Florence and May's Sheen

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Theresa May has had a good run the last few days. Will it extend to the weekend?

I think the PM is having a good spell (cue newsflash saying she’s just resigned). Let’s just look at some real actual things TM’s done over the last few days:

  • The trip to Canada was positive, with Justin Trudeau suggesting that the UK would flip into a bilateral deal based on CETA after Brexit. May did a solid for Northern Ireland and Canada by calling President Trump on behalf of Canadian plane maker Bombardier, which employs a ton of people in Belfast but is threatened by a nasty trade dispute with Boeing;
  • The PM’s tireless (and still under-recognised) efforts on Modern Slavery were rightly recognised in the Evening Standard as George Osborne appeared to show contrition for his remarks about wanting May chopped up in his freezer;
  • In co-ordination with close European allies, she is sticking it to the online giants for their failure to take on the scourge of online extremism; and
  • She appears to be taking control of Brexit by moving DExEU Permanent Secretary, Olly Robbins, to No 10.

Of course, the biggest test is Friday, where we will know if she has managed to outline an approach in Florence which simultaneously satisfies cabinet (which meets in advance on Thursday), her party and provides enough red meat to move negotiations with the EU27 forward. It’s a tough ask.

*** I have just updated the Brex-o-meter and I will probably have to do so again at the end of the week after Theresa May’s Florence speech.
Check out the latest version here: https://cicero-group.com/introducing-the-cicero-brex-o-meter-what-are-the-chances-for-each-brexit-deal/  ***

A pivotal moment is coming

It does look like we are facing another defining moment in the Brexit Saga. Theresa May is fond of using set piece speeches to make a big statement. It allows her a level of control over delivery which suits her style. And for all of Theresa May’s shortcomings, it can’t be said that her big speeches have not made an impact. The Nasty Party, Police Federation and Lancaster House speeches have been amongst the most significant British political speeches in (relatively) recent times.  In retrospect, Lancaster House has stood up pretty well – setting out a destination that even now the fractious, divided and weakened Conservative party still buys into. Indeed, the Lancaster House approach may in time, be credited as the one thing that prevented the Conservative party from collapsing into civil war.   

But it’s time for May to go further, as there are one or two matters that need to be cleared up PDQ. The questions the Prime Minister might tackle on Friday:

  • How much dosh is the UK willing to pay on the way out? Nothing? A bit? A lot? An absolute pile? FT reports said the Germans have been told eur 20bn – which shows enough leg to move the discussion forward, but without making a big commitment on future liabilities. That can will be kicked down the road.
  • Does May signal an intention to formally withdraw from the EEA under Article 127? The Government has said it will not be part of the Single Market after Brexit. However, Article 127, the process under which a country leaves the EEA has not been triggered - the Government says the Article 50 process will do the job. That view is contested by some Remainers who think that it must be done separately with the agreement of Parliament (hoping that Parliament will vote it down thereby keeping us in the EEA). Will May make it crystal clear that the UK government intends to press the button on Article 127, challenging opponents to sue the Government in the High Court in a re-run of the Article 50 case? That might calm the Brexiteers down who smell a conspiracy to keep us half-in half-out.
  • What kind of transition will the UK seek? Will it last 8 minutes? Two years? Three years? Will it be based on mirroring EU responsibilities and obligations or something else much more limited? I think we or on for at least two years with a model that looks quite a lot like what we have now – UK complies with EU rules and standards, pays in and has same levels of market access. The Brexiteers appear to have given a bit of ground on transition in order to get to the final destination.
  • What model is the UK seeking in its future relationship? Somewhat based on the EEA, with the UK effectively implementing EU rules on a sector-by-sector basis? Or more like a modern trade deal such as CETA, with a bunch of side deals on things like security and law enforcement? This appears to be the new battle line. George Osborne’s former adviser Rupert Harrison says there probably isn’t much of a difference in practical terms. I agree to some extent. But the question of ongoing payments to the EU is critical to the Brexiteers - after transition, payments would be intolerable for them. I think the exit, when it comes, will, by definition, be a pretty hard one because May will not compromise on her red lines and so the EU cannot give us what we want. For me the question really is whether the apparatus of the British state will be ready to handle this fundamental change.

