EU: What Next?

 

Whilst the word 'historic' has rarely been used so frequently over the weekend, it is clear that Friday will be one of those significant days in all our lives that we will never forget. This is as close to a revolution as we've experienced in my lifetime. And it's only just begun.

 

The economic impact will be far reaching and there will be key areas to watch:

 

Exchange Rate

The pound has already taken a battering and the value against major currencies is a true indication of foreign confidence in the UK. The value of sterling against the dollar reaching its lowest level since 1985 tells you all you need to know and will have a huge impact on UK imports / exports. As oil is bought in dollars, expect to be hit at the petrol station soon.

 

Investment Markets

Share and bond markets are also a good indicator of confidence in an economy. Clearly with political and economic uncertainty as a result of leaving the EU, investment markets are likely to be volatile and there could be more panicking to come. 

 

Foreign Investment

Leaving the EU is hardly an invitation for foreign investment into the UK. In fact, it makes little sense to invest in the UK with so much uncertainty over the next 2 - 3 years. This will have a significant impact to many UK businesses. In addition, it wouldn't be a surprise to see multi-national companies move their UK operations to a more stable country.

 

Bank of England

It is clear from the banking collapse that the Bank of England will have a significant role to play. Their decision making will determine whether our exit can be orderly or if it will be hugely volatile / panicky. A key short term aim over the next 18 months is to take appropriate actions to avoid the UK going into recession. Expect interest rates to go to 0% and significant funds being made available to prop up the banks again.

 

Housing Market

A measure of consumer confidence in the UK has always been the housing market. When the housing market is moving and prices rising, the confidence this brings sees consumers spend. However, when there is economic uncertainty, the housing market dries up, prices start to fall and we stop spending generally. The UK economy is very dependent upon consumer spending and a slowdown would escalate a recession.

 

So that's the economic outlook. However, it is the political legacy of the vote result that 'amuses' me the most. Last year we democratically elected our Prime Minister. Last week we democratically decided to leave the EU. However, the byproduct from Friday is that we will have a new Prime Minister by Autumn who will not be democratically selected and instead will be chosen by Tory back slappers. The new non-democratically selected Prime Minister will then serve for a longer period than the democratically elected one. An undemocratic democracy......who'd have thought it!

 

The fallout will be far reaching and I fear for the many losers of the vote decision. Let's hope that a political leader of worth is chosen that can lead us through the minefield of leaving the EU. 

EU: What Matters Most?

We are just hours away from voting and the results of the EU in / out referendum being known.

 

Whilst there are so many other issues on the in / out argument, political campaigning / spin and the media have effectively made it come down to two main points – migration and economic benefit.

 

I wrote in February 2016 about the financial implication and figures behind Migration (Brexit: It’s Not All About Immigration http://stevesmithlive.blogspot.co.uk/2016/02/brexit-its-not-all-about-immigration.html ) which I hope gives some perspective.

 

I also wrote a few weeks ago about the financial cost to the UK to be part of the EU without there being any hard facts on the financial benefit (The Opportunity Cost of EU http://stevesmithlive.blogspot.com.es/2016/06/eu-opportunity-cost.html ).

 

It is disappointing that so many of the key issues have barely seen the light of day but that is the state of politics in modern day Britain. However, my biggest disappointment is how little air time has been given to informing the electorate what a ‘new world’ exit of the EU would look like so that we could make an informed decision on which earns a vote.

 

At the end of the day, it all boils down to what issues matter to you most and who you believe.

 

Happy voting!

 

Incompetent Or Untrustworthy?

 

I wrote as recently as last month (Whitehall Shortfall http://stevesmithlive.blogspot.co.uk/2016/05/whitehall-shortfall.html) about my concern that the Cabinet Office had made a right old royal financial hash and that we should be justifiably concerned on their ability to manage our money.

 

Now, I naively assumed that this was down to incompetence. However, the latest news the Government has no record of how it spends £2.5 billion each year on public policy research leaves me to consider if there are sinister motives. Unethical politician behaviour……surely not!

 

In short, the Government has no central record of around £2.5 billion a year it spends on research commissioned to develop public policy. A recent inquiry found that only 4 out of 24 Whitehall departments maintained a database of research they had commissioned.

 

If I had my “the Government is bloody incompetent” hat on then I would simply shake my head at the inefficient and unorganised shambles another Government department is in.

 

However, with my “you can’t trust them lot at Westminster” hat on then the lack of transparency raises concerns that ministers and officials are quietly ‘burying’ research that they do not agree with.

 

Incompetent or untrustworthy? To be fair, neither should be acceptable yet somehow we shrug our shoulders and accept it.

 

It’s farcical really.

EU: The Opportunity Cost

 

The Oxford English Dictionary defines ‘opportunity cost’ as: The benefit that is sacrificed by choosing one course of action rather than the next best alternative.

Or to put that another way……the benefits you could have received by taking an alternative action.

 

Which leads us nicely on to cost to the UK of EU membership or should that be ‘opportunity cost’?

 

So what exactly does it cost us to be in the EU? Here are the big numbers for you:

 

1.     The UK's forecast (it is being finalised currently) net cash contribution to the EU budget for 2015 is £8.5billion but the actual amount for 2014 was £9.8billion.

 

2.     The UK contributed 12.5% of the total EU budget in 2015.

 

3.     Of the 28 countries in the EU, 2/3rds are takers (receive EU subsidies).

 

4.     Of the 1/3rd givers, the UK is the third largest (i.e. only 2 countries pay more).

 

 

Is it any wonder that the EU is desperate for the UK to remain?

 

Contributing £8 - £10 billion a year is not abstract. It's a fact & represents the extra cash we pay to be a member of the EU.

 

But here is where all political parties in the EU in / out debate fall down……what is the financial benefit of EU membership? We know the cost. We understand the cost. Now tell us the ‘benefit’ figure so we could then understand if the negative issues surrounding migration, EU Law making we are forced to use, etc. is worth the sacrifice for our greater financial good.

 

Only then can we begin to understand the opportunity cost. Only then can we (the electorate) make good, honest and valued judgements to base our EU in / out vote on.

 

Not too much to ask is it?

Haldane Pain

 

 

There has been quite a kerfuffle in the economic / pension world over the past week.

 

In short, Andy Haldane who is the Bank of England’s Chief Economist (he’s a big deal) decided to go public with his opinion that “I confess to not being able to make the remotest sense of pensions”.

 

Oh dear.

 

Not having a ‘foggy’ about pensions is pretty damn important given that there are hundreds of billions sloshing around in those darn pensions. Just a 1% collective change in how these pensions are invested could cause a financial collapse the likes of which we have never seen before. Or just a 1% collective withdrawal from pensions would see inflation reach 15% within a heartbeat. Or there is the financial impact of the State Pension rising from age 65 to 66, 67 and 68. Just a couple of thoughts off the top of my head that make pensions pretty important don’t you think?

 

Being able to make sense of pensions should be the bear minimum prerequisite for the role of a Chief Economist surely?

 

This is the same man that was voted one of the ‘most influential people in the world’ by Time magazine in 2014.

 

No further questions your honour.