Austerity Remains

As someone who campaigned for the UK to remain in the EU and who believes that no exit deal will be as good as the deal we have as members of the EU, I subscribe to a number of Labour pro-remain groups.

From time to time one of these groups makes a false claim or cherry picks the evidence to support a particular course of action. I try to put these comrades right especially if they are likely to mislead people on important economic issues. I particularly object to claims that leaving would compel a Labour government to continue austerity.

The latest campaign to fall for this lazy argument is Remain Labour. On the basis of a curiously inept economic briefing this group has been lobbying the front bench. When I saw the letter it had sent to John McDonnell, I contacted the group to explain why a smaller tax take does not automatically translate into austerity.

The claim in the Briefing that lower government receipts could force the next Labour government to impose austerity is not only false but serves to legitimise the phony idea that austerity is somehow inevitable if government income is compromised.  

A moment's thought should be enough to see that the last Labour government did the reverse. Faced with an actual fall in tax receipts, not just a smaller increase than might otherwise have been expected, Gordon Brown's government cut taxes and brought forward spending particularly on investment. Why then would a Corbyn government default to austerity when slower than expected GDP growth limited growth in government revenue?

I have yet to receive a reply.

The group's claim is that leaving the EU on the terms Jeremy Corbyn had offered to the prime minister would cost the government finances £24bn. This is not a figure you will find in any reputable analysis. It is a number Remain Labour have arrived at apparently by splitting the difference between two estimates constructed using completely different methodologies. They base their case on a study carried out in a collaboration between the LSE and King's College which concludes that after ten years GDP would not have increased as much outside the EU as it would inside and consequently the fiscal position would be poorer.

This week the group's founder, Andrew Lewin, followed up with a letter to the secretary of state for education, Angela Rayner. This time he had persuaded a number of youth and student leaders to sign up to the argument that Labour could not deliver on its manifesto promises on education if Britain left the EU.

Labour needs £25bn to pay for its National Education Service and Early Years reforms set out in the 2017 manifesto. At the same time, the cost of Labour’s ‘alternative Brexit plan’ is £24 billion per year to the economy.

I wrote to Mr Lewin.

The interpretation of economic evidence can be difficult. In this case you have drawn an equivalence between additional expenditure funded from taxation with the estimated difference in long term fiscal outcomes under two scenarios. Clearly they are not comparable figures.

More seriously your claims misrepresent the conclusions of the study on which your analysis rests. The LSE/Kings study does not suggest a deficit nor a fall in government income. Its claim is that public finances would not increase by as much as they would compared to remaining in the EU.

To illustrate the significance of this error, assume that GDP would grow at 1.5% per annum in a remain scenario. Then a the end of the 10 year period to which the study refers the fiscal impact would be an increase of 6.4% of GDP, based on the same assumptions as in the study. It is from this figure that you would subtract the 0.4% - 1.8% fiscal impact of leaving the EU. That means the chancellor would still have an additional 4.6% - 6.0% GDP to allocate however he wishes. That is around 96bn to 126bn.

You also seem to have missed the significance of timing. The methodology of the LSE study does not allow it to say anything about the short term, but the shadow cabinet spending plans are precisely short term. A Labour government would implement its plans during its first years in government. The LSE study tells us nothing about the fiscal position at any point before its ten year horizon.

 If I get a reply I will give an update on this blog.

Totems, Reason and the European Economic Area

From time to time a political issue takes on a totemic role. It acquires a significance beyond its practical import and becomes a symbol or icon of virtue. Support for the issue becomes a badge to identify a political in-group.

Something like this has happened to the question of Britain joining the European Economic Area. The rational assessment of the pros and cons or the choices about trade-offs implied by EEA membership have been eclipsed by the symbolism. Support for the EEA has become a symbol of pro-EU commitment.

Last week, I read in a Sunday paper that “true Remainers want to stay in the EEA”. I suspect that true Remainers (I’m one) want to stay in the EU. It is the choice of a good alternative that is not easy.

Many pro-EU politicians have concluded that this is not the best option for post Brexit Britain. But the 75 Labour MPs who rebelled on Wednesday are using the issue to signal that they are more European than their colleagues.

Many may indeed believe that this formula for access to the single market is the best available. There are good arguments on their side. It would appear less economically disruptive to minimise the changes in the framework of business and trade relationships. Studies suggest a small net benefit to the long run level of economic activity in this scenario. In addition, there is an administrative simplicity in opting in to an existing framework compared to the risks and effort involved in creating a new arrangement.

