The saviour of the British economy?

A safe pair of hands. Over and over again, British media outlets have used these words to describe Theresa May, the new Prime Minister. She is said to be stable and reliable, and yes, a bit boring. But maybe that’s exactly what the country needs now, after all the excitement that her predecessor David Cameron provided the UK with.

Similar things are being said about Theresa May’s new chancellor, Philip Hammond. The 60-year old has already held several ministerial posts – he was Foreign and Defence Secretary, among others – and has, contrary to many of his colleagues in the House of Commons, had a “real” job before becoming a Member of Parliament 19 years ago. After his studies at Oxford University, Hammond worked for a company that sells medical appliances, spent some time in South America as a consultant for the World Bank and became a partner at a consultancy firm.

Prior to the British EU-referendum on the 23rd of June, Hammond was part of the Remain-camp. It is expected that he will try to negotiate a deal under which the City of London can maintain its passporting rights into Europe, a crucial factor for London to keep its status as Europe’s leading financial center. At the same time, the Conservative will have to stabilise the British economy and regain trust from international investors. Thanks to its high budget and current account deficit, Britain will continue to rely on foreign funding – even more so, should there be a sharp recession looming.

Philip Hammond has had an eye out for the prestigious role for a while. Already in 2010, when the Conservatives formed a government with the Liberal Democrats, the man with the grey mane uttered his interest for the role as a Chief Secretary in Her Majesty’s Treasury, the second most important job after that of the Minister. However, at that point in time, a Liberal got the chance.

Thus, Hammond started in the Department of Transport before becoming Defence Secretary in 2011 and Foreign Secretary in 2014. A Member of Parliament, Hammond has represented Runnymede and Weybridge since 1997 – a constituency that voted Leave although their MEP supported Britain to remain in the EU.

Philip Hammond will now have to make use of his vast experience in order to reassure international investors that the UK is still a good destination for their money. “We don`t turn our back against the world”, he said after his appointment. Hammond pledged to take “whatever measures” needed to help stabilise the economy and retain Britain as an attractive destination for firms to invest.

It remains to be seen what this means for his tax policies. On Thursday, Hammond declined to comment on the announcements made by his predecessor George Osborne to slash corporation tax to 15 percent. Hammond is known for his support for low taxes. Nevertheless, it is still too early to tell whether Hammond will engage in, as some critics such as Pascal Lamy, the former head of the WTO, have claimed, extensive tax dumping in order to keep companies from leaving the UK after the divorce from the EU.

There is more to watch out for. There are two areas where Hammond could clash with his new boss fairly soon. First, there is fiscal politics. Hammond has a reputation of being a “fiscal hawk”. Nevertheless, he cannot just continue what George Osborne started in 2010 when he embarked on a massive austerity program that still is not finished. Prime Minister May has been very clear in the past days that the government’s first goal should not be – as planned before – to generate a budget surplus by 2020 but to make sure that more people benefit from economic growth and prosperity (assuming, of course, there is still something left to share after Brexit).

We might get a first glance of his fiscal plans when he presents the Autumn Statement in November. Different to what then chancellor George Osborne announced before the referendum, there won’t be an emergency budget. Experts like Kallum Pickering, the UK economist at Berenberg Bank, thus expect some more fiscal loosening in the short run whilst more cuts are being postponed towards the end of the Parliament.

Besides fiscal policy, there is a second topic that holds vast potential for conflict, the so called passport for the City of London. This framework allows banks headquartered in London to sell their products on the continent. Should the City of London lose these rights, several thousand jobs could be moved to Frankfurt, Paris or Dublin. London would subsequently lose some of its attractiveness for international banks. Hammond seems to be all too aware of this. On Tuesday, he stated at the British Bankers Association that the financial industry will be possibly hit the hardest by Brexit. “I know and understand the importance of passporting”, Hammond said.

Theresa May though not only needs to satisfy the banks, but also those 17 million Brexit-voters of which many requested the European Freedom of Labour Movement to be scrapped or at least reduced. Leading EU-politicians such as Jean-Claude Juncker, the President of the European Commission, or Angela Merkel, the German chancellor, have already made clear that there is not too much room for negotiation here. Access to the Single Market and passporting can only be sustained if the four freedoms remain in place. So where will that leave the two safe pairs of hands?

 

 

 

 

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May and Merkel – will they get along?

The parallels are all too obvious. They are both females, in their late fifties or early sixties. They are both pastors’ daughters. They both studied untypical subjects (geography and physics). They are both known for being practical, having a strong endurance and, paying attention to details. In addition to all of this, they have fought their way to the top by beating the competition (mostly men) and by making sure that there is actually not too much competition left to challenge them in the future (Merkel has killed off all critics in her party while May was the last Tory-woman standing after a bruising Referendum campaign).

