consequently that there are political consequences to constantly attacking the union. As a result, politicians who have previously attacked the EU in order to deflect unpopular decisions in their countries now face a choice: do they make a pro-federalist case for EU reform through integration or do they support a de-centralisation strategy. The choice is likely to be settled by two issues: the German election composition and Turkey.

Germany’s election is more complex than it seems. Current polling suggests that the CDU will win, but the question is whether they are able to govern with a “Jamaica coalition” of the FPD and Greens. A Jamaica coalition is desirable because of another party, the AfD. The AfD are on course to receive 11% – 12% of the popular vote and become the 3rd largest party in the Bundestag. If the CDU and SPD were to form another grand coalition, then the AfD would become the official opposition to the German government. A great podcast covering this is available here. If Germany does assemble another grand coalition, it is expected to be much more open to renewed EU federalism. However, if the FDP enters government then the dream of an EU finance ministry will be dead in the water.

Assuming a pro-reform minded Germany, the only barrier to further EU reforms would be Turkey. The migration crisis in 2015 was not resolved, but Merkel’s bilateral arrangement with Turkey has been a very effective stop-gap measure. Following a heated war of words between both nations in the last two years, the status of the refugee arrangement may be under review. According to the UN there are 3.1mn Syrian refugees alone in Turkey, though the official number may be higher. Were Turkey to renege on the deal, Greece would certainly see a significant uptake in new arrivals, as would most of south east Europe. Given the current hostilities and tension towards migration in the union, the risk that shengen may collapse in parts is very feasible. Such an action would again set back momentum towards a unified Europe.

The resurgence of pro-EU sentiment following Brexit, suggests that the political stalemate on further integration may finally be broken and that meaningful treaty reform is feasible. But this requires the German domino to fall into place and the migration pact to hold. As Guy Verhofstadt’s most recent book title suggests, this may be “Europe’s last chance” to successfully push through irrevocable integration among EU members.

All the wrong issues

Despite 7 years of stagnant economic growth in Europe, austerity in Britain and growing inequality in the US, the political left has never looked weaker. That is a problem. All good political systems require competition of ideas to help both sides refine and improve the policies which they offer their electorates. In the founding of any democracy it is widely acknowledged that a failure to create two equal political parties, who can act as counterweights to one another, is essential. Some even believe that if the Russian Communist party had split into two parties in 1990, one moderate and the other traditionalist, it would have fundamentally changed the trajectory of Russian democracy.

But why are the political left so weak? The answer is that they are focusing on all the wrong issues. LGTBQQ rights, climate change, religious tolerance and gender equality are important issues in making our world a better place. But they are not the reason why people decide to vote for one party or another at the ballot box. Hillary Clinton did not lose because every Trump voter is a climate-denier, racist, misogynistic homophobe who wishes to punishes poor people. Though there were likely many of those too. But the reality is that people vote for bread and butter issues and as Bill Clinton once famously quipped, it’s often about “the economy stupid”.

Politicians in the modern era have a tendancy to focus on issues that are at best tangental and at worst, irrelevant, to the day-to-day lives of most citizens. Climate change is a huge issue, one that I passionately seek to help fix every day. But it isn’t something you can explain or resolve in a tweet. It also is something that is extremely hard to explain to citizens that work 9am – 5pm in an office. The same is true with the rise of identity politics issues. It is morally clear that Donald Trump’s ban on transgender service in the military is wrong, but if democrats think that they will win votes over these issues then they are misguided. As sympathetic as the ordinary citizen is to the suffering of others, it takes more than the empathy that one may feel from an article or a youtube clip to vote for a political party that is also raising your taxes or restricting your social rights.

If we acknowledge that the issues championed by left wing parties are the wrong issue to win elections and political power, then intuitively one must ask why parties cover these issues. In part the answer lies in the  membership base and in part it is a feature of the social media age. Political parties draw their strength from loyal members, who contribute funds as well as time to help win elections and in exchange they are granted an input into the policy making process. Today though, members are no longer content with “an input”. Grass root activists, inspired by social justice movements like Occupy Wall Street and other online anarchist strctures, are seeking to rebuild the entire political governance of their parties. In doing so, the parties are sacrificing external clarity of message for the ostensible goal of greater internal cohesion, as all factions and members feel more engaged in the policy creation process.

