Sturgeon Loses The Plot

Scotland has delivered a strong, unequivocal vote to remain. The vote here makes clear that the people of Scotland see their future as part of the European Union.’ Nicola Sturgeon - Scotland's First Minister; June 24, 2016

So spoke the Scottish First Minister the day after the referendum last June. Anyone puzzled as to why she yesterday announced her party’s intention to pursue IndyRef 2 should be under no illusion about what the Nats are about. They are hard coded to pursue independence at any moment of opportunity and to do so all the time. Logic, good sense and good governance come way behind their short, medium and long term pursuit of that single aim. In this context, soft or hard Brexit are simply an irrelevance. If it wasn’t this torch they would find something else. The ‘once in a generation,’ mantra during the last referendum was insincere. It was simply a tool to push undecided’s over the line.

Without question, many Scots are firmly in the independence camp and probably always will be. For some it is a rational conclusion that they have come to having weighed up their optionality. For many, it remains an emotional response in tune with how they see their position in relation to the rest of the UK and the rest of the world. Unfortunately few, especially those leading the SNP, can present an economically coherent case for independence which would underpin the political case. The SNP’s manifesto for independence in 2014 estimated oil revenues at £7.9bn. Following the fall in the oil price that number is some 90% or more lower. An independent Scotland simply could not absorb such a financial shock. The Scottish governments own figures show that they spend £127 for every £100 raised in tax, a ratio that is difficult to find anywhere else in the developed world. For every £100 pounds spent per person in England, £120 is spent in Scotland. The SNP will attempt to talk through, over or round the fact that Scotland’s deficit at 9.5% of GDP is the worst in the developed world. That number alone would keep the door to Europe firmly slammed shut even if resistance from some European countries such as Spain did not already exist. Had Scotland gained independence the country would now be staring down the barrel of slashing and burning state spending by 15% or raising taxes by 19% or a combination of the two. The quantum of those rises would be to raise the basic rate from 20% to 39% or VAT to 40%. Alternatively, an 82% cut in health spending would get them there. It is difficult to think of any country that has embarked on such a vicious austerity programme in peacetime. Regardless of oil revenues being high or low, it is a fact that Scotland has run a deficit every single year since devolution in 1999 and the deficit has deteriorated over recent years, and is now running even higher than during the aftermath of the 2008 Crash. Even in 2011-12, when the North Sea oil price peaked at $125 per barrel, Scotland's deficit was 5.7% of GDP.

So why go now? Bearing in mind that to Nat’s any opportunity is a good opportunity, the SNP are not actually in the commanding position they enjoyed three years ago. They have been in government now for 9 years and it is slowly dawning on Scottish voters that the SNP is not perhaps as capable at running a country as they are election campaigns. Despite the constant lecturing and grievance chasing it is apparent that while there is an open debate and willingness to explore new ways to improve public services efficiently in England, and which are meeting with some success especially in education for poorer children, few such improvements are evident in Scotland. Partly because the SNP are wary of upsetting some of their core constituencies, such as teachers, their solutions always veer toward more centralisation, more money, more government. The Scottish electorate are alert to this and the popularity of Sturgeon is consequently on the wane with the Scottish Conservative leader, Ruth Davidson, somewhat implausibly ahead of Sturgeon in the approval ratings.

Sturgeon’s move is simply irresponsible. She is putting her party’s historic political aims above the best interests of Scotland. The timing is theatrical. To demand a referendum as Brexit is being finalised will create an unnecessary distraction both to the UK and to Europe. I can guarantee the last thing the EU will want or need, if it still exists then in its current form which I very much doubt, is a small country with a banana republic sized deficit clinging to its coattails. The UK government will though acquiesce and offer a referendum but probably after Bexit, that is, after 2019. The SNP will stamp their feet and have sequential hissy fits about not being taken seriously or ‘insults to Scotland,’ but the only people who will take them seriously will be themselves. A growing number of Scots are fed up with their holier-than-thou ranting and simply want things done that matter to them and done properly. The English meanwhile are less and less animated about independence and that is more evident the further north in England you travel. As the English demographic has changed so have traditional ties to Unionism. Millennials for example, for the most part, see self-determination as an entirely fair and reasonable aspiration; ‘if you want it, have it.’ It would suit the SNP to have a much more robust response from the English but I think they will be disappointed. In fact, the quieter and more mature arguments that are presented the more likely they are to enrage them all the more which is kind of satisfying.

