A tale of two constituencies

Owen Paterson, MP for North Shropshire, claimed that his constituents were telling him they we’re frustrated by the lack of progress on Brexit. Jess Phillips, MP for Birmingham Yardley, thought that was a bit odd. “I’m in a leave seat and my constituents never ever say this stuff,” she said. “Where is he hearing these opinions?” She reckoned he and his fellow Tory MPs were making it all up.

They might not be though. It is quite likely that they are both right. A quick glance at the two constituencies shows that they are very different places. Both are estimated to have had a Leave vote of around 60 percent but there the similarity ends. North Shropshire and Birmingham Yardley sit either side of the UK average on a number of measures.

Comparing Birmingham Yardley and North Shropshire (all figures percentages)

Source: House of Commons Library

Birmingham Yardley is the 21st most deprived constituency in England while North Shropshire is 315th. In general, North Shropshire’s population is older, whiter, more financially secure and more middle-class than that of Birmingham Yardley. According to constituency profiles developed by Electoral Calculus, North Shropshire is likely to be more economically right-wing than the rest of the UK, while Birmingham Yardley is a similar number of degrees to the left.

The Brexit vote is often depicted as a working-class revolt but as Danny Dorling says, according to Ashcroft polling data, ABC1 voters made up 59 percent of the Brexit vote – higher than their proportion of the general population. A majority of working class voters might have voted for Brexit but fewer of them turned out. It was the middle-class voters who made it happen.

Working class people were much more likely not to vote, whereas middle-class people, particularly older middle-class people voted.

And your typical Leave voter was a conservative Tory voter who wasn’t rich but wasn’t particularly poor.

So your typical Leave voter was very much like the typical voter in North Shropshire.

The people who want Brexit, I mean really want it, tend to be middle-class and middle-aged to elderly. As IpsosMORI consistently reports, it is these voters who see it as the most important issue.

Owen Paterson and Jess Phillips are probably both right. North Shropshire is just the sort of place where people are likely to bend their MP’s ear about Brexit. And Birmingham Yardley isn’t.

It is perhaps not surprising, then, that it is Labour seats which are seeing a shift in opinion against Brexit. Some of this is because people who have turned 18 since the referendum are predominantly Labour and Remain supporters and are helping to shift the balance. But many working class voters were never as personally invested in the idea of Brexit in the first place. They are also the ones likely to suffer most from the economic consequences. Birmingham Yardley has seen the 8th highest swing to Remain. Based on these figures, the constituency would probably now vote narrowly to stay in the EU.

But think what might happen in a place like Birmingham Yardley if the political party with which most voters identify were to campaign wholeheartedly against Brexit and the havoc it will wreak on working class areas. With some clear leadership, the trickle of support away from Brexit in Labour areas would become a flood. Jess Phillips came to a similar conclusion a few days ago:

Labour voters are starting to realise that Brexit will be bad for them. Really bad. Until now, many Labour MPs have been worried that opposing Brexit would see them punished at the ballot box by hordes of angry working class Brexit voters. But working class Brexit support has been overhyped and the ground is now starting to shift. Working class voters are far more likely to punish their MPs for allowing an unnecessary job-destroying catastrophe. For Labour MPs it is less of a risk to campaign against Brexit than it is to blindly plough on with it because they think it’s what their supporters want. Brexit is not Labour’s project. It is the fantasy of conservative middle England. It will be severely damaging for most Labour voters. The party should put all its energy into stopping it.

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Brexit as a bad career move

Among those shouting loudest about EU bullying and punishment are people who also claim to be advocates of the free market. This strikes me as slightly odd because Brexit is, effectively, the UK market-testing its power and prestige in the world. Those who took us down this road assured us that the UK was such a powerful player that leaving the world’s largest trade bloc would actually make us better off. We would get the exact same benefits, other countries would be desperate for trade deals with us and the EU, terrified by the loss of one of its biggest members, would fall over itself to conclude the easiest trade deal in history.

Two years later, things are looking a little different. As a series of reports out this week show, all the Brexit options are likely to leave the UK worse off than if it had stayed in the EU. The most revealing part of the Treasury’s Brexit analysis is how little difference new trade agreements are likely to make to the UK’s GDP after Brexit. Even with generous assumptions about who we will do trade deals with (see footnotes on Page 22.) the impact is a tiny 0.2 precent of GDP, nowhere near enough to offset the losses from increase trade friction with the EU.