The pro-Europeans who are not convinced by the EEA membership have a diversity of reasons related to political strategy, regulation and economic performance.

For some, particularly MPs in leave voting areas, there is a need to placate the electorate’s concern over immigration. If there is one area where single market rules would inhibit Labour’s manifesto promises it is the pledges made in 2017 on immigration.

Others who are wary of the EEA point to the difficulty of implementing “rules” over which the country has no say and little influence. Under the rubric of removing non-tariff barriers, single market regulations cover not just product standards, but public health, environment, public procurement, competition and a mass of important public policy issues.

The concern is not so much that current rules might thwart existing policy ambitions. (Although even advocates for the single market acknowledge that some objectives would require careful navigation around the rules.) The real problem is that future rules dealing with technologies yet unknown or problems yet to be identified will impact on policies yet to be imagined.

How would a rule-taking government react if a British regulator declared that single market rules may pose an unacceptable risk to customers or taxpayers, as the Financial Services Authority said of banking regulation in 2009? Inside the EU there is scope to fix such problems which would not be available in the EEA.

At a deeper level rule taking has an economic effect. The best known economic impact studies treat the economy like a self-equilibrating machine. Politicians might set the controls but the mechanism runs by its own logic. A more modern understanding does not separate the economy from its social and political context. An economy is embedded in the norms and standards of a society and adapts to its choices on what behaviour and risks are acceptable. Adopting the rules made for a different social context can inhibit economic development.

Making the EEA into a totemic issue for pro-EU signalling obscures the important questions that need to be explored. The choice is not straightforward. Faced with trade-offs different politicians will make different judgements and arrive at different conclusions.

Creating an in group may serve to paint those who reject the totem as less pro-EU. For some opponents of Labour’s leadership that might be the point.

Using Brexit to Advocate Austerity

A number of Labour politicians - Labour politicians - have been making the case for post Brexit austerity. They may not consciously intend to promote a continuation of austerity even under a Labour government. Their intention might be to harness an anti-austerity impulse to support for the single market. But their case repeats the logic of George Osborne: if tax revenues are down then the government must cut spending.

I thought that the old government-must-tighten-its-belt argument had been defeated, at least in the Labour party. It's back, however, promoted by some Labour politicians who have yet to break from the neo-liberal mindset. Naturally, support for the single market is not limited to neo-liberal thinking. The TUC, for example, makes a more convincing case based on jobs and employment rights.

I challenged the "Brexit means austerity" line in Labour List, Even after Brexit austerity will remain a choice

I fear however than some apparently pro-European campaigns serve another purpose, shifting policy in a less progressive direction.

Labour's Brexit Policy

As part of my role on the NPF, I study the submissions made by members and others to the policy commission on which I sit, Economy, Business and Trade. Quite a few of these relate to Brexit, although a different commission actually has the lead on that topic.

I find that many of the submissions are unsure of where Labour stands and it helps to have this statement of policy which was adopted by the Party conference in September 2017. Unfortunately, I can't find it on the web so I'm posting it here.

NEC Statement on Brexit 25 September 2017

Pessimism Takes Hold

Back in May, before the negotiations on leaving the EU got underway, I wrote that the differences between the UK and the EU need not be insuperable.

The EU had adopted an approach to the talks that would make finding the necessary trade offs difficult. I warned of the difficulties caused by the long period of not talking to each other; the had EU insisted that there would be no informal talks, no probing, no sounding out in advance of formal notification and that all negotiations would take place within the prescribed framework. As a result, I thought, the two sides had developed their understanding of the issues in separate bubbles.

When Mr Juncker accused the prime minister of being on a different planet, he should have realised that both parties were on different planets and needed to invent some quick form of space travel.

I made the case here on Left Foot Forward:

https://leftfootforward.org/2017/05/how-deep-is-the-may-juncker-divide-and-can-it-be-bridged/

Once the talks got going, my concerns deepened. I am acutely aware that the EU is not run by disinterested experts but it has a democratic structure where the centre right has been in power for a number of years. As I explained in this piece on Left Foot Forward:

https://leftfootforward.org/2017/06/brexit-will-be-negotiated-by-europes-tories/

Not only is the EU negotiation mandate inconsistent and illogical, as you might expect from an agreement thrashed out by 27 parties, but it is defensive and negative. It sets out what the EU27 don't want but has little to offer on what they do. The idea that both sides should be aware that they have interests in common in finding a solution that serves all Europeans, those who remain as well as those who are leaving.

