Brexit-lite and Brexit properPost-Brexit discussion suffers from a serious vacuum. Although the British people have voted by a narrow margin to leave the European Union, the next prime minister has not been appointed, and no one knows exactly how he/she and his/her team will organize the negotiations. Two main options (both with many potential variants) are emerging,
- Brexit-lite (“the Norwegian/Swiss option, plus or minus”. The government gives priority to maintaining access to the EU’s Single Market, although seeking (like Norway and Switzerland) to restore parliamentary sovereignty and judiicial supremacy (i.e., that the highest court in the UK is its own Supreme Court, not the European Court of Justice in Luxembourg). Control over new regulations would be with the UK Parliament, but EU regulation would have to be respected in much of the economy and not just on exports to the EU. The UK would pay some money (“danegeld”) to the EU. Given the politics of the situation, the UK would want significant concessions on “freedom of movement”, so that it did indeed control its borders, but something like “freedom of movement for workers only” night be devised.
- Brexit proper. The government says that access to the Single Market is not essential, as the UK can trade satisfactorily with the EU under World Trade Organization rules. It says this, even if UK exports would be subject to the “common external tariff”. Of course the UK restores parliamentary sovereignty and judicial supremacy. It also oversees all new business regulation, although exports to the EU must anyhow comply with EU regulation. The UK pays no money to the EU and recovers full control of its borders.
The UK Independence Party claims to be ‘changing the face of British politics’. The big support it received in the May 2013 county council elections certainly came as a shock to the three so-called ‘main’ parties, with one of these parties – the Liberal Democrats – receiving far fewer votes than UKIP. (The LibDems had 14% of the vote and UKIP 23%, and UKIP was in fact only 2% behind the Conservatives.) However, opinion polls tend to show UKIP support at only just into the double digits per cent and not much above the LibDems. Are the opinion polls telling the truth? UKIP is doing far better in local government elections than in the opinion polls. In the following note I compare opinion poll and local election results since late August. In the 47 local government elections analysed the UKIP vote share was 19.0% and its average result where it stood was 20.8%. (But note that this 20.8% was lower than the 2nd May figure! Admittedly, the difference is small.) By contrast, the UKIP share in the 59 opinion polls compiled by UK Polling Report in this period was 11.6%. On this basis, the opinion polls are seriously understating the size of the prospective UKIP vote in both the European elections of 2014 and the general election of 2015. It also needs to be emphasized that the UKIP share in local government elections has climbed from 3.1% in 2010 to 19% plus in 2013. If it continued to make gains at this sort of rate, it would certainly be ‘a major party’ in the 2015 general election and could even win it. For clarity, this is not what I expect, but for some years to come fluctuations in the UKIP vote share, around a rising trend, are likely to disrupt the thee-party, Lib-Lab-Con pattern of British politics which began in the 1980s. (This pattern began with the formation and rise of the Social Democrats, and their eventual absorption into the Liberal Party.) It is unclear whether a four-party pattern (Labour, Conservatives, UKIP and LibDems) or a three-party pattern will now develop, but a case can be made that UKIP will supplant the LibDems as the third party.
The following note sets out the results of UK by-elections from the start of 2012, a period in which a (predictable) swing to the main opposition party, Labour, and an (unpredictable) swing to a less-than-20-year-old one-issue party, the UK Independence Party, have occurred. Averaging all the by-elections and excluding the March 2012 Bradford West by-election, the swings are of about 10% from both Conservatives and Liberal Democrats, and of about 10% to both Labour and UKIP. If the Bradford West result is included, the swing to Labour is reduced substantially, to about 5%. The explanation is the large swing to Respect, a breakaway political force under Mr. George Galloway
One of the puzzles about early 2010 is that, across the industrial world, stagnation in the quantity of money has been accompanied by strong equity markets. This seems to contradict the argument that the general level of asset prices (equities and real estate, in particular) depends – like the price level of goods and services – on the quantity of money relative to the demand to hold it. (I developed this argument in my 2005 study on Money and Asset Prices in Boom and Bust, but it is not original. The same proposition can be found, for example, at the end of chapter 7 of Keynes’ General Theory.) A particularly conspicuous anomaly has been the conjunction in the USA of a slide in “institutional money market funds” and a rise in stock prices. In the six months to February institutional money market funds – the main kind of liquidity held by big institutional investors – dropped by 14%, whereas the Dow Jones industrial average climbed by over 20%. Does this mean that money is irrelevant to the determination of asset prices? No, the explanation is that fund managers are operating at present with much lower ratios of “cash” (i.e., bank deposits and other liquid assets) to total assets than in late 2008 and early 2009. It has been possible to reconcile a big advance in equity markets with static money holdings because fund managers are more confident about the medium-term future. The degree of “bullishness” – as reflected in institutions’ desired cash/assets ratio – does affect asset prices. Indeed, in short runs (of periods up to, say, about two years) changes in bullishness can dominate changes in the quantity of institutional cash as an influence on equity markets. But in the long run institutions’ cash/assets ratio tends not to change much and monetary influences on nominal asset prices become all important. The critical message for today is that, if the stagnation of money persists in the rest of 2010, equity markets will struggle to advance. The bull market is running on empty.