All Brexit scenarios are bad and the further away we move from the single market and customs union the worse they get. It looks like the world out there is tougher than the Brexiters led us to believe.

All this talk of it not being fair or the EU acting like the Nazis and punishing us for leaving reminds me is the kind of petulance you hear from the bloke who walks out of his job and then fails to get the better one to which he had assumed he was entitled.

I have known a few such people over the years. Very occasionally they are right but most of the time they get a huge shock. What they fail to realise is that a proportion of their salary is a function of their place in the corporate system. If they have worked in the same company for a while, their progression is based, in part, on their knowledge of that company and their ability to work within it. Likewise, the way they are treated by others is based on their employment status. The fact that they get appointments, sit in the fist class lounge and everybody wants to talk to them at conferences isn’t because they are ‘just bloody good’ it’s because of who they work for. This often comes as a shock to those who go freelance. As a senior executive in PoshBigCo plc, everyone wants to know you. As MD of MeAndAFewMates Ltd, it’s a lot more difficult.

So, more often than not, our overconfident executive finds it more difficult to get higher-paying work in the outside world than he imagined. Not that he is discouraged. You’ll hear him sounding off in the pub about all the ‘idiots’ who are making ‘silly offers’. “I’m worth much more than that,” he rants. “I know what I’m worth and I’m holding out for it.”

The UK’s exercise in testing the market has revealed that our worth, too, is a lot more tied up with the organisation we were part of than we cared to admit. Other trading partners prioritise deals with the EU. Even the commonwealth countries are more interested in building trade relationships with the EU than with the UK. They would, of course. It’s much bigger. To be fair, they did warn us that we would lose influence if we left the EU but we chose to ignore them. It is true that the UK is still one of the major economies in the world but much of its prestige and influence now rests on the fact that it sits at the intersection between the western military alliance, the anglophone world and the EU. Jettisoning one of those key components makes us less interesting to people.

To stretch the jobseeker analogy, all the offers so far have turned out to be worse than his old job. All pay less and have less security and benefits than the one he has just walked out of. The best offer so far is to go back to his old employer as a contractor, only on slightly less money than he was on before and without a seat on the executive team. Worse still, there’s a serious risk he might end up having to take orders from people he once considered to be junior.

It’s been some time now since he handed in his notice and he really needs to get something sorted out soon. Curiously enough, his old company have kept his job open. He can go back any time, with all his pay and benefits and his seat at the top table. But he won’t because that would make him look a bit silly. He’s still there at the bar, insisting that all he needs is a bit of self-belief and some tougher negotiation and that elusive great deal will soon come his way. His friends roll their eyes, shrug their shoulders and walk away.

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Why is the EU in no hurry for a trade deal?

The BBC’s Adam Fleming reported today that the EU’s trade commissioner hasn’t yet started preparing for trade negotiations:

Katya Adler said something similar yesterday:

[T]his is another reason for the rather laid-back atmosphere in Brussels Brexit circles right now – EU insiders think much of the detail and substance governing EU-UK future relations will actually be worked out after the UK leaves the bloc in March next year.

Perhaps the clue to this is in the report by Institute for Government last month on the views of the EU 27:

The Single Market matters more than the UK market to EU27 governments and businesses.

[T]he other member states mean it when they say that maintaining the integrity of the EU and its Single Market is their priority.

[T]here are many reasons why the EU27 will want a close future relationship with the UK, and they will all have their own priorities. That does not mean that the consensus that has prevailed so far will crumble. All member states share an interest in a deal that protects the integrity of the Single Market and the stability of the EU.

The integrity of the Single Market is a phrase we hear often from the EU but one to which a lot of our politicians and commentators don’t seem to have paid a lot of attention. There are good reasons for wanting to preserve it though. When it works in sync with the EU’s Customs Union it enables trade to flow freely in a way it does nowhere else in the world.

Outside the EU, trade is a lot more complicated. Many people seem to think that leaving the EU will free us; that there is some state of nature where countries trade freely with each other. The truth is that, in international trade, the state of nature is nasty and brutish. Historically, countries have restricted trade. They have protected their home markets and imposed tariffs, quotas and regulations on others. Over time, through trade agreements and the World Trade Organisation, these barriers have started to come down.