The detail is here in Left Foot Forward:

https://leftfootforward.org/2017/06/what-does-the-eu-want-from-the-brexit-negotiations/

The Risks of Leaving

I've expressed my scepticism about the predictions of dire economic consequences resulting from the decision to leave the EU. It will be bad, but not catastrophic.

That does not mean that there are no risks of a major impact on the economy. Just that to see the risk we need to look elsewhere than the macroeconometric analyses that get attention. The problem lies more in industrial structure and the unpredictable consequences of adjustment.

I explain this in more detail on Left Foot Forward.

Time Is A Great Healer

There is a little too much pessimism in the Labour Party right now. The problem is that the party seeks to represent both Remainers and the "left behind" who voted Leave. The party is at risk of being squeezed between a Lib-Dem revival hoping to grasp the mantle of the 48% and UKIP targeting working class voters.

If the election is not held until 2020, then will Europe still be the dominant issue?
I think not and I said so in this piece on Left Foot Forward.

https://leftfootforward.org/2017/02/brexit-wont-dominate-politics-forever-and-that-gives-labour-reason-to-hope/

Recession? What Recession?

I've been puzzled that so many of my friends and comrades are expecting an economic catastrophe to follow the referendum to leave the EU. I've written before about how the long term cost of EU exit will not make itself felt as an obvious disaster. Part of the reason for the continuing expectation of some kind of immediate economic shock comes from the exaggerations made in the referendum campaign that a Leave vote on its own would be damaging.

I've taken a look at the predictions of a recession following the referendum result. What I've found is that the memory of a consensus among the experts is false. On the whole there were not the universal forecasts of recession that we think we remember.

I wrote up the detail in an article published by Left Foot Forward on 14 February 2017.

Did the experts really predict a post-Brexit recession?

There was a moment after the Iraq war when we were waiting for the allies to uncover the weapons of mass destruction stockpiled by Saddam Hussein. While the generals asked for more time — they would turn up eventually — some brave souls like Robin Cook, called it correctly; they were never there in the first place.

Waiting for the post referendum recession feels like waiting for Saddam’s WMD. Last May we were told that the Bank of England, the Treasury, the IMF and others forecast an imminent recession if Britain voted to leave the EU.

Other studies of the long term impact of EU exit added to the gloom with predictions of a loss to GDP varying from 3 percent (London School of Economics) to 7.5 percent (HM Treasury)

It is not surprising that many remainers are still expecting an economic catastrophe while smug leavers feel their distrust of experts has been vindicated.

Robin Cook knew early on that no WMD would be found because he had paid close attention to the original evidence. A careful reading of the economic evidence would have shown that the recession story was just as over hyped. While Mark Carney, George Osborne and Christine Lagarde were all reported as predicting a recession, their organisations’ analyses said something else.

Bank of England

The Bank of England’s Inflation Report in May 2016 pointed to the downside risk of a leave vote including ‘a materially lower path for growth and a notably higher path for inflation’. The press conference is a classic example of reporters in pursuit of a preconceived story.

After repeated questioning, Mark Carney finally used the r-word:

“There’s a range of possible scenarios around those directions, which could possibly include a technical recession — possibly include that.”

He emphasised that the Bank had made no formal forecast but the press had their headline.

Treasury

Misleading reports of the Treasury forecast should not be blamed on the press. ‘Scrupulous with the truth’ is not a quality we associate with George Osborne. Indeed the BBC deserves credit for fact-checking the recession claim.

The Treasury analysis included a ‘shock’ scenario and a ‘severe shock’ scenario. The latter included as a kind of sensitivity analysis. Under the first GDP would be 3.6 per cent lower and under the second, six per cent lower after two years. A 3.6 per cent fall in GDP would be a major recession and a six percent fall would be another great recession. That is not the Treasury claim.

A close reading of the document shows that these are projected falls from a ‘baseline’ case where Britain voted Remain. Since the economy normally grows by more that 3.6 per cent in two years the shock scenario is not obviously a recession.

