Some thoughts on Boris Johnson

It was a shock. German politicians, their French counterparts, EU-representatives – they all shook their heads in disbelief when it was announced that the former mayor of London, Boris Johnson, would become the UK’s new foreign secretary. German TV commentators reportedly could not stop laughing about the appointment. Others, such as the French foreign minister, Jean-Marc Ayrault, described the Prime Minister’s choice as a sign of the political crisis in the UK. According to Ayrault, Johnson lied a lot during the referendum campaign and is now, what an irony, being rewarded with the post of foreign secretary.

Others tuned in, commenting on Johnson’s rather undiplomatic comments about for example President Obama’s African ancestry, and the fact that he, Johnson, lent his voice to a campaign that was made up of a lot of half-truths, to put it mildly (most of which have already been deleted from the internet). Frank-Walter Steinmeier, the German foreign minister, stated: “To be honest, I find this outrageous. It’s not just bitter for Great Britain. It’s also bitter for the EU.”

Angela Merkel, the German chancellor, however, did not comment on Prime Minister May’s choice. She instead called 10 Downing Street and invited her to Berlin. “I think it is our duty to work quite closely with governments of allied countries“, Merkel said. “The world has enough problems so we need to make progress in foreign policy collaboration, the way we have done it in the past with Great Britain.“

Again, Merkel behaved differently than her – mostly male – colleagues. Instead of exclaiming what an ill-fated choice the selection of Boris Johnson, a prominent Brexit-supporter, was, Merkel waits and sees, a tactic that she mastered very early on in her political career.

From a German point of view, Boris Johnson’s appointment is an interesting choice. Yes, admittedly, he is a populist. He is someone who seems to lack strong political beliefs and who jumped at the chance to join the Brexit-camp just because it fit his long term ambitions. Seldom has this been so obvious as in the case of Boris Johnson, a man who seemed to have little in common with hardcore Brexit supporters such as David Davis, Theresa May’s new Brexit-minister, or Nigel Farage, the former head of UKIP who decided to withdraw from the public eye quickly after the referendum in order to make sure that he will not be associated with the mess that is likely to follow.

However, with the appointment of a Brexit-minister and the creation of an international trade ministry, May has made sure that Johnson’s remit will be quite limited. The real driver in Britain`s Brexit-negotiations will not be the Foreign Office, but 10 and 11 Downing Street as well as the Brexit ministry and the ministry for international trade. Consequently, foreign secretary Johnson will not be involved too much in negotiating Britain´s future relationship with Europe. At the same time, May has made sure that Johnson is inside the government, not outside where he could have easily attacked her decision-making without having to carry any responsibility himself.

He will be fairly busy in the months to come, travelling the world, trying to get the message across that although the UK has voted to leave the EU, it is not turning its back against the world. In addition to that, he will have to make sure that he does not make too many gaffes, something that he is quite known for.

It remains to be seen whether Johnson will be able to curb his tongue. If he does not, he might be the first minister of this new government to be sacked. At least, that´s what the bookies think.

 

 

 

 

How to prevent chaos after a Brexit-vote

It’s the last day of campaigning before the big vote on Thursday. Traders, bankers and money managers are already pretty nervous, judging by what they have done during the past days. Whereas last week saw a strong sell-off of all sorts of assets, particularly those with a strong UK-exposure, investors bought back heavily on Monday and Tuesday. Still, billions have been taken out of UK based funds in the run-up to the referendum. Last week, the FTSE 100 shed close to 100 billion pounds within four days. Banks, particularly Barclays, are deemed to be among those most affected by a vote for Brexit.

The losses have flavoured the debate, now that the vote is imminent. For some, they are an indicator for what might await them on Friday. Although most polls no longer see Leave in the lead – and the bookies just readjusted their odds towards a vote for Remain – many decision-makers working in the financial industry fear that the early morning hours on Friday might provide them with a surprise outcome.

