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London Assembly Economy Committee – Tuesday 10 July 2018

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London Assembly Economy Committee – Tuesday 10 July 2018 Appendix 1 London Assembly Economy Committee – Tuesday 10 July 2018 Transcript of Item 6 – Preparing London for EU Exit Susan Hall AM (Chairman): Today’s main discussion item is preparing London for the United Kingdom’s (UK) exit from the European Union (EU). I welcome our guests. We have Ben Gardiner, Director of Cambridge Econometrics, and Roger Bootle, Chairman of Capital Economics. Lord Andrew Adonis is going to be late, I am afraid, but hopefully not too late. Dr Graham Gudgin is an Economist at the Centre for Business Research, Judge Business School, University of Cambridge. Welcome, gentlemen. If we can come to our first questions and if I can start with you, Ben, given what we know about the Government’s plan for leaving the EU, which scenario in Cambridge Econometrics’ study aligns the closest to the deal the Prime Minister is hoping to secure with the EU? Ben Gardiner (Director, Cambridge Econometrics): Yes. I have had a look at the three pages that have been released thus far and, without a proper [Brexit] White Paper, it is difficult to say conclusively too much about it. If I just draw your attention to the slide on the scenarios, which is part of the pack, we did five scenarios, as explained, one of which is a business-as-usual type of thing if the referendum had not happened and things had continued more or less along the trends of what they were following pre-2016. Then we did two - what you might call - ‘soft Brexit’ options, looking at either the Single Market membership continuing or Customs Union membership continuing without the Single Market, and then the World Trade Organisation (WTO) rules, commonly known as the ‘hard Brexit’. Given that even in the three pages of the Government’s summary position they are still talking about restricting movement of labour, this would tend to lead you down the line of saying that they are not going to continue membership of the Single Market because that violates one of the four fundamental freedoms, the freedom of movement of people. If you are ruling that out, then you are really looking at scenario three, which is the Customs Union membership without the Single Market, which gives you free trade more or less with EU members on manufactured goods. It does not cover agriculture; it does not cover services. Those are subject to secondary agreements, which we do not know much about. This is why when people sometimes comment on our study they say, “Why have you not pursued the Government’s option?” One reason is because it was still very uncertain what the Government’s real option was and what its strategy was. The other one I will not go into now but it was largely because of the speed with which we had to produce the study and having to rely on previous assumptions for trade barriers and non-trade barriers. We basically took what was there in the literature and in previous studies already and put those into our model. Those studies did not consider the Government’s option, the Canada deal or anything like that, and so we could not, in the time available, model anything like that. Anyway, to answer your question, I would say the closest one is probably scenario three, which is more like the Turkey model, if you like, not turkeys for Christmas but Turkey the country. Roger Bootle (Chairman, Capital Economics): It is very difficult to know where we are, is it not? I feel like I am commenting in a vacuum, really, about something that we do not even know exists. What appears to be the Government’s plan emerging from the Chequers agreement - if that is what it was - is about the worst of all possible Brexits, amounting virtually to a ‘non-Brexit’. We can of course analyse it in some detail and think through what the implications would be for London. I have to say I do not think it is going to happen. We are in a situation where the politics is changing almost by the hour -- Leonie Cooper AM: Excuse me. Sorry. I do not normally sit on this Committee. I do not understand why you say that that is a ‘non-Brexit’ if we are leaving the Single Market. I am sorry. I do not quite understand why you have said that. Sorry to interrupt. Roger Bootle (Chairman, Capital Economics): All right. Thank you for interrupting me. If you look at what those people who were arguing for Brexit were asking for and then examine this proposal, it does not really stack up very closely if we are leaving the Single Market. Are we leaving the Single Market? We do not properly know. At the moment of course, we have not seen the detailed [Brexit] White Paper. This is one of the problems with this. We do not know the precise proposal. We do not know what the arrangements are going to be with regard to freedom of movement. There are questions to be raised about the jurisdiction of the European Court of Justice. There are issues about how able we would be to form free-trade agreements (FTAs) with other countries around the world. This goes right to the nub of the case for Brexit. Ask any economist supporting Brexit - and there were some, but a lot more opposing it - what is the nub of the argument for? Obviously, there are arguments for and against and we know what the arguments are against. If any economist were arguing for Brexit, what would they be saying was the nub of the argument for Brexit? They would mention two things: firstly, freedom over trade policy and therefore the ability to set our own tariffs and to negotiate FTAs around the world - how well would we be able to negotiate FTAs around the world? Probably not very - and, secondly, the freedom to diverge with regard to our regulations. Those are the nub, those two things, and that also is compromised by our accepting the Single Market Customs Union rules with regard to manufacturing and agriculture. Those are the reasons. Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I very much echo what Roger Bootle just said. The agreement as far as we understand it - and as Roger said, we have not seen the [Brexit] White Paper yet - is a long way from leaving the Single Market and the Customs Union. The Single Market is really two things. It is regulatory alignment. You have a common set of regulations for producers and consumers, but the EU insists all the time that a number of freedoms go with that free capital movement and, of course, the important thing is freedom of movement. What the Chequers agreement seems to be asking for is that we would have what they call a common regulatory framework or regulatory environment. They seem to be hoping that we will get away without having to sign up to free movement, but of course the EU has insisted at every stage in its famous ‘no cherry-picking’ phraseology that you cannot have that. You cannot have the advantage of a Single Market without the freedom of movement. There has been plenty of speculation in the press that the Government will soften its stance on that, perhaps with some form of words that says that EU migrants will not be able to come into this country unless they already have a job. A huge majority of migrants who come in already have a job and so that would be no restriction at all. There is certainly a concern among a number of Brexiteer Members of Parliament (MPs) that that is the direction of travel. If that is the direction of travel, then of course we would still be in the Single Market in all but name. The Customs Union, again, there is an attempt here -- one of the things that has been driving the Prime Minister’s desires on this is the need of particularly car and aircraft manufacturers not to have anything held up at the ports. They want their lorries to be able to come straight through. In the great majority of ports, there is no problem at all, but we are probably only really talking about Dover. I personally cannot see why this cannot be arranged without this huge transfer of policy sovereignty to the EU. The problem from many people’s point of view - and I apologise if I am straying into future questions - is that the UK is proposing to hand over to Brussels quite a significant proportion of its trade policy, its production regulations, its competition policy. One thing that has hardly been commented on but, to me, as somebody who has worked in more disadvantaged regions for much of my career in the UK, state aid policies mean that Brussels will continue to tell the British Government what is the most money it can spend on helping disadvantaged regions like the North East or Wales or Northern Ireland. It is really very hard to see why on earth we would hand over all of that policy and what is the gain. To come back to your question, which of the scenarios is closest, I guess it is some amalgam of three and four. By the way, I perhaps should have said right at the beginning that I congratulate you on commissioning Cambridge Econometrics to do this. This is an excellent report and a very sensible model on which it is based.
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