More significant is that the Treasury has no figure of its own for the baseline. The Treasury analysis does not give an independent estimate of the level of GDP after a leave vote. In order to deduce a recession it switches methodology to subtract its estimate from the OBR forecast. This allowed a conclusion of four quarters of growth at -0.1 per cent.

Even if we were prepared to accept that manoeuvre the report makes the unrealistic assumption that, faced with a downturn there would be no fiscal or monetary response. The smallest stimulus would surely nudge that figure into positive territory.

IMF

The IMF also provided warnings of a post-vote recession. It too offered two scenarios. In the limited scenario GDP would fall by 1.5 per cent by 2019 and in the adverse scenario by 5.5 per cent over the same period. Again these are falls relative to a baseline of GDP after a remain vote.

Tracking down the relevant IMF staff report uncovers this useful graph. In one scenario growth dips but remains a long way from recession, in the other a recession is visible.

What can we conclude?

Firstly, the idea that there was a confident consensus that a leave vote would cause a recession is wrong. In each case the possibility of a recession was acknowledged but given too much emphasis in the reporting. A closer look shows that the Bank was not making a forecast, the IMF was more nuanced and the Treasury report lacked credibility.

Secondly, even taking account of the exaggerations, it is clear that most analyses expected a greater negative impact than has so far occurred. It may have been correct to warn of the risks which conventional economics would identify. We avoided those risks and should be relieved. Investment and consumer spending, for example, have continued better than expected.

Risks remain but they should probably be set in the context of the wider state of the economy – household leverage, low productivity and stagnant incomes. EU exit is not the only factor.

Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party

Political Economy and Trade Deals

Trade agreements are in the news at present; mostly because commentators think the UK is desperate for any deal it can get. I shared some thoughts on the political economy of trade deals on Left Foot Forward originally published on 27 January 2017.

Why there’s no such thing as a quick trade deal

How easy would it be to agree a quick trade deal? Do negotiations need to drag on for seven years or more? Can a UK-US trade deal really be done in three months? If trade is a win-win, agreement should be simple.

There are two problems. Firstly the economics of trade deals are straightforward; the political economy is not. Secondly, modern trade deals are mostly not about trade. They are about the free movement of capital, the protection of intellectual property rents and the subjugation of regulatory policy to commercial interests.

Political Economy

The key economic fact is that the benefits of trade come from imports: consumers have more choice, cheaper goods and services become available and resources are released for more productive use. Exports, according to economists, are needed to pay for imports.

In trade talks, by contrast, the aim seems to be to promote exports. Negotiators reluctantly accept imports as the price of access to export markets. To liberal economists trade negotiations are a game where delegates pretend to care about exports when in fact they want the benefits of imports.

Political economy explains the paradox. Consumers seeking more choice or cheaper products have little power. Firms which might employ the resources freed by imports have less power than existing incumbent producers.

Incumbent firms have developed their business strategies based on a competitive advantage that wins extraordinary profits. For some trade offers the capacity to extend their competitive advantage into new territories. The more successful incumbent firms are, the greater their influence will be with governments and trade representatives. They can point to the jobs and tax revenues generated by access to new markets. Thus exports become the focus of attention.

Some incumbent firms may be threatened by competition from more efficient foreign producers. While their arguments have less appeal to policy-makers than those of successful companies, it does explain why certain favoured sectors are often exempted from trade deals. Agriculture is the obvious example.

Deals should not be called “free trade” deals. Most agreements are a mix of market opening and protection driven largely by the power and influence of incumbents.

Non-Trade Trade Issues

Protection is evident in some of the non-trade issues in modern trade agreements. Intellectual property rights were a major item in TPP, the US-Asian deal recently abandoned by President Trump. IP rights are a source of market power and so of extraordinary profits. US firms were keen to extend the generous protection offered by American rules to Asian countries.

The I in TTIP stands for investment and created one of the most controversial problems for the US-EU talks. People making inward investment decisions want to minimise the risk of their capital being appropriated or their contracts not being honoured. Special arrangements to settle investment disputes have been included in many recent trade agreements.

In countries where the rule of law is well established, courts are independent and corruption is low this should not be a concern. In fact the reputation of Britain’s courts is a source of comparative advantage much valued by the finance sector among others. Investor protection clauses are not needed in deals between advanced democratic countries.

Government procurement is another item on the agenda of modern trade deals. Government purchasing can favour domestic suppliers and so act as a form of protectionism. Equally, such purchasing can be a major tool of industrial policy not just supporting favoured sectors but also to encourage investment in innovation.