In the social media age, these internal struggles play out across the public sphere and muddle the waters. Moreover, the areas of greatest acrimony and therefore greatest publicity, are not issues of inequality or climate change (where agreement is much stronger) but rather the extent of engagement with identity politics issues. These topics, ranging from the appropriate use of social pronouns (if such a thing still exists), towards use of public facilities (notably toilets) and removing statues, hold no interest to the vast majority of society but they are fought though they are an existential battle, by left wing activists across social media platforms. In the maelstrom all other issues are lost. The conservatives in the US understand this well. Breitbart, Fox and other right wing activist groups are easily able to distract the political left from delivering clear messages on inequality, healthcare and the economy by effectively trolling the political left with social politic clickbait. Milo Yiannopolous andDonald  Trump are experts at this.

Many could contest that the political left is stronger than it has been portrayed, but the success of Jeremy Corbyn in the UK and Macron in France is misleading. Macron was the ultimate example of the “lesser of many evils vote”, a product ofthe disastrous   Socialist government election process, a crippling leadership scandal in the Republican party and a desperation to keep the National Front out of power. Corbyn is even stranger. A product of the anger felt by many in the UK who suffered disproportionally from the reduction of public spending in social services and a rising anger that the system is rigged which came from the financial crisis. Such anger against elites is ironically why Corbyn and Macron share so many similarities with Trump, in that they are all populists that are riding a wave of anger against the perceived liberal, effete elite. But the perceived success of these leaders is due to electoral circumstance, not the strength of their political positions.

Jeremy Corbyn persuaded young students that their debt would be removed, while sending two contrasting visions of Brexit to Labour voters in the north and labour voters in the south. Macron did even less. It is perhaps unsurprising therefore that Macron’s popularity has dropped faster than any French president in the last 20 years. Meanwhile Labour may being riding high in the polls, but Jeremy Corbyn still polls as a “less trusted to govern” leader than Theresa May. A leader that lost an election and is expected to be removed in the next 12 months.

In politics there is a disctinction between doing the right thing because its right and doing it because it looks right. The Conservative party in the UK will never outliberal the Liberal Democrats and they will never be seen as more progressive than parties whose foundations were built on championing the rights of excluded groups in society. Similarly the Labour party and Democratic party will never win over aspirational voters, who want a better quality of life by championing social issues as their primary selling point.

The obsession with social politics issues is a problem for the political systems of western liberal democracies. If we can’t move on from it and focus on the bigger picture issues that affect the day-to-day lives of millions, citizens will start to wonder what democracy is doing for them anyway. Confused onlookers from China and Sinagpore may be asking that already.

The politics beneath the noise

Whenever people ask me for my opinion of US politics at present, what always strikes me is how little is actually happening. While the press covers Trump’s regular tweets, public gaffes and the inevitable criticisms of his actions, the most interesting aspect of Trump’s presidency is how little in reality is happening.

Let’s start with the economy. While the US market certainly has been caught up in the “animal spirits” surrounding Trump’s proposed fiscal stimulus boost, few analysts have actually looked at how this would work in practise. For starters, Trump’s long expressed desire to boost US energy infrastructure is trapped in a permanent limbo until the number of FERC appointees rises from its present 2/5 to 3/5 or more. At present, the lack of a “quorum” for the US energy regulatory agency means that no energy projects can be approved at a federal level until a new appointee is selected and approved by the senate. That is still a long time away. Next consider how Federal fiscal stimulus actually works: The US federal government does not contract for infrastructure projects within states, rather the states themselves manage the process. Thus as most states are heavily indebted at present, it is highly questionable whether a large financial giveaway from the federal government would lead to increased infrastructure spending (it is far more likely the funds would be used to pay down debt). But beyond even the potential for a stimulus lies the more significant question of whether congress would even approve such a bill. With the Republican party still heavily influenced by the Tea Party, it certainly shouldn’t be assumed that tax cuts and increased spending is a given.

On healthcare, the picture is similar. While people expected a bonfire of medicare “repeal and replace” style, there have been no plans put to the public, the President or Congress that provide a clue about how Republicans will do this. Moreover, the few suggestions that have been raised are politically toxic with Republicans. These include aspects around Medicaid/medicare cuts and non-discrimination provisions (very popular with voters and hated by the US health insurance lobby). With the senate at 52-48 Republican, no democrat support for reform and division in the Republican House of Representatives. Reform here also seems unlikely.