If May doesn’t meaningfully address at least some of these points (especially the money) and just recapitulates Lancaster House, it will make it clear the Government won’t move the conversation forward in time for the October Council Summit. That will make business and markets freak out and the papers will go barmy. Yet the more detail she gives, the bigger the risk of alienating a wing of her party and perhaps pushes Bo Jo towards resignation just ahead of Tory Conference. It’s a Catch 22 and the way she handles it will be a serious test of her mettle and authority.

The Brexiteers are turning up the volume

Everything emanating from the Government over the last few weeks suggests that the Gradualist approach to Brexit is winning out – this is a compromise that appears to have been struck amongst the players in Cabinet. No one is thrilled with it – and Bo Jo and maybe Gove oppose it - but that’s precisely the point. It’s a compromise.  This seeks a longish ‘status quo’ transition, allows for some form of budget contribution to the EU (certainly in the interim, if not beyond) and presumably a future relationship in which the UK largely mirrors EU standards and regulations without formally being in the Single Market or EUCU. We would however, have control over our immigration policy and there would be no direct jurisdiction of the ECJ. This is the Hammond model, and purist Brexiteers - both in Parliament and in the grass roots – view it with deep suspicion if not antipathy.  

Sensing the tide has been running against them, radical Brexiteers like Dominic Cummings, Nigel Lawson and Mervyn King have begun to distance themselves from what they now think will become a train wreck (one for which they will never accept any responsibility, by the way). They think negotiations are likely to end in failure variously because: the civil service isn’t up to it; the EU will never agree to what the UK wants; and even if they did, the UK would be subservient to the EU which would defeat the point of Brexit. Or to put it more bluntly they are saying May, Hammond, Davis, Heywood and Robbins are screwing it all up and we need to GTFO of the EU quick and hard. It’s little surprise Mervyn King says the UK government should be planning for ‘no deal’.

Bo-rexit: £350 million a week redux

This is a good point to segue into Boris’ 4,200 word opus setting out what Snoop Mogg described as a ‘romantic’ vision of Brexit (romantic is one word for it). I thought it was a stark reminder of the colossal gulf between the outrageous claims and naïve idealism of arch-Brexiteers and the increasingly dismal, declinist defeatism of the Remoaner brigade.

Predictably, critics of Brexit have again fallen into the trap of arguing about the veracity of the £350 million-a-week-for-the-NHS-claim instead of engaging with the thrust of what Boris is saying. He’s making a blindingly simple point: he wants UK taxes spent on UK public services, not the Brussels circus carting back and forth to Strasbourg, or MEPs and Brussels officials who are paid bucket loads more than our own MPs and Civil Servants, or sending the EU money so it can be sent back to the UK. That is a remarkably simple message and it works. The public don’t care if it’s £200 million or £350 million, the principle is the same. So I was a bit surprised to see both Dave Norgrove and Robert Chote writing letters moaning about the £350 million claim. It’s over. Move on.  

Whither Boris?

The Johnson Telegraph piece was drippingly disloyal and Ken Clarke is surely right in saying that he would have been sacked in other circumstances. But on a personal level I can understand Boris wanting to express a view on something he helped bring about, but in which he has been subsequently marginalised. This move positions him for the future if the Gradualist approach goes wrong and takes down its architects with it. But it comes with the attendant risk that he is seen by the party as a destabilising force at a time when stability is needed.

Will he resign? Will he stay? Will he back Florence, or disown it? If he flounces out, will it backfire? We’ll find out soon enough. But while the Boris situation makes good political drama, it is symptomatic of something bigger: the battle for the heart and soul of Brexit. Henry Newman of Open Europe puts it very succinctly: ‘[Boris’ piece] was above all a rejection (at least implicitly) of the way in which the Government has treated Brexit as a bomb that needs defusing, rather than as a mandate for change, and an opportunity to remake the nation for the better’. This is an argument that is bigger than individuals. It’s about two world views which have not yet been, and probably will not be, reconciled.

Theresa May has to try to chart a course through this. She recognised very quickly and acutely that Brexit was a mandate for change but has struggled to deliver it because she doesn’t have a majority and she doesn’t have much money. This makes her vulnerable. But who else can lead the Conservative party right now? And which Tory MP wants to increase the chance of a General Election? This is her strength.

Things can move quickly and by the middle of next week two extreme storylines are equally possible: May is in deep trouble and faces an imminent leadership challenge. Or she has seen off the threat and has stamped her authority. I wouldn’t like to make a bold call, but if I had to put a fiver on it, I think it’s the latter.

Blast from the Past

A reminder that it’s not just George Osborne who can be mean…this is from November 2016.

boris.PNG

That will do for now. See you on the other side.