Should there be a vote to leave, experts forecast a sharp decline in Pound Sterling between 10 and 20 percent, a move that could also drag down the Euro. British shares as well as European shares are supposed to tank, with a mark-down in the region of around 20 percent.

With the help of extra liquidity operations, the Bank of England has already provided banks with extra cash in case. Governor Mark Carney is said to be prepared to reduce base rates further, from the longterm historic low of 0.50 percent. In addition to this, the Bank of England could increase the amount of money it spends on asset purchases (currently at 375 billion pounds) and coordinate with other central banks such as the ECB in order to limit any impact on the overall financial system. As recently as Tuesday, the Executive Board of the ECB met in order to discuss potential scenarios after the referendum on Thursday.

Thanks to a number of swap lines between for example the Bank of England and the ECB, officials seem to be confident they are well-equipped for any sort of shock. That’s also what I took away from my recent interview with Andrea Enria, the chairperson of the European Banking Authority (EBA). According to him, national and supranational regulators have made sure that British and European banks are prepared for the worst.

Banks and funds have also taken measures. Depending on whether they are hugely exposed to the potential outcome of the referendum or not, they have hedged some of their positions, sold off risky assets and set up contingency plans should there be a vote to leave.

However, there are people who say that this might not be enough. On Monday, George Soros, the famous investor who successfully bet against the Pound Sterling in 1992, warned of a potential “Black Friday” should there be a vote for Brexit. Unlike in 1992, when the UK dropped out of the Exchange Rate Mechanism, there is not much scope for a cut in interest rates, Soros argued. Assuming that the Bank of England would not embark on a similar mission like the ECB to enter negative interest rate territory, there is obviously not too much room between 0.50 percent and zero.

This is also where it’s no longer just shares and currencies that are suffering. After a Brexit vote, a decline in Pound Sterling would impact ordinary citizens relatively quickly. “Too many believe that a vote to leave will have no effect on their personal financial positions. This is wishful thinking. If Britain leaves the EU it will have at least one very clear and immediate effect that will touch every household: the value of the pound would decline ­precipitously. A vote to leave the EU would also have an immediate and dramatic impact on financial markets, investment, prices and jobs,” Soros said, according to the Guardian.

So will it be all shock and horror on Friday? The first results are supposed to come in around 3 AM in the morning. That might be the time when the turmoil starts, first with money markets in Asia. Thanks to my editors, I will be watching this very closely: On Friday, I will be shadowing a trader at an investment firm here in London, from around 4 or 4:30 AM onwards, and see how he reacts to the outcome of the referendum.

I guess I will be more nervous than him.

Brexit – The Norwegian model

One of the frequently discussed post-Brexit models is the “Norwegian solution”. The oil- and gas rich, but sparsely populated country in the North is not a member of the EU, but of the European Economic Area (EEA), similar to Liechtenstein and Iceland. Technically, it is as much a part of the single market as France, Germany or the UK.

Norways is a regular contributor to EU budgets: It pays into the EEA and Norway Grants scheme (388 million Euro anually) and into a number of other EU programmes like Horizon 2020, Erasmus+ and Galileo. According to the Norwegian mission to the EU, the second amounts to 447 million Euro per year, plus nearly six million Euro for the participation in the Schengen agreement as well as 25 million Euro for the European Territorial Cooperation Interreg. In total, Norway, on average, contributes 866 million Euro per year to the EU budget.

Under the EEA arrangement, Norway has to adhere to part of the existing regulatory framework of the EU. Some areas, for example the fishing and agricultural industry, are excluded from that. Nevertheless, Norway has to accept the European freedom of movement which leads to Norwegians working in the EU and EU citizens working in Norway.

On the political level though, Norway is much less involved than a full EU member. Although it can influence new laws and directives in the early stages by trying to work with the respective EU bodies, it is not involved in drafting new regulation nor in decision-making. As the government in Oslo concludes, “Norway is in practice bound to adopt EU policies and rules on a broad range of issues without being a member and without voting rights”. According to Fullfact.org, new EU rules are passed through a committee before they become Norwegian law. Only in significant cases does the Norwegian parliament consider them.