Regarding defence, the Trump administration is remarkably consistent with previous administrations, including Obama. Additional military support in Iraq, statements of support to Japan and South Korea, Covert ops in the Arabian Peninsula and commitments to spend more on defence. So far, so Republican. Even on NATO, an area often attacked by Trump in his speeches and tweets, the actual messaging to Europe has been more focused on “we value NATO, but you need to pay more”. This again is hardly new. In fact, the last five Secretaries of defence (under Bush and Obama) have said the same thing publicly.

On law and social justice, the reality of what is happening is also far less controversial than the noise. The reforms to H1B visa are one example. While portrayed as a Trump attack on skilled labour, the area has been under review for years, with Obama considering raising the minimum required salary to $110,000 and Trump considering similar numbers. Even the delay in processing within 90 days, appears to be more a product of overworked government agencies than a specific anti-migrant move. Trump’s choice of Supreme Court nominee is also a good example. Despite the criticism in left wing circles, Neil Gorsuch was approved to his current position by a unanimous senate vote (including all Democrats) and was in fact a Bush Jnr era appointee. Moreover, Gorsuch is a replacement for a previously Republican supreme court position (he is even seen as a perfect model of the last figure), thus ensuring the balance in the court has barely shifted since Obama.

None of this is to say that the noise and tone of the Trump administration is not having a significant impact on America’s standing in the world and how people in America view themselves and their fellow citizens. However, it is striking how much focus and attention the tone and voice of a world leader receives, rather than the reality of what is happening on the ground.

A final observation I would share is how little resistance there is within the States to the actions of the President. While a number of states are certainly fighting specific actions, such as the travel ban executive order, there is a remarkable lack of strategy behind those who oppose Trump. For one thing, there is no meaningful discussion of candidates who could revive the Democrat party and provide a real leadership challenge to Trump. Nor is there any clear sign of a moderate Republican leader coming through the ranks. One challenge may be the desperate lack of new faces in both parties, but it is interesting that no US political figure seems like a ready replacement for the President. Interestingly as well, the momentum of protests appears to have petered out entirely. In Washington DC, the protest momentum after the inauguration seemed to be growing, but now there has been little to no real action. In part because, I suspect, there are few well organised and funded organisations that are able to sustain the momentum. Instead those in the nation who oppose Trump appear numb and subdued. A tragedy for democracy, and perhaps an answer to the question of whether Trump would seek a second term (and win).

Defending Ideologies

For about twenty years it seemed as though life was simpler. The European continent largely avoided any major wars, prosperity recovered after a series of economic challenges, the world become more multicultural, and technological innovations flourished. However, even then the signs of future challenges were clear. New ideas about how society should function were gaining popularity and nation states worried that their culture and identity were under threat by malign foreign influences.

If any of this sounds familiar, it shouldn’t. This was 1820-1840.

As human beings, we can be wonderfully contradictory. We praise tolerance and openness, yet criticize those whose views are widely divergent from our own. We talk about the need for businesses and governments to act on climate change, poverty and to promote fairness, yet criticise them when they raise taxes to do so. But perhaps the most interesting contradiction comes in how people react to the word ‘ideology’.

If you mention ideology today, the connotations are overwhelmingly negative. Those of a politically left wing orientation think of Fascism, Thatcherism and Capitalism. Those of a right-wing orientation think of Socialism, Communism and Protectionism. One thing both agree on however is that our society today is different. From the 90’s, people have professed that ideology is dead. From the famous “End of History” by Francis Fukiyama to the creation of “Third way” parties across the developed world, the impression our society has given is that the world is no longer governed by a fundamentalist set of ideas. Instead, people believe that our societies our governed by a scientific method.

According to this belief, the western world is governed by “what makes sense”, by “what is rational”, and by decisions based on “evidence”, not “emotion”. An alternative definition would be to say that our society is governed by pragmatism. The idea that decisions are (generally) made based on careful consideration of the evidence, accumulated by subject matter experts, reviewed against other considerations (such as budgets and the environment), before being implemented, often after an initial pilot project.