From a trade perspective, standards and regulations are seen as non-tariff barriers. For example the EU ban on growth hormones in beef production was seen by US producers as a trade barrier. The EU saw the application of the precautionary principle and the dispute was taken to the WTO.

More recent deals have sought mechanisms to harmonise standards. The problem here is that rules designed for consumer safety, public health, environmental protection and so on can all impact on trade, but they need to be set through mechanisms which are democratically accountable not frozen in trade agreements.

It is significant that when the EU created its single market it did not just have a court it created a parliament as well.

Easy

Trade deals might be easy if they were just about trade. Traditional issues of tariffs, quotas and subsidies have been joined by a vast new agenda of complex issues. With traditional barriers to trade already low, some claim that the future benefits will come from removing non-tariff barriers.

Economic analysis shows that these benefits are tiny. The extensive agreement which the EU was seeking with the US included all of these new issues. Its expected impact on the EU economy was an eventual increase in GDP of 0.5 per cent, according to the EU’s own analysis. To be clear that is not an increase in growth of 0.5 per cent but an increase after 10 years equal to about two months of growth.

Even tinier is the expected benefit of the ‘comprehensive’ agreement with Canada. The EU forecast an eventual increase in GDP of just 0.02 per cent to 0.03 per cent .

The secret to a quick trade deal is to limit it to trade. The more linkages there are with other issues the more difficult become the trade-offs and the longer the process will take.

Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party.

Letting the Government Off the Hook

With so much attention focused on the consequences of leaving the EU, I have begun to fear that the Tories will be able to blame every failure on the referendum. I shared this thought in an article published by  Left Foot Forward on 27 November 2016.

Brexit cannot become an all-purpose alibi for Tory incompetence

Remember the Marmite crisis? A few weeks ago leaving the EU had led to Britain’s favourite (or least favourite) spread being lost to consumers. So keen were we for evidence of the negative impact of EU exit that this squabble between a monopoly supplier and a monopoly buyer became a story about the EU.

The prime minister’s hard tone on leaving the EU caused the pound to fall causing import prices to rise and promising soaring inflation. Marmite was off the virtual shelves.

Now we have the Office of Budget Responsibility forecast on inflation.

They predict that inflation will soar to a peak of 2.6 per cent next year. In other words, CPI will go from one percentage point below the government’s target to 0.6 of a percentage point above before falling back to the target. That is not the bad news we were expecting.

The OBR does not dispute that the pound has fallen. A trade weighted index has sterling down almost 30 per cent compared with 2007, but actually only a little lower than the period 2009-2013.

 Sterling effective exchange rate assumption

The lesson we should draw from this is that commentators are so focussed on the aftermath of the vote that every piece of economic news is fitted into a post referendum narrative. Psychologists call it confirmation bias. Commentators see what they expect to see and what they expect to see is an economic impact from EU exit.

EU exit is distorting our understanding of developments in the economy. One issue with this distortion is that we lose focus on the questions that matter. Leaving the EU will slow the economy, but that is not the whole story.

Another problem is that it lets the government off the hook for its failures. Leaving the EU could become the all-purpose alibi for Tory incompetence.

Labour front benchers like Clive Lewis and Rebecca Long Bailey, did a good job challenging this narrative following the Autumn Statement. They pointed out that EU exit accounts for only half the increase in government borrowing. The other half represents government’s own failings.

Sources of changes to public sector net borrowing since March

This last chart is copied from the OBR presentation on their report. It illustrates the changes made to their GDP forecasts in November compared to the pre-referendum forecast in March. It shows a clear slowdown in the rate of growth in 2017 and 2018 compared with their earlier expectations.

Annual real GDP growth

The most striking fact is not the temporary slowdown in growth but the low level of expected growth overall. Before the financial crisis growth averaged over 2.5 per cent. Even before the impact of leaving the EU was taken into account the OBR foresaw slow growth continuing up to 2020.

There is another story being told in the OBR figures. It is one of inadequate investment and a stagnating economy. Minor changes in government policies announced yesterday do nothing to improve the country’s prospects.

There is a story about the impact of leaving the EU but the narrative which emphasises the effects of EU exit risks masking other fundamental problems.

The tale of productivity, living standards, investment and inequality still needs to be told.

Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party

Perspective on the Economy after EU Exit

EU exit will be bad for the economy robbing us of some future prosperity. It does not mean the economy is about to melt down. We need to get the bad news into perspective.