For those in Britain arguing to “take back control”, one of the core straplines of the Leave-campaign, this cannot be the most attractive route to take after a vote for Brexit. Still sending money to Brussels, still introducing EU laws, but having no real say at all? To me, that does not sound too convincing. If we take immigration into consideration, the Norwegian model appears even less attractive, given that immigration is one of the most important arguments cited by the Leave-side.

Under a Norwegian style EEA-agreement, the UK would still have to allow EU-citizens to come and to work here. Assuming that years after a Brexit vote, the economy would finally recover, there is not much that would keep European workers coming to Britain in similar or even bigger numbers than now. The Norwegian solution hence does not solve the immigration dispute.

Regardless of all these objections, the majority of Brits seems to favour this option. 54 percent of those questioned by YouGov for the Adam Smith Institute would support a Norway-style trade deal in case of a Brexit. Among Brexit-supporters, the figure is even higher (79 percent). Just 25 percent of those surveyed would oppose such an arrangement.

Interestingly enough, the Norwegian model is also the one which would cause the least economic damage, compared to other options such as the Swiss model, the Turkish model or the WTO-model, as the London School of Economics, the National Institute of Economic and Social Research (NIESR) and the Treasury have found out in their various Brexit studies. Nevertheless, the economists at NIESR expect that cost for exports will rise ten to 16 percent, compared to today’s levels, as will prices for costs for imports (eleven to 17 percent).

So how does that work? Why would the majority of Leave-supporters vote in favour of a Norwegian-style model, given that immigration is one of the core concerns for why the UK should leave the EU? For me, this is another strong indicator of the lack of coherence on the Leave-side. If European immigration is really the reason for why people think the UK should leave the UK, a continuation of the freedom of labour can obviously not be what people want.

Even if this might be the most economically feasible option on the table (which remains to be seen), it seems quite daring for any politician to negotiate a Norway-type treaty with the EU after a Brexit-vote. That’s why David Cameron has already signalled his opposition to a Norwegian solution should there be a vote for Brexit. The Prime Minister told the BBC’s Andrew Marr show during the weekend that it would be impossible to follow the Norwegian model by remaining inside the single market despite being outside the EU because that would mean accepting freedom of movement and trade legislation made in Brussels. “What the British public will be voting for is to leave the EU and leave the single market”, he said. Were the British public to vote for Brexit, he would take the country out of the single market, the Prime Minister pledged.

But that, of course, remains to be seen as well. I would be very surprised to see David Cameron lose the referendum and still be Prime Minister for long enough to pull the country out of the single market. It might very well be his successor trying to convince voters before the next general election in 2020 that pulling out of the EU was a good idea, even if the immigration issue is – thanks to a Norway-style EEA-agreement – still unsolved.

Reporting under purdah

It’s not as if reporting the referendum used to be an easy task. For weeks and weeks, journalists like me have been trying to steer our way through misquotations, half-facts, lies and inaccuracies. Given that the EU is such a vast topic, it’s been easy for both Brexiteers and Bremainers to only provide the facts that support their claim, leaving out information – even if true – because it supports the opposition. And yes, for every statistic (for example the 350 million pounds that the UK sends to Brussels per week), there is at least one more that stands against it (for example the 165 million pounds that the UK gets back from Brussels every week).

This was challenging, yes. But we got used to it. Albeit, it did not stay that way. On Tuesday, I encountered another hurdle to reporting the referendum in a factual, balanced and unbiased way. It has a funny name and does not originate from politics, but from the world of faith. “Purdah” initially came from Persia and was, according to the Encyclopedia Britannica, acquired by the Muslims during the Arab conquest of what is now called Iraq in the 7th century a.d.

The encyclopedia defines it as a “practice that was inaugurated by Muslims and later adopted by various Hindus, especially in India, and that involves the seclusion of women from public observation by means of concealing clothing (including the veil) and by the use of high-walled enclosures, screens, and curtains within the home.”