Against this backdrop its easy to see why China’s foreign policy, the election of Trump, the Brexit vote, the popularity of Le Pen, Geert Wilders and Putin all seems so scary to western societies. We have grown up thinking that decisions are only rational and therefore only plausible, if they pass a carefully assessed cost-benefit analysis. In this capacity, economists are the rock stars. As individuals who profess to quantify human behaviour into predictable patterns, the word of an economist is all-powerful. Uncertainty is the enemy of a rational, pragmatic based system of governance. It affects long term planning and it is difficult to respond to.

But while the intentions behind pragmatism are often noble, what the political leaders of today have forgotten is that belief in the scientific method, as a strategy for governance, is an ideology in and of itself. Even worse than that, it is a fundamentalist ideology that cannot answer the questions that fundamentally matter to society. To provide one good example, let’s look at international trade.

Free Trade is the perfect example of the strengths and limitation of the “Pragmatism” ideology. It is universally agreed by economists that free trade makes everyone better off. Free trade expands the combined economic pie, by allowing people to specialise and therefore work in the areas they are most efficient in relative to others. Moreover, the evidence proves that free trade expands a country’s economic pie over time. Seemingly therefore this is a clear win for pragmatism. Yet all over the world, hostility to free trade is fierce. For people of the Pragmatist ideology, the answer to why people are upset is easy: most people simply do not understand economics, they cannot get the bigger picture and they are easily misled by people with their own agendas. Safe behind these rhetorical defences, the pragmatists wistfully think of multilateral organisations that remove control over these policies from governments and some even muse about voting restrictions so that “only educated people can vote”. But they are wrong. It is not that the average voter is against free trade per se, or that they do not understand free trade. Rather, their opposition is rooted in the issue of who is benefiting from trade and who is not. It is these questions: of equity, of who should gain, of who should lose, and what compensation people should get, that pragmatism and the scientific method is totally unable to answer.

If you want to understand why seemingly “populist” parties are back in vogue today, then look no further than this. In a world which is rapidly changing, where new innovations and dynamic population shifts increasingly create new classes of winners and losers, the scientific method is painfully slow at providing the solutions people need. Pragmatism requires decision makers to be able to find the answers to problems, through studying a phenomenon and carefully analysing it. But that isn’t possible in a fast-changing world. Ironically enough, it’s not just voters who have realised that governance by pragmatic ideology is ineffective; it’s businesses too. It is no coincidence that companies like Facebook, Tesla, Amazon and Uber are riding high in the stock market and catching the interest of people across the world. It isn’t because they have all the answers, that they understand all the trends, or even that they have the best technology. Rather, they are run by people who have a clear vision of how they think the future should look. In short, they are run by people who have ideologies of their own.

Ideologies are an essential part of the human condition. Before the rise of literacy in the European middle classes, governance was driven by “pragmatic” considerations among the educated classes that subscribed to a set of beliefs prioritising stability and certainty over dynamism and volatility. The result was peace, but at the cost of dramatic human misery. It was the inability to govern according to an equitable set of ideas that led to the rise of socialism, liberalism, communism and nationalism. Without these four ideologies, the world would never have introduced basic human rights concepts into law, such as the right to a free trial, freedom of speech, basic workers’ rights, the right to healthcare, and education. The list goes on. Moreover, in contrast to a popular understanding of ideology, many nations would never have escaped serfdom and feudalist systems without nationalism. Nationalism was the driving force which allowed people to cross vast geographical and social divides, and to unite behind a common set of ideas. Without nationalism, it would have been impossible to break down many of the divides that existed between communities, even those separated by only a river.

None of this is to say that ideologies cannot cause immense human suffering. Clearly they can and have. However, ideologies are vital to our way of living precisely because they can answer the only questions in governance that really matter: is it equitable, is it fair, is it just and does it make people happy? The current obsession with governing by a pragmatic ideology is not only wrong, it’s dangerous. Dismissing people’s concerns simply because, in a purely rational world, the economic outcome of a policy is net positive, is not a credible way to govern. It was precisely this hubris that lost the remain campaign vote last year and which lost Hillary Clinton her presidential campaign. If those who define themselves as being politically centrist want to keep the world as it is and prevent the changes they see taking place around them, they need to understand this lesson. People are not machines; they are beings of emotion. If you cannot explain to someone why your system of governance is fair, why it is just and why it will make them happier, then you will not be able to govern.

Ideologies are back on the world stage. It is about time too.

 

“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.