With that in mind I wrote this piece which first appeared on Left foot Forward on 26 October 2016.

The economy is stalling – but to fix it we need to look beyond Brexit

What is today’s most pressing economic issue?

The average reader of newspapers and the blogs would probably think that it is Britain’s decision to leave the EU. News reports continue to cite predictions of dire economic consequences from implementing the referendum decision.

Despite what you might have heard, Britain outside the EU is likely to be a far wealthier country in 2030 than it is today. How much more wealthy depends a little on the nature of the trading relationship with Europe but it depends a lot on the issues that concerned us before June – low productivity, low investment, low wages, low inflation, low returns on savings, the current account and the imbalances between regions and sectors.

That this idea seems surprising is partly because too many of us are still fighting the referendum. We remainers see every piece of bad economic news as vindication of our position. The other side at least get to cheer when the news is good.

The exaggerations of the campaign still colour our understanding.

Take for example the Treasury study whose central prediction was that Britain’s GDP would be 6.2 per cent lower outside the EU in the long term. That’s the figure Mr Osborne turned into an unbelievable £4,300 loss for every household. (I doubt Mr Osborne ever met a statistic he couldn’t torture into saying what he wanted it to say.)

The figure came from a serious study so let’s take it seriously: after 15 years Britain’s GDP would be 6.2 per cent smaller. The question is smaller than what? The claim is that, ceteris paribus, Britain out of the EU would be poorer than Britain in the EU, not poorer than Britain today.

	In the EU	Out of the EU
Good policies	44.8%	38.6%
Bad policies	25.0%	18.8%

If GDP grew at its historical trend rate of 2.5 per cent per annum then after 15 years Britain would be 44.8 per cent richer than today. If leaving the EU cost 6.2 per cent then Britain outside the EU would be 38.6 per cent richer.

That might be too optimistic. Growth as high as 2.5 per cent has been rare in recent years when austerity has held back the economy. Suppose that due to poor policy choices GDP growth averages only 1.5 per cent per annum. After 15 years GDP would be 25 per cent higher than today in the EU and 18.8 per cent outside.

Increase in GDP with good or bad policies, in or out of the EU



These figures should not be treated as a forecast or a projection. They are merely an illustration of the scale of the impact of leaving the EU setting it in perspective with other developments in the economy.

What can we conclude? Firstly, it would be better to stay in the EU, which follows from accepting the Treasury analysis. Secondly we see that other economic policy choices can have a bigger impact on our future wellbeing than the decisions on Britain’s future trading relationship with the EU.

The conservative leavers have their idea of those other policy choices. They favour further deregulation and cut to corporate taxes to lower business costs. However this approach leads to a low wage low productivity environment where insufficient demand and deflation risks locking the country into a low growth trajectory.

The alternative lies in a virtuous cycle of investment, rising productivity and rising wages. Higher wages provides an incentive to productivity enhancing investment which in turn funds the rise in workers income.

An active industrial policy accompanied by public investment is needed to drive this process. Leaving the EU could start a rebalancing away from the financial sector but active policies will be needed to support an expanding manufacturing sector in its place. Industrial policy needs to promote manufacturing exports to take advantage of the fall in sterling. A low pound is necessary to address the current account deficit, but without active measures the opportunity may be missed

Cross border supply chains will face new frictions and industrial policy should aim to help firms to create shorter supply chains without compromising quality.

With inflation is still one below the government’s target, rising wages could help steer away from the danger area of deflation. Only when inflation is significantly above target will it be safe to raise interest rates which will have the benefit of increasing returns to savings.

Despite the media focus on the economic impact of leaving the EU, that is not the main determinant of future prosperity. The disruption of leaving will weigh on the economy for some time and the loss of efficiency will have permanent effects. Nevertheless there remain many important policy choices which will have greater influence on future economic outcomes.

We need to get back to the policy debates we were having before June.

Jos Gallacher represents Labour International on the National Policy Forum of the Labour

Pass the Port

If we were to remain in the EU then financial services passports would be an issue in financial sector reform of interest to people who worry about the next crash. EU exit has pushed the subject up the agenda; mostly in the form of the City demanding that passporting is preserved.

Here are a couple of articles explaining why we should think again.

Passporting peril: How can the UK make banking safer post-Brexit?