The Brex-o-meter has swung!

*** This blog post was sent to my email list before being posted here. To get on the list, DM me on twitter @rowlandreport or connect with me on LinkedIn ***

The Brex-o-meter has moved. To check it out click here.

The Government has compromised on its pre-election position and the ‘Official Position’ needle is heading softwards (softbound, squidgewise?).  ‘Ah!’ You might ask, ‘how can you discern the official position when members of the government are fighting like ferrets in a sack?’

Good question!  

I will explain the reasons for taking the view that I do. First, David Davis is the Brexit negotiator, not Boris Johnson or Liam Fox. Noises-off from this or that cabinet minister make good summer copy, but it’s what the person in the room in Brussels says that counts (irrespective of whether they have any briefing notes in front of them).

Second, it’s helpful to split things into the BE (before election) and AE (after election) eras when making an assessment of where we are. The difference is stark, not just in terms of ‘optics’ (yeah, I used that term), but increasingly in matters of policy.

The Before Election era – the best Brexit is a quick Brexit

The BE era was hard, uncompromising and (from a City perspective) semi-detached from reality. The strong language on immigration – from Cameroon Remainer Amber Rudd no less - at last year’s Tory conference was jarring to liberal Tories, the business community and to hypersensitive European observers and media alike. The Chancellor was slapped down for suggesting that the path to Brexit may be neither quick nor straightforward. The subsequent departure of Sir Ivan Rogers as Ambassador to the EU in early 2017 showed that Number 10 was not interested in the views of a long-standing EU insider telling them ad nauseam that Brexit would be a long and tough exercise. The business community was kept at arms’ length and, if we are honest, went to ground – still reeling from June 23rd. There wasn’t a great deal of detail on what the UK was seeking but it created a mood. Theresa May’s approach, when finally articulated in some detail in her Lancaster House speech back in January, was unequivocally one of a quick break. The ‘no deal is better than a bad deal’ soundbite encapsulated this period. Either give us a deal in short order, or we will walk away.

The After Election era – the new gradualism

The result on 8th June collapsed everything the Government thought it knew about the world and handed the architects of the Lancaster House position their P45s while empowering the opponents of what my boss Iain Anderson calls a ‘c**p Brexit’. Yet, until Theresa May went on her summer holiday, there had been little evidence that fundamentals of the Lancaster House position had been abandoned in substance. To be clear, even now there is no suggestion that the final destination - leaving the Single Market and EUCU - is up for discussion at all (though some of the more suspicious Brexiteers might think that a long transition is a Trojan Horse for Brexit reversal).

Nevertheless, the government has clearly softened its approach on citizens’ rights, immigration more broadly, the length and nature of transition and – it appears – is preparing to give ground on budget contributions as well. As an aside, my guess is we’ll arrive at a bill of a nice round 50 billion euro, not that it will ever be presented as such. This can, in large part, be put down to the way business-friendly, pragmatic Remainers (Philip Hammond, Amber Rudd) and like-minded Leavers (David Davis) appear to agree that the journey should be given as much thought as the destination. About time, because there wasn’t much evidence of this in the previous 12 months.

This view appears to recognise that a multi-year, fudge-tastic transitional period is necessary because at the very least the UK simply cannot build the institutions, systems and processes required to become a fully independent nation quickly enough. Moreover, a relatively smooth transition will protect the UK from an unnecessarily large economic shock. It is also the essential precursor to the bigger prize – which is agreeing decent framework for the UK’s future relationship with the EU. That cannot happen quickly – and it won’t happen in an atmosphere of acrimony and recrimination - so it’s useful to secure more time in which to agree this.  

There appears to have been some resistance to this from some of the more ideological Brexiteers (Liam Fox and, it seems, Boris Johnson). They seek a quicker, less tapered exit. But I sense that this is a battle which is being won by the gradualists.

A note on Labour

Labour’s position on Brexit remains deeply ambivalent. At an event hosted at Cicero last week, Keir Starmer called for tariff-free trade with the EU and a close relationship and said ‘no options should be off the table’. Except, presumably membership of the single market (which his boss has recently ruled out in quite clear terms and enforced a three-line whip against). If anyone can explain to me in precise terms where Labour’s position actually differs from the Government’s at the moment, I shall be pleased to hear from you.  The best piece of writing on this is from CER’s Simon Tilford, on the Limits to Labours Constructive Ambiguity over Brexit.