This is of course not what “purdah” refers to in the UK. Here, it means that civil servants are restricted with regard to what they publish in the run-up to a significant date, mostly an election or a referendum date. “During the purdah period before the forthcoming EU referendum, central and local government are prohibited from publishing material relating to the referendum although some exemptions apply”, a parliamentary briefing states.

The key words here are “publishing material relating to the referendum”. And that’s where I unexpectedly hit a wall. For one of my stories for DIE WELT, I tried to find out what kind of goods the UK exports to Germany and what kind of goods it imports from Germany. Thanks to UK Trade & Invest, I already knew that Germany is the UK’s most important trading partner in Europe. Since 2009, UK exports to Germany have increased by 23% to 43.3 billion pounds in 2014.

I also knew that the UK exports mineral fuels, machinery, vehicles and automotive components to Germany, as well as aircraft, electrical equipment and pharmaceutical products. What I did not find though was specific numbers for both the UK and Germany. At DIE WELT, we are planning to publish a table with the “Top 20 goods exported into the UK” and one with the “Top 20 imported from the UK”.

Unfortunately, the Office of National Statistics did not have this kind of data. They forwarded me to Her Majesty’s Revenue and Customs, HMRC. And that’s where I made the acquaintance of purdah. My request was stuck in the press department for two days before I phoned them up and asked about the tables we had spoken about before. “I am afraid that, owing to purdah restrictions, all I can provide you is what we have already published”, the spokesperson said.

Which was not want I wanted to hear. I thought this must be a joke, but no. As I found out, data about whether the UK sells more cars or insurances to Germany is hugely political and thus cannot be disclosed, at least not in a new form in which it hasn’t been published before.

It’s not as if HMRC does not have this data – it’s right there, in one of their data bases. The problem is that a new composition of existing data and a subsequent publication by DIE WELT – by the way, a German paper with no English edition and thus not many readers in the UK – would be considered as a breach of the purdah rules and is thus not going to happen. “We don’t want to see this potentially impacting the debate around the referendum”, the spokesperson tried to explain.

This got me even more irritated, given that I was asking for data on trade. Dry statistics, rows of numbers. By trying to assess the importance of the trade relationship between Germany and the UK, my story could be influencing the potential outcome of the referendum, I was told. I am of course honoured that people think that any of my stories makes a difference to voters in Britain but to be honest, that’s not the most realistic assumption to be made. It’s interesting that purdah seems to have successfully quieted even HMRC.

This leaves me in a state of surprise. So at times when public interest, not just in the UK but also in other European states, is particularly high – in those final weeks before the referendum – there is no publicly available data on something as basic as the type of products traded most between Germany and the UK? No wonder that this debate is dominated by so many half-truths and inacurracies, given that access to the “real thing” is in most cases denied.

Thankfully, HMRC seems to be not the only body in possession of this data. I will now collaborate with the Atlas of Economic Complexity, a project between Harvard University and the MIT in Boston. They have some of what I am looking for. It will be slightly outdated – the latest data they have is from 2014 – but that’s more than I hoped for after my exchange with HMRC.

So that’s purdah. Let’s see what else gets in my way reporting the referendum.

Speak to a bookmaker!

There is a question that I get asked every time I travel outside the UK. In Shanghai, in Berlin, in Innsbruck, they all want to know: “So tell me Nina, how will the referendum go? Will they vote to leave? Or will they remain?” Interestingly enough, all the Germans that I speak to assume that there will be a clear Yes for Remain – simply because they cannot imagine the UK leaving the EU and secondly because they don’t understand why there is a referendum in the first place. Unfortunately, it is not that easy.

Taking into consideration that I am a foreigner in the UK who is not allowed to vote and who does not cover politics but business and finance, this is a pretty difficult question for me. For sure, I know that I am not the only one struggling with this question. I guess not only Prime Minister Cameron and Finance Minister Osborne but also thousands of bankers, entrepreneuers and other decision-makers will be racking their brains these days because of the upcoming EU-Referendum.