Both are known to be hard workers. Both have the reputation of wanting to get things done and, of just getting on with it, as people say here in Britain. Both Merkel, the German chancellor, as well as May, Britain’s new Prime Minister, have been around for a while (Merkel since 2005, May since 2010). Both are said to be a “safe pair of hands”, a safe bet. Neither of the two has the reputation of being too emotional, chatty, charming, or anything but business.

So, the question goes, will they get along, the German chancellor and her British counterpart? For sure, the relationship between Merkel and May will be crucial when negotiating Britain’s exit from the EU. Both will be studying each others previous negotiating quite closely, and they will be trying to predict the future by investigating the other’s past behaviour in negotiations where a lot was at stake.

From a German point of view, out of the two choices at hand – Theresa May and Andrea Leadsom – May is definitely the preferred option. This is not so much because she was a soft Remainer, but rather because she is expected to behave fairly rationally, pragmatically and reasonably. That’s not to say that Merkel and others should not expect some tough negotiating. Theresa May will, and I am sure that people in Berlin and Brussels will be aware of this, fight as hard as she can to get “the best deal for Britain”.

A lot will depend on the careful calibration of this relationship. Merkel might help May where other European partners don’t want to. But, as the leading representative of one of the most important trading partners of the UK, she can also play a huge role in massaging May into the desired direction.

As to the end result, I am not sure whether it makes a huge difference whether the two get along well, given the gigantic task that lies ahead of them. There is a fundamental issue here that needs to be resolved but that at the same time seems totally unresolveable. How do you keep full access to the Single Market if you plan to reduce the European Freedom of (Labour) Movement? Any negotiator will have to be very witty to achieve anything that comes close to this.

Depending on how the coming months unfold, Merkel could become May’s interconnector into Brussels and other European capitals. However, it could also be the contrary. Merkel might well become a strong adversary to May, should the British Prime Minister try to use the Europeans currently living in the UK as bargaining chips for the negotiations in Brussels.

However, we should not overplay the importance of the relationship between the two. Germany and the UK no longer have closely aligned interests (at least not as aligned as before June 23rd) and so each side will fight with might for what they want to get out of this situation.

Soulsearching

It was an easy question, at least from the perspective of the radio presenter who asked it. “So would you apply for a British passport if this would allow you to stay in the country?” The scene took place Monday early afternoon, at Western House in Central London, right next to Oxford Circus. I had been invited to share some of my experiences as a European in a post-referendum Britain, on the Jeremy Vine Show on BBC Radio 2, and there we were. Right at the heart of the question.

Imagining that the European Freedom of Movement could be restricted or even revoked after a British EU-exit, would I still want to live in this country and, secondly, would I apply for British citizenship in order for me to be able to stay? It´s an interesting thing to think about, especially for me. So far, I have merely seen the outcome of the referendum as an unexpected turn in British history. I have watched the pound crash, Cameron resign, EU-Commissioner Hill step down. Within days, Boris Johnson was knifed, George Osborne dumped his austerity goal and Nigel Farage quit.

As a journalist, I watched it with fascination – seldomly, we get the chance to witness decades happening in a couple of days – but I haven`t really contemplated on what all this means for me personally. I have been in the UK for three years now (four if you count the year that I did at the London School of Economics in 2011) and I always liked it here.

I find it disappointing that a country with so much potential is now slowly dismantling its reputation in the world, its relevance as Europe’s leading financial center, its relationship to Europe. Of course, from a journalist point of view, this is as exciting as it gets. But from a personal perspective, do I still want to be here?

The huge amount of racist incidents since the referendum has clearly not helped. These days, you watch videos in which Brits are telling Europeans to leave their country. You read about insulting behaviour on trains and trams, in streets and restaurants.

The more worrying to me though is the debate about Europeans living in the UK and the question of whether they will be allowed to stay, should the UK really trigger Article 50 and sever its ties with the EU. For a long time, we were told (and happily believed) that nothing would change for those who are already in the country, that there would possibly be grandfathering of those arriving between now and the formal exit.

However, over the course of the past days, the debate has changed a little. Theresa May, currently Interior Minister and one of the favorites for the job of Prime Minister Cameron, alluded that she might be using the Europeans currently living in the UK as a bargaining chip in the negotiations in Brussels.

On the Peston Show, May stated: “What’s important is there will be a negotiation here as to how we deal with that issue of people who are already here and who have established a life here and Brits who’ve established a life in other countries within the European Union. (…) There’s no change at the moment, but of course we have to factor that into the negotiations.” Foreign Secretary Philip Hammond made similar comments on Monday.