So, what should Sturgeon have done?

Seen through an SNP lens, I see Brexit quite simply as a lost opportunity to quietly build a firm economic platform for succession on a ten year timeline. Instead, all Mrs Sturgeon has succeeded in doing with her ill thought out announcement is to put a cap on Scottish property prices, to disincentivise long term inward investment and put a question mark over firms and central government looking at expansion in Scotland. In her stilettos, I would have done the following,

  • Seen Mrs May and offered quiet cooperation in return for,
    •  No change to the Barnett formula
    •  More shipbuilding orders
    • No further defence reductions in Scotland
    •  Inward investment incentives from Westminster for areas of special need
    •  HMG help and assistance overseas in capturing inward investment
    • (insert other items from economic shopping list as desired)
  •  Stepped down from the soapbox marked ‘grievance,’ and focused on internal matters pertinent to Scots; employment, housing, education, NHS Scotland etc. Adopt a stance of industrious humility and work tirelessly to organically improve the Scottish economy
  • · Stop obsessing about the single market (which, after all, was a creation of Mrs Thatcher through her former trade Secretary Frank Cockfield!). Scotland is in a single market. It is called the UK. Stop being emotional and start being pragmatic. Is it really sensible to leave the UK and then have your economic relationship with your biggest trading partner, (64%) negotiated by Brussels
  • Immediately sterling was devalued thrown open the doors to the country to visitors from across the world and aggressively pursued the tourist dollar / Euro / Yen. Pursue them with a generous international marketing budget and do so on a three year view
  • Dial back the incredibly short sighted pious remarks made about the US President and make friends. Usually, US Presidents go straight to Ireland and effect a sort of Plastic Paddy persona, playing to the gallery on their own East Coast and Chicago. A US President with a Scottish mother, who actually likes Scotland a lot, doesn’t come along very often. A successful visit to Scotland by Trump could unleash a tsunami of tourists from the Southern States and at least a reasonable shot at business investment.
  • Raid every educational establishment in the UK and US, business and the media for the best Scots, (or other), minds available and begin to establish the intellectual and economic case for inward investment and beyond that, independence. It simply does not exist at the moment.
  • Monitor Brexit and quietly learn from negotiating mistakes and inevitable errors of judgement.
  • Be humble and learn from success stories such as education in East London instead of dismissing everything south of the border as irrelevant.

In summary, Mrs Sturgeon and the SNP should cease and desist generally from the hectoring Calvanistic tone adopted in every interview or speech. Scots may be proud and they may be romantic but most are also gritty realists who can see through the flannel, (the SNP’s own independence newspaper’s circulation is down 30% in 12 months). They can also see that the SNP are not making any friends. Friends that economically at least, Scotland very badly needs. The big danger for Scotland is that the rest of the UK simply gets worn down by the SNP’s incessant moaning and just gives in. That would be tragic for Scotland and tragic for the UK. Having a next door neighbour throwing itself into economic Armageddon would not be good for any of us. Referendums are unpredictable but I’ll be hoping for 3/3 and will be relying on old fashioned Scots common sense when I place my bet today. Growth in Scotland has been put on ice with a breathtaking display of selfishness and arrogance which potentially sets Scotland on a road with a destination signposted ‘Catastrophe.’  It need not be so.

Europe; Coming Unglued

The financial media have, as usual, been watching a different movie.

The financial media have, as usual, been watching a different movie.

A friend recently said in reply to a comment, 'I think we're going to hell in a basket.' She is probably right but not for the reasons she thinks. My friend was referring to the consequences of Brexit. I am referring to the structural issues which are baked into the Eurozone and which are coming unwound at a pace which is very likely to accelerate throughout 2017. Standing close to an exploding bomb is never a good idea. The further away we are the better although it will take more than the English Channel and the political aspiration, if not commitment to leave, to save us from at least some of the backblast.