The EU has taken this process further than most. Its Customs Union removes tariffs and its Single Market harmonises regulations on goods and some services. The combination of these two systems removes the need for border controls. Common tariffs are charged and common standards enforced at the EU border so once something is inside the EU, whether as a finished product or a component of another product, it can be moved freely. It is therefore possible to put goods on a truck in Manchester and drive them to Munich, then pick up another load and come back again, without being stopped. One way to think about the EU is as a system of immunity. It provides a space in which the usual constraints of international trade do not apply.

It therefore follows that once a country leaves the EU it loses that immunity. There is much talk of the EU threatening to put up barriers once the UK has left. That is back-to-front thinking. Once the UK leaves the EU, the barriers that exist in the normal course of international trade will reappear. By placing itself outside the system, the UK loses the benefits of that system’s removal of tariffs and regulatory barriers. The EU’s border will move and the restrictions that apply to other countries will then apply to the UK.

But couldn’t we just decide not to check goods that cross our borders with the EU? After all, we have the same regulations as the EU at the moment so what’s going to be different after 29 March? Wouldn’t that solve the problem in Ireland too?

Unfortunately it’s not that simple. WTO rules mean that countries can only offer preferential trading terms as part of a trade deal. As the Institute for Government explained last year:

[T]hough there is scope for flexibility to unilaterally apply a lighter-touch regime, the UK would be unable to liberalise its borders for EU imports completely.

First, under World Trade Organization (WTO) rules, unless the UK is prepared to drop tariffs for all imports, it will have to collect duties on EU imports.

Second, as a member of treaty organisations such as the WTO and as a signatory of the TBT (Technical Barriers to Trade) and SPS (Sanitary and Phytosanitary) agreements, the UK would be bound by the principle of non-discrimination when it comes to applying regulatory checks.

In other words, if you drop tariffs for one country you have to drop them for everyone. The same applies to regulatory checks. If the UK decided not to implement checks on the Irish border it would have to stop checking imports from anywhere or else, sooner or later, someone would bring a legal challenge to the WTO. As the FT’s Alan Beattie pointed out:

If the UK discriminates in this way, it will be vulnerable to widespread litigation in the WTO. This will come at a time when the UK is attempting to regularise its position in the organisation, in which it has hitherto been represented by the EU. The UK is dependent on the goodwill of other WTO members in the tricky question of splitting the EU’s existing commitments on food import quotas. It must also establish its position in the WTO’s government procurement agreement which gives its companies the right to bid for public tenders abroad. Arriving on the scene while creating one of the biggest breaches of WTO law in the organisation’s existence probably isn’t the way to get other countries on side.

The same applies in the opposite direction. The EU would be obliged to treat UK exports the same way as any other and therefore subject to customs and regulatory checks. It is not that the EU would ‘slap’ tariffs and checks on British goods. They would simply appear as a consequence of our withdrawal from the customs union and single market.

There is no free trade deal that can magic these borders away. A zero tariff agreement on its own would not remove the need for border checks. Regulatory and rules of origin checks would still need to be applied. Once the UK leaves the customs union and the single market there will have to be border checks.

Which is why the EU is very reluctant to allow the UK to ‘cherry pick’ which bits of the single market it wants to be in. Once the UK starts doing trade agreements with other countries it will mean that goods that don’t conform to EU standards will be circulating in the UK. That means there is a risk of those goods crossing borders and so there will need to be border checks. A country can’t be half in and half out of the Customs Union and Single Market because that contaminates the system. The whole point is that any goods inside can be moved anywhere and any goods outside are checked as they come in.

This ease of movement has enabled firms to set up EU-wide supply chains. This FT graphic, showing the journey of a fuel injector, is an example of how something manufactured in the UK can end up as part an EU product manufactured elsewhere.

The UK imports to make its exports and exports so that others may make their exports. As Mark Carney pointed out last year, over 30 percent of the total value of UK exports is components for goods that are finished elsewhere in the EU:

The proportion of UK exports that are intermediate components of EU value chains has increased from about 1/5th of exports in 1995 to about 1/3rd in 2014. Increasingly the UK doesn’t so much export to Europe as through Europe; it is a supplier of components to final goods that are exported beyond the continent.