I hope you all have a restful and relatively Brexit-free summer.

Behold the Brex-o-meter

A friend reminded me that it is an auspicious day in the history of Brexit. Yes it's 365 days since the Rally for Leadsom. It is one of those moments that encapsulates just how weird British politics has become since 23rd June last year. 

I thought I would mark the occasion with a missive for you all.

My last posting in March (tempus fugit) mooted the possibility of an early election. When Theresa May pulled the trigger on an early election in late April, my colleague got a pay out on his bet (a 7/1 shot) and I felt pretty pleased with myself for having set out well in advance the arguments for going to the country, even though I didn't think she would go through with it. By Jove how she must regret that decision now.   

If May had got the expected fifty-plus majority, the Brexit die would have been cast. The victory would have been a mandate for hard and relatively uncompromising approach set out in the Lancaster House speech, with the attendant risk that the two sides would end up so far apart that the UK would walk away with no deal at all. George Osborne was correct in his analysis that this was a Brexit that put sovereignty and immigration control above the economy. 

While it pains me to see the Conservative party in such a dilly of a pickle, I can't say I dislike what this disastrous election campaign has given us from a Brexit perspective: a proper stooshie about the kind of Brexit we should seek. This is the row that we should have had in the UK before Article 50 was triggered. But that discussion was entirely shut down. Instead we are having that discussion as the negotiations begin. This is not ideal, but it is better than no debate at all.

So all bets are off now. The political environment is so unpredictable that anything can happen. Frankly, I think I wouldn't even rule out the UK remaining inside the EU (unlikely as it is). For this very reason I have developed the Brex-o-meter to track where the UK position is and what could happen next. 

You can check it out by clicking below:

Click on the image to see the Brex-o-meter

Click on the image to see the Brex-o-meter

The Spring Budget was so Philip Hammond

Here's my take on the Budget yesterday, as published in Cicero Group's special report....

An exciting cover and a snazzy name

An exciting cover and a snazzy name

When Philip Hammond spoke of the Brexit rollercoaster at Conservative Conference in October, he probably didn’t anticipate that the economic outlook would be so benign for his Spring Budget. Growth is higher than expected, employment is robust, borrowing is lower. Project Fear it ain’t.

While this gives Hammond a bit of space, he has been careful not to allow the positive message to slide into hubris. For a start, he is all too aware that OBR forecasts are highly sensitive to growth projections and growth forecasts are notoriously fickle. If UK consumers stop borrowing to fund consumption as they have been, or the housing market stutters, then the fiscal situation could deteriorate quite quickly leaving him in a difficult spot in the autumn.

Brexit looms over all, but was barely mentioned either in the statement or the Red Book. That’s because this was a Budget that focussed primarily on domestic challenges. The most important of these is addressing the funding crisis in social care. Hammond has managed to find some money to help provide relief to hard-pressed local authorities, but a long-term solution must be found. Regardless of the solution the Government chooses, this is possibly the most important long-term social policy discussion since the Turner Commission reforms to the pension system. The Government will publish a Green Paper on funding later this year, but in an emphatic and pointed pledge, the death tax will not be an option up for consideration.

This budget was so Philip Hammond

George Osborne’s love of the ‘big reveal’ was the cause of a lot of heartburn both inside Government and outside. Conversely, Philip Hammond has taken much of the drama out of fiscal events, though he has an unexpected knack for delivering a good joke. Those who have seen him speak often will recognise the wry sense of humour increasingly finding its expression at the despatch box. He delivered some zingers today, mostly at the expense of Labour. It’s clear he’s enjoying himself.

Though deficit reduction remains the sine qua non of fiscal policy, there is also the emergence of a distinct ‘Hammond-ian’ approach in which difficult reforms will be made if they tackle unfairness in the system. Take also the bold statement that the Government would not shrink from raising taxes if needed – and that these changes would be clearly spelt out.

For example, a long section of Hammond’s statement carefully addressed the imbalance in taxation between self-employed and employed people. Seemingly breaking a Conservative manifesto commitment – and ditching reforms proposed by George Osborne – he has tweaked national insurance rates so that the self-employed will pay more from April 2018. This will face stiff opposition in some quarters, and it’s almost inconceivable that Osborne would have chosen a similar route; his visible wince at the announcement was telling. Hammond is also reducing the taxfree allowance on dividends to try to close a similar gap in taxation for owner-directors and company employees. This is probably the first step in a longer-term equalisation of tax treatment so that individuals cannot use their employment status to arbitrage the tax system. It will make the system fairer, but it was certainly not the path of least resistance.