Political risk in Europe appears to be growing. The truth is, it never went away. It was simply subdued temporarily by successive ECB bailouts which have rescued (some) ailing banks but have done nothing to correct the systemic flaws in the Euro which have ruined southern European economies. Now, as political risk takes front and centre stage with Le Pen soaring in the polls the underlying economic risks which have been fermenting for years are at risk of ripping loose. The means of transmission are again, most likely to be the banks. You see, nothing has really changed.

We saw during the last period of Euro stress in 2011-12 that a sell off in bonds hit the balance sheets of European banks who tend to hold their own governments debt which increased their need for bailouts. In turn, that hits depositor and investor confidence which damage the banks even more creating a death spiral requiring direct central government intervention. As you may have guessed, the three countries with the banking sector most exposed to their own governments debt are Italy, Spain and Portugal.

With the ECB scaling back its bond purchases and the rising incidence of inflation yields have been rising. More importantly, spreads have been widening reflecting growing risk between member states.

Markets have so far placed a low delta on a Le Pen victory in France. Markets are being naïve. The French electoral system is designed to keep the door firmly shut against extremist parties but with the other candidates carrying baggage of their own her defeat is far from certain. Italy’s election meanwhile could result in a government under the influence of the Five Star Movement of the Northern League, both of which are committed to leaving the EU. Markets would not wait for an EU referendum result in these countries. Merely scheduling one will result in financial chaos. Meanwhile another Greek crisis similar to 2015 looks baked in when they run out of money in July.

Investors are hardened to serial crisis in these countries but are broadly complacent in their thinking that after a lot of fuss there will be another bailout and normal business will resume. Italy’s banks still hold 276bn in bad loans and the countries debt to GDP ratio stands at 134%. With 12% of the country’s bank assets being held in national debt there is a financial death spiral just waiting to be triggered. A small issue here is that Italy is the third biggest economy in the Euro block. That won’t be an easy fix.

Portugal meanwhile is back where it started with debt as high as it was in 2010. The 78bn Euro bailout there did not reverse economic trends. It did though, save the banks, for now.

The ever sensible and cautious Germans have been trying for years to neutralise this threat, first with a proposal to limit the amount of domestic sovereign debt that a bank could own. Germany failed. The second German proposal was adopted. That was to require that bank bond holders take a draw down, to zero if necessary, before government money could be used to bail out. Unfortunately, when Banca Monti Dei Paschi ran onto the rocks in December the rules were bent out of shape by using out of date stress tests and reimbursing debtholders saying they had been misled. That prevented a political fuss in Italy but has left the potential financial death spiral in place.

Other ideas, mostly based on the ‘bad bank,’ approach have circulated in recent years and include creating two classes of bonds, pooled together from the Eurozone countries, and divided into ‘safe,’ and lets call it ‘less safe.’ Loosely, that would be Germany plus one or two other countries and the rest. Unfortunately, the Germans are not big fans of either of these plans or any of their derivatives. The Germans in fact have been playing a quite crafty and streetwise game and who could blame them. German banks have pulled back their lending to non-German companies in the Eurozone over the past few years. Their appetite for shared risk is diminishing and the banks preference for keeping their money inside their national borders reflects this.

Germany itself has its own handcart of problems. Germany will of course work hard to keep the Eurozone together but it is not without its critics from both within and from outside. Germany is under constant criticism for having the largest trade surplus in the world, something that has not gone unnoticed by the Trump administration. It is ironic that Germany is the most powerful member of the very institutions that were imposed upon it in post war Europe. Indeed, the Euro was created years later in part to tie a reunified Germany to France and losing the Mark was the price paid for reunification. The trade off for Southern Europe in being unable to devalue was access to Northern European borrowing rates which allowed much needed structural reforms to be put firmly on the back burner.