Although May and Hammond were criticised heavily for what they said – not only by Remain-supporters but also by Leave-campaigners – I guess these comments give us a bit of a foretaste how the negotiations between the UK and the EU turn out once the UK officially starts the divorce proceedings. May and Hammond have made clear that they might want to use the approximately three million Europeans currently living in the UK as bargaining counters. (According to the FT, May’s team rowed back on Tuesday, stating that “Her position is that we will guarantee the legal status of EU nationals in Britain as long as British nationals living in EU countries have their status guaranteed too.”)

Given that the negotiations will not start for a while, I find this development deeply worrying. With comments like these, and the amount of racist incidents that have been reported since the Brexit vote, the UK has already changed dramatically. To me, it seems to be a less friendly, less open place to live in. I know that it all depends on the outcome of the negotiations so I think there is no need for premature panic. But – many of my European friends share my worries and some of us fear that the climate will become more heated once the divorce talks are under way.

A long answer to a short question. Would I apply for a British passport, in some years from now, and give away my German passport that allows me to travel to a record 177 countries, visa-free, according to most recent edition of the Visa Restrictions Index? I don`t know. Maybe not. Hopefully, there will be an alternative solution to this.

Leaving the UK

It did not take long. Several days into the new, post-Brexit reality, more than a handful of foreign friends have already declared their intention to leave the UK. It’s not just Europeans but also Americans, Canadians, and even Chinese. They all have different reasons for leaving.

Take Jovana, a change consultant who has lived and worked in London for four years. Jovana is German but thought she would stay in the UK. However, after Thursday’s Brexit-vote, things have changed quite dramatically. Although nothing has really changed, from a legal perspective, Jovana wants to leave the UK, as soon as possible, but no later than the end of the year. “If this is the message – that we are no longer welcome here – I don’t want to continue living in the UK”, she explained when I interviewed her on Tuesday.

Jovana is a true believer in the European project and thus the rejection of it by British voters has affected her deeply. “I am perceived as one of the better migrants”, she stated, highlighting the differenciation that is being made between “good immigration” from countries such as France and Germany, and “bad immigration” from Eastern European countries. Jovana is currently searching for jobs in Berlin, one of the cities that might actually benefit from Britain’s vote to Leave.

Another friend of mine, Natalie, hasn’t gotten quite that far. She has lived and studied in the UK as well, founded her company here. Natalie is American and has waited since March for the arrival of her new investor visa. “Since then, I haven’t even been able to go to Paris”, she complained, “I had to submit my passport for this.”

If for any reason, her visa is not prolonged, Natalie already has a Plan B. She plans to move to Amsterdam, to the Netherlands, a city that is, according to her, much more open to young businesses than London with its sky-high rents and lots of economic uncertainty, thanks to the vote for Brexit. In her circle of friends, Natalie is not the only one thinking of leaving the UK: “There are several others who have are mulling over this idea as well”, she said.

There are a couple more examples I could mention. All these friends are relatively young, cosmopolitan, well-educated and can’t identify themselves with the strange turn that the country has taken since it voted for Brexit on Thursday. Interestingly though, none of them mentioned a potential change in the existing Freedom of Labour framework that has so far allowed non-British EU-citizens to work and live in the UK. According to recent labour market statistics, there are 2.1 million of these people currently working in the UK.

What might happen to them after a British divorce from the EU is difficult to tell. Both camps have declared before the referendum that Europeans who are already in Britain would be allowed to stay and those who are arriving between now and the exit date could be grandfathered, thus allowed to stay. That, it seems, is also what a majority of Europeans working in the UK would want. According to a survey by Totaljobs, 76 percent of Europeans working in the UK want to stay even in case of a Brexit.

Another interesting fact is that the Leave-side has already backtracked on some of its core arguments regarding immigration. As Tory MP and Leave-supporter Daniel Hannan explained, people who thought that European immigration would be reduced to zero after a British exit from the EU would most likely be disappointed.

Thus, Madeleine Sumption, the Director of the Migration Observatory at the University of Oxford, assumes that there will be some form of continued European immigration into the UK. “Immigration will continue to be the most controversial issue in unpicking the relationship between the UK and the EU”, she stated on Monday when I interviewed her for DIE WELT.

For those that want to stay in the UK, this question is one that will keep us awake at night. Others, like Jovana, have already relocated from the UK, at least in their minds.

Immigration & the EU-Referendum

Immigration, it has turned out, is one of the hottest topics in the run-up to the referendum. With Prime Minister Cameron having promised a reduction of net-migration to under 100.000 per year, the reality looks a bit different. According to new statistics from the Office of National Statistics, net-migration into the UK stood at 333.000 in 2015, the second highest on record. Out of those 333.000, 184.000 Europeans came to live and work in the UK, under the freedom of labour movement.