The reason for that is not just the magnitude of what is at stake – Finance Minister Osborne recently called the referendum a “once in a generation-decision” but also the fact that a lot of people do take the polls with more than a pinch of salt. Given that the pollsters were so bad at forecasting the outcome of the UK general election in 2015 (virtually no one predicted a sound Tory-majority), there is a lot of scepticism about the accuracy of their Brexit-forecasting.

That’s not only because the models or the methodology could be wrong. Many survey institutes and pollsters took a very close look at how they conducted their surveys after the 2015 election and vowed to improve the quality of their forecasts. But there is a second issue which makes the British EU-Referendum so hard to forecast. This is because many voters allegedly don’t tell the truth when they are asked whether they would vote for Brexit or not. Some of them state they will vote remain although they are actually in favour of leaving and plan to vote acccordingly.

The third issue with polling the referendum comes down to the methodology. Do you rely on landline calls? Do you focus on online surveys? Or do you do a mixture of both? Provided that many younger people in this country (like me) don’t have a landline anymore, this of course does affect the outcome. According to a recent Guardian/ICM survey, phone polls lead to significantly different results than online polls. Whereas the phone poll found a majority of eight percent for a Remain-vote (43 percent Remain, 39 percent Leave, 13 percent undecided), the online poll showed a four percent lead for Leave (47 percent Leave, 43 percent Remain, 10 percent undecided).

In addition to that, the survey discovered an overrepresentation of pro-Remain Labour-voters in phone polls and an overrepresentation of pro-Leave supporters of the UK Independence Party (UKIP). “There is no definitive way of adjudicating between the two polls, but as good a guess as any is that the right answer lies somewhere in between”, the Guardian quoted Martin Boon of ICM Unlimited.

So where does that leave me? What do I say to my friends next time they ask me about my predictions for the outcome of the referendum? Fortunately, I did not exhaust all of my options when I looked at the polls. There is second means for when you want to get a better understanding of probabilities and likelihoods. Speak to a bookmaker!

That’s what I did some days ago. I met with Matthew Shaddick, Head of Political Odds at Ladbrokes, one of the big bookies here in the UK. According to Shaddick, more than 90 percent of the money is placed on Remain. “There is more money on the Remain-side, but more bets on Leave”, Shaddick said. On Saturday, Ladbrokes put the probability of a Remain-vote even higher, at 79 percent and cut the odds for staying in the EU at 1/6. William Hill, one of their competitors, even went further with stating that the likelihood of a Remain-vote based on their bets was 85 percent – a significantly higher number than what the polls predict.

“You need to look at where people put their money”, Matthew Shaddick of Ladbrokes explained. Covering around ten percent of the British betting market, Ladbrokes is expecting most bets during the last two weeks before the referendum. “That’s when people will make up their mind”, said Shaddick. He expects some bigger bets closer to time. “We will take in some for 100.000 pounds and more.” Shaddick grinned.

According to him, the current closeness of the polls is actually benefitting Remain. “It will lead to a higher turnout which could be good for Remain”, he said. In contrast, a lower turnout is seen to be favouring the Leave-side. The assumption is that older voters are more in favour of leaving and have a higher likelihood of voting, whereas younger voters are more in favour of remaing but might not show up at the ballot box. So far, so good.

Up until that point, I had the feeling I knew a bit more about the potential outcome on June 23rd. But Shaddick destroyed all my confidence with a single sentence. “You know, we lost a million pounds last year after the general election”, he admitted. My heart sunk. Another deadend? Shaddick saw my dissappointment. “We don’t have as much data for our political analysis”, he said. “In Tennis or Football, you have matches every weekend, you have milions of datapoints.” As a result of which the accuracy of sport bets tends to be much higher than that of political bets. “That’s part of our business. This is not a superpredictor”, Shaddick quipped. I smiled. Maybe I should look into the betting industry instead of trying to understand the polls. And place a bet myself.