Monetary union with fiscal union blocked potential wealth distributing mechanisms and acceptance of risk sharing required Southern Europe to gift their fiscal policies to Brussels. The Eurozone crisis and subsequent austerity measures have created fertile ground for growing resentment which has fanned the flames of populist movements which are gaining traction across the Eurozone. The refugee crisis and local political scandals have poured kerosene on an already politically volatile state. Growing recent civil unrest in France, (not much reported in the UK), and less violent demonstrations in Germany, reflect the heightened political volatility.

Political and economic structural tensions in Europe will continue to rise across the Continent in the coming months. They may well be contained and then abate. Protectionist rhetoric from Washington however complicates matters somewhat and are anathema to Germany’s export led economy. How the global economy, which has been designed and built around the free movement of people, goods and services reacts to fundamental changes driven by Washington remains an open question. Certainly, a much stronger dollar would be deflationary and wipe out the glimpses of inflation we are now seeing and that has a world of implications starting with Emerging markets and the $9tr of foreign dollar denominated loans which are ticking away.

With, for the moment, inflation at the gates and with bond yields rising in France and the periphery, the increased cost of debt repayments will do nothing to stabilise matters. Equities meanwhile have been skipping along without a care in the world. They may be about to stumble. For what it is worth, I firmly believe that the whole rotten construct is closer than most believe to coming completely unglued. Let’s hope that the financial boffins at the Bank of England are earning their money and are stress testing the banking and clearing system to destruction. It won’t be so very long before risk managers across the City are once again obsessed with counter party risk.

As a quiet postscript, those investment banks such as HSBC and Morgan Stanley who are making noises about moving some staff to Frankfurt and Paris, good luck. You are going to very much need it.

Back of the Net

Mrs T puts the ball squarely in the back of the net in her Bruges speech made in 1988. The historic speech, spawning The Bruges Group, was delivered at Bruges in September 1988. Famously rejecting the centralised, unaccountable, federal Europe of Delors, Margaret Thatcher proposed instead a wider, decentralised, outward-looking democratic Europe of independent, freely- trading and cooperating nation states.

Brexit Ahoy!

As June 23rd rumbles into view the debate, such as it is, is reaching new levels of hysteria with the Prime Minister this morning citing the increased risk of a ground war in Europe as a reason not to leave the EU. That follows utter nonsense promulgated by ex heads of intelligence over the weekend in a letter to the Sunday Times, one of which has already been discredited with the disclosure that he said completely the opposite in a recent private conversation. The spooks, whose entire careers are based on disinformation and manipulation, should get back in their Box. 

The problem for the Remain campaign is that the British voter has so far been implacably unmoved by scare tactics and misinformation from both sides. It is a bigger problem for Remain because they need to mobilise their voters on the day whereas the Brexit camp are already motivated to make an active choice. Remain will also suffer because many students, who generally are more relaxed about the status quo, will have left university, some will have cocked up their voter registrations and be unable to vote from home, others will be travelling while some will find it too much trouble to get out of bed. 

In general, the campaigns have been unimaginative and negative. That largely reflects the quality of our politicians and comes as no surprise at all to any of us. Neither side is really pitching a positive vision of what their favoured outcome would look like. There are no sunlit uplands to behold, only scorched earth if we don't vote their way.... apparently. 

There is however, a genuine thirst for knowledge out there, certainly among people to whom I have spoken, and a frustration that there is no balance sheet of facts on which to base a fair and measured decision. That is, voters seem to me to be treating the referendum with much more earnest reverence than are either the campaign leaders or the media. 