For Brexiteers, this is just what they have been waiting for. Both Boris Johnson and Michael Gove, two of the leading voices of the Leave-campaign, have called for a reduction in European net-migration into the UK and for the introduction of an Australia-style points system. This, they argue, would help the UK make sure that only high-skilled, high-earning foreign workers would enter the country.

Economists however are not impressed. “Under the current system, the UK is mostly attracting the right kind of immigrants from the EU already”, a report by Berenberg Bank in London finds. An Australia-style system would create extra administrative costs and would rely on government or some other central agency to identify supply gaps in the labour market and then allocate foreign workers accordingly in a more effective way than the current market based system. “It makes little sense to risk introducing a government failure where a market failure doesn’t exist”, the analysts conclude.

Still, Johnson and Gove pretend to have a case in point. And yes, on a superficial level, you could argue that large amounts of European workers end up in low paid, low skilled jobs in Britain. According to a recent study by the Migration Observatory at the University of Oxford, a majority of Europeans currently working in the UK would not meet Tier 2 visa criteria, were they obliged to apply for a work permit in order for them to work here in the UK. A Tier 2 visa requires, among other criteria, a university degree and an annual salary of at least 20.000 pounds.

But, this does not come as a surprise, as large parts of the British food manufacturing, fruit picking, plumbing and building industry are desperate for workers, independent of where they come from. Eastern Europeans come here because there is plenty of work for them and wages are higher than in their home countries. They also come because British companies cannot find enough Brits who want to work as plumbers, fruit pickers, waitresses or builders.

Still, Vote Leave argues, Poles, Bulgarians and other EU-nationals should not be allowed to come here for work. The argument is similar to what you hear in Germany when discussing the asparagus industry: These people are taking away our jobs, our future, our prosperity.

A pretty one-sided argument, both with regard to the UK economy as well as the German economy. So what do firms do if they cannot find domestic workers for their jobs? Not only the builders, but also food processing firms, the hotel industry and even tech firms fret about the possibility that they would soon be restricted in hiring EU-nationals instead of Brits. Obviously, this cannot be good for their business.

As Taavet Hinrikus, the co-founder of TransferWise, one of the fastest growing London fintech firms, put it, a Brexit would be “a complete disaster for the tech scene”. According to him, tighter labour laws could lead to TransferWise opening an office in Germany, maybe in Berlin. “If the movement of people gets restricted, we would need to make changes”, Hinrikus said. Not only professional changes, but also personal changes: “I don’t know whether I would still want to live here.”

Like me, Hinrikus is a foreigner. He comes from Estonia but has lived in the UK for many years. Limitations to European immigration after a Brexit would not just make things harder for TransferWise here in London where a third of their 100 employees come from other EU-countries. It would also create an additional emotional barrier between Brits and other Europeans, a feeling that I share.

As do many other fellow Europeans here in the UK: 40 percent of EU-nationals working in the UK say the referendum has negatively affected the opinion of the country, a recent study by Totaljobs has found. 87 percent of Europeans living in the UK are worried about the potential impact of Brexit. Still, 76 percent hope to stay even if Brexit becomes a reality. “Maybe even the Brits will leave”, Hinrikus joked when I spoke to him on Tuesday, “who wants to work in a UK that suffers a huge economic crisis?”

The anti-immigration attitude here in the UK strikes me as odd, given that the UK prides itself on having had one of the biggest empires in the world, with citizens in the remotest places on earth. Many of those people came to live in the UK after the liberalisation of the colonies, a welcome stream of immigration. Since 1991, EU migrants have accounted for just over a quarter of total net migration into the UK and thus, for only a small portion of the growth in the UK population, the Migration Observatory has found.

Of course, Vote Leave-campaigners still have one argument in reserve. Because of European immigration into the UK, public services and housing have come under severe strain, they claim. Both for schools as for flats, the economists at Berenberg flatly reject this argument. EU migrants make a net-contribution to the UK budget, the study finds, thus enabling more, not less funding for public services.

The same goes for the housing market: “The UK housing market suffers mainly from a lack of supply than excess demand”, they conclude, “less than 10 percent of Britain is urbanised, it does not lack space.” Comparing the country to Germany where you have thousands of little towns dotted around the countryside instead of one big centre like London, I definitely agree. “Better land and planning laws to make the supply side of the market more responsibe to changing demand conditions are badly needed”, the report reads.

So let’s see what June 23rd brings. I hope I won’t have to apply for a visa any time soon.