Productivity

If the Chancellor is enthusiastic about one thing, it’s productivity and particularly the role of technology in boosting it. He has long said that UK workers are less productive than those in France, Germany and Italy. The UK’s competitiveness is derived from the fact that the British simply work longer hours to produce the same amount. This is not a new problem, but Hammond is unusual in the fact that he has made it a signature priority. The two pillars of Hammond’s productivity offensive are training and infrastructure. There is a package of measures today to try to address this including the introduction of new T-Levels, £270m of funding for cutting-edge R&D and 1,000 new PhD places and fellowships in STEM subjects. There is also some cash for 5G, fibre roll-out and the alleviation of road congestion.

The future

A low-key Spring Statement to update on the public finances and an Autumn Budget is the new fiscal rhythm to which Whitehall will march. Hammond has again showed he has no intention of making policy on behalf of other members of the Cabinet. In any case, the Chancellor has a number of long-term challenges to deal with, of which Brexit is only one. Brexit is important, but for most people making sure their loved ones are looked after in their later years – or seen by a doctor when they are ill – is a more immediate and visceral issue. All politics is local, and once the public’s attention has moved on from Brexit (as it will) it will come back to what they see every day: public services.

Birmingham and the great hard Brexit feedback loop

At conference Theresa May announced that she will trigger Article 50 by the end of March 2017 and that a Great Repeal Bill  will be brought forward at the next Queen’s Speech. In a piece of spin Alistair Campbell would be proud of, this Bill will actually incorporate the entire acquis communitaire into British law at the same time as shredding the European Communities Act.

While some were calling for more time before pressing the big red Article 50 button (notably one Mr George Osborne of Notting Hill) in order to wait for the result of French and German elections, there is some logic in the move. First, it means the Art 50 negotiations are completed one year ahead of the expected May 2020 general election. Second, it means the UK will not be participating in the 2019 European Parliament elections – which would have been a ludicrous charade. Third, it anchors Brexit to a firm timeline – which countries such as France are equally as keen to see as Brexit campaigners here at home.

May and her senior team faithfully kept to the line that there would be no running commentary on the negotiating position. And they kept on message at the events I attended, except for Liam Fox who we all know is itching to get out of the European Customs Union and as quickly as possible and can’t hide the fact. Nevertheless, the Government’s two red lines were the same as they were before conference – control over borders, and an end to the jurisdiction of the European Court of Justice. The UK will seek the closest trading ties possible within these parameters. While HMG’s position more or less rules out EEA membership, it leaves quite a few avenues open so long as the EU 27 are in negotiating mood.

But despite this, as the conference went on a sort of hard Brexit feedback loop started to form in which the idea that the UK was going to cut and run just seemed to take on a life its own. Why all the flapping, given that there was no new announcement except for the date of the trigger of Article 50 and a pretty prosaic bit of legal tidying up? I will hazard a guess or two:

  • Team Brexit were simply more prominent at conference and they were certainly chattier in the bars and backrooms
  • The change in tone from Cameron to May was so stark and uncompromising – especially on immigration – that – rightly or wrongly - it gave a sense that she couldn’t possibly favour anything other than a hard Brexit
  • Chancellor Philip Hammond’s statement of the obvious that this ride is going to have some ups and downs seemed to be to some a huge revelation
  • And media, EU and overseas observers were visibly taken aback by how quickly and completely the Conservative party had pivoted to the brave new world of Brexit  

All this drove a sort of narrative that the Government - which remember is not offering a running commentary - didn’t really do an awful lot to assuage. After all, everyone is playing high stakes poker here. But the substance rather than the presentation is now as it was then. Nevertheless, markets put the pound under such a lot of pressure that the PM’s TV interviews last Tuesday sought to reassure the world that the UK did not want to bail completely on Europe. Ladies and Gentleman, meet Her Majesty’s Loyal Opposition – the Sterling/Dollar market:

The wild drop in Sterling’s value on thin volumes overnight on Thursday hasn’t helped the jitters. In response the Chancellor on Friday told journalists at the IMF and World Bank meetings in Washington D.C. that everything was still negotiable- including continued membership of the Customs Union. But he also noted that he expected there to be more of this turbulence in the years to come. To misquote James Carville, if I am reincarnated, I want to come back as the FX market.