It has long been my view that on the day most voters will disregard the hyperbole, walk into the voting booth and go with their gut instinct. Like it or not, immigration will be a big factor in nudging that instinct. Many of our citizens see their life chances and opportunities being impacted by unrestricted immigration and the flavour and character of their homeland changing in years when before it would have happened imperceptibly over decades or centuries. Many Remain campaigners simply will not accept this but then many of them are those least affected by immigration or benefit directly from cheaper labour. I am well versed in the advantages of selective immigration just as I am of the unintended consequences of the current situation in which we find ourselves. No one is suggesting we slam the door shut forever but the current policy is simply unsustainable. Here then, are some of the facts from Migration Watch UK that will be weighing on voters minds,

  1. The current scale of migration to the UK, 330,000 a year, of which roughly half is from the EU, is completely unsustainable.
  2. As a result of this mass immigration our population is projected to rise by half a million every year – the equivalent of a city the size of Liverpool – for as long as immigration is permitted on the present scale.
  3. England is already twice as crowded as Germany and 3.5 times as crowded as France.
  4. The additional population growth makes congestion worse and adds to the pressures on public services. This comes at a time when public spending is being reduced.
  5. One in four children born in England and Wales is to a foreign born mother. The rise in the number of births has put pressure on NHS maternity services.
  6. It has also led to a shortage of school places. 60% of local authorities will have a shortage of primary school places by 2018.
  7. The UK has a serious housing crisis. Mass immigration is the main reason for the additional demand. We must build a new home every six minutes for the next 20 years to accommodate the additional demand for housing from new migrants.
  8. Population growth on this scale renders integration of newcomers virtually impossible.
  9. Three quarters of the public want to see immigration reduced and half of them want it cut by a lot.
  10. To stop the rapid rise in the UK’s population size, net migration would have to be reduced to well below 100,000 a year. It is currently at over 300,000.

The Remain campaign also makes the galloping assumption that all is well within the EU. It most certainly is not. The EU is rotten to the core and is unravelling from within as events in Greece over the weekend demonstrate. 66% of Germans are now against Merkel and there are many across Europe who see Brexit as the potential catalyst to shake down the EU and force it to get it's house in good order. Yes, we might actually be a force for good in effecting change for the wider European community. 

British citizens have not had the opportunity to express an opinion on the EU with referendums on treaties as the citizens of other nations have. This democratic deficit has created an under current of unease about Europe and the obvious implication in the here and now that a vote to Remain will be forever. I want out but then I always have and am therefore not typical. My one real concern, and this is a biggie, is that while I have no qualms about the ability of British industry to compete, I have severe doubts about the quality of our civil administrators and politicians to execute Brexit efficiently. Just as we have cocked up our participation in Europe by not sending our best people to European institutions, we could easily underplay the execution risk of getting the mechanics of leaving right. We will need to muster our very best people who will have to be at the very top of their game to get it right. 

A Good Day

Mr Cameron has done a good thing in fulfilling his promise and offering us a straight answer in-or-out referendum on Europe. While I don't agree with his personal view, I respect him as a man and a politician for having the courage to face down what has been a corrosive issue in British politics for a generation. Some would say it has been corrosive for Britain but then we have the referendum to settle the issue. He at least has done what none of his predecessors had the confidence to do.

Westminster and the media are loving the whole thing. They relish plots, intrigue, alliances, broken loyalties, subterfuge and everything else that goes hand in hand with the self feeding circus they live off. After all, this is why they all did PPE at Oxford and this is their moment. Well, actually... sorry to rain on your parade boys and girls but it isn't. The rest of us have been waiting an awfully long time to make ourselves heard and I suspect the sound is going to rattle and reverberate across the world on June 24th at a level that will spin the needle off the clock. My view, for what it is worth, is that the leave vote will overwhelm those who wish to keep the status quo by a margin which Westminster, and the EU, are simply not prepared for. 

We have already heard many short sound-bite arguments from both sides, usually in less than 140 characters. Much of what is said is simply made up and has no basis in fact. The principle tactic employed by both sides appears to be one of who can scare us the most. Well it won't wash. In the voting booth most citizens will disregard all the hysteria that has been pumped out and will simply apply their own reasonableness test based on their own experience of family and community around them. No nation on earth is better equipped to be reasonable, it is what we are. That gives me confidence.

Nonetheless, in a modest contribution to the discussion allow me to share an illuminating discussion paper on Brexit written by former colleague Dr Savvas Savouri of Toscafund, in which he deconstructs some of the more alarmist claims being banded around the television studios by the Hampstead and Notting Hill crowd. It is worth taking the time to read.