Brexit: Is the financial services passport actually worth fighting for?

My First Reaction to the Referendum Result

No-one knows anything. On the morning of Friday 24 June we entered a new world where we no longer knew the rules. Over that weekend I met with friends to share the shock and begin to think about what it all means.

Those discussions led to an article first published in Left Foot Forward on 20 July 2016.

We’re still grieving for Europe – big decisions should be avoided

It is not surprising that everyone I know voted Remain.

I’m a Scot living in Brussels. In my circle, the grieving over the loss of Britain’s European future has barely begun. All of our politics have been thrown into chaos.

The assumptions we stood on have been whipped away. New issues and unexpected questions occupy us. Everything has changed and no-one knows anything.

A good piece of advice is: do not make any decisions too soon after a loss. Yet we expect politicians to have answers to quell the uncertainty we feel in this post-referendum period. I urge caution. The solutions which seem most attractive now may not in reality be the best for Britain in the long run.

The first stage of grieving, they say, is denial. We hope to awaken from this nightmare and find that Britain’s position in the EU is restored. Parliament will act. Leavers will have buyers’ remorse. There will be a new referendum or a general election.

Sadly, denying reality does not change it.

Denial gives way to anger, the second stage of grieving. There are many targets at whom to direct anger: the leavers’ lies, the poor campaign, media moguls and unscrupulous politicians. To appease the anger party leaders must be sacrificed. Those who made the mess should be given the job of cleaning it up, whether or not they are the most capable of performing the task. Anger, however, is a poor guide to action.

The next stage is bargaining. Maybe if we do this then the fates will be kind to us. We can delay Article 50 and hope that something turns up. We could realign political movements to create a pro EU party or a pro EU alliance. We could let the reality of an economic shock shift opinion against leaving.

The last stage before acceptance is sometimes described as confusion.

In this stage there is a realisation that something fundamental has changed but all the complexities of the change are difficult to grasp. What does Britain outside the EU mean for policy on agriculture, science, competition, innovation, urban regeneration and regional development, tax rules and employment rights?

Given the complexity, the interactions and spillovers between these areas, being confused is perfectly rational. Recognising how little we know is the beginning of wisdom.

Hence my argument that we should not rush into decision. If EU membership is the best option then it is tempting to think that the closest to membership is the best alternative. We might assume that the Norway model is better than the Swiss model which is better than a trade deal or no deal. It would be rash to reach that conclusion without much more thought and analysis.

Membership of the EEA, for example, would mean accepting many EU policies with no say in policy-making. Even the most ardent Remainer agrees that many EU policies need major reform.

There are many issues to consider before deciding how Britain should position itself in Europe. I offer three out of many examples. They concern competition policy, public procurement and the free movement of capital.

The EU has a successful approach to competition policy which is capable of challenging anti-competitive behaviour by even the largest corporations. However, EU state aid rules can be an obstacle to providing support to major employers in difficulty or to using subsidies to promote industrial development. Would we want to continue to operate with these rules when we have no influence in shaping them?

Equally the EU approach to public procurement is based on sound principles of transparency and objectivity. We could agree that reciprocal access to each other’s public contracts is in Britain’s interest. Alternatively we could conclude that public purchasing power could support a more active industrial policy.

My last example concerns the financial services ‘passport’. This allows banks and other financial firms regulated in one member state to operate in any other without further regulatory scrutiny.

While this seemed like a good idea in the 1980s, since the crisis of 2007-2008 we understand better then need for stronger oversight of banks. Lobbyists for the financial sector claim that passporting is essential for the City. Should we believe them? These are the same lobbyists who oppose every attempt to make banking safer through more active regulation and requirements to hold bigger capital buffers.

Without passporting banks would face more regulatory scrutiny and would need to hold more capital. At present passporting allows undercapitalised Italian banks to offer their services in Britain without oversight by the Bank of England. We need to ask if there are risks to passporting we would be better off without.

If Britain had voted remain then each of these issues, and many others, would form part of a reform agenda. They would be technical issues of interest to policy specialists who take an interest in financial regulation, competition policy or industrial strategy.

In the changed circumstances of the leave vote they become important aspects of the most pressing issue of the next four years, namely how do we want to relate to the EU in future.

While still reeling from the shock of an unwelcome plebiscite we must begin to assess carefully many questions across many policy areas and to analyse the trade-offs between them. These are not decisions to rush.

Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party.