Chart by Bank of England

Once the UK leaves the Single Market and Customs Union this trade will be subject to border checks. This will cost to processes that have been integrated for years, many of which are time sensitive. In some cases, the disruption will be enough to make it worth relocating these supply chains. For the most part, it will be a lot easier for EU firms to do that than for UK ones, simply because they will still have a number of other countries from which to choose while UK firms will have to source components from within the UK.

As the Institute for Fiscal Studies remarked:

[T]he UK is a much less important source of inputs for the EU than vice versa. For example, manufacturing firms in the rest of the EU only obtain 1.5% of their inputs from the UK.

The disruption to supply chains will be a lot less of a problem for EU countries than for the UK.

Chart by Institute for Fiscal Studies

From the perspective of other EU countries most of the problems associated with Brexit come from the UK’s withdrawal from the Customs Union and Single Market. A free trade agreement might mitigate that to an extent but it won’t restore the smooth flow of supply chains. As BMW’s sales and marketing director Ian Robertson said, a FTA isn’t that much better than WTO rules. Once the supply chains are disrupted the damage is done.

The British Ports Association agrees. The impact on ports, it says, would be the same under a FTA as under WTO rules. Its chief executive said:

A potential Brexit free trade deal will be welcomed by many in the sector but this is unlikely to cover border processes. In terms of border operations the impact of leaving the Customs Union and Single Market is now fast becoming a ‘no deal’ scenario for ports. Indeed this means that new border controls on UKEU trade are likely to be unavoidable and that delays at certain ports and important trade gateways are a distinct possibility.

Maybe that is why the EU doesn’t appear to be in any great hurry to talk about trade deals. Its objective is to limit the damage to EU supply chains and re-set the Customs Union and Single Market to operate without the UK. That’s the priority. Set against that, a trade deal is simply a nice-to-have.


It reminds me of what happens when you disturb an ants’ nest. The ants rush to seal the breach as quickly as possible. That is what the EU will do when the UK ruptures its carefully designed system. It will re-seal it in a way that does not leave any holes. A two-year transition period, should it be agreed, will give it time to do this. EU firms will be able to relocate their supply chains so that when the final break with the UK comes it will not be as big a deal.

There is a possibility that the EU might agree to the UK staying in the Single Market for goods only and negotiating a new customs union. As Sam Lowe and John Springford argue, this is similar to the arrangement Jersey has now and it would enable the UK to regain control of its immigration policy. The “Jersey Option” would also remove the need for physical checks on goods thereby avoiding the disruption to supply chains and the need for a visible border in Ireland. So far, it is the only proposal I have seen which enables the UK to retain its red lines, honour its commitment on the Irish border and to which the EU might just agree.

Otherwise we may find that come 2021 the EU will happily let us leave without a trade deal. It will have relocated its supply chains, put its port infrastructure in place and secured the UK’s budget contributions until the end of the financial period. With its system of friction-free trade preserved, then the EU might get around to talking about a trade deal with its awkward neighbour.

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An Irish Sea border is a silly idea but so is the cake-and-eat-it bluster

The EU wants to annex Northern Ireland. Such was the predictable hysterical reaction by pro-Brexit MPs and commentators to the European Commission’s attempt to turn December’s Phase 1 agreement into a detailed withdrawal agreement.

What has really upset people is the Protocol on Ireland/Northern Ireland, which starts on Page 98. It contains the suggestion that, in the absence of any other way of avoiding a hard border in Ireland, it would be necessary for Northern Ireland to remain in a customs union with the EU. The corollary of this would be a customs border on the Irish Sea, effectively dividing the UK into two customs zones.

Of course, Theresa May is right when she says that “no United Kingdom prime minister could ever agree to it”. Chuka Umunna is also right when he says that parliament would never vote for it. A customs border on the Irish Sea is a silly idea which would create more problems than it solved. Leaving aside the possibility of Loyalist violence, the flip-side of the Republicans potentially attacking the border posts, there is the simple economic impact. While Northern Ireland’s principal foreign trading partner is the Republic of Ireland, the majority of its external trade goes to the rest of the UK. A customs border with Great Britain is therefore likely to be more damaging than one with the Republic. It also wouldn’t remove the Republic’s other Brexit headache, the loss of its export bridge to the rest of the EU.

The European Commission knows all this and knows that such a thing would never come to pass. It also must have known that its suggestion would provoke outrage. So why do it? Was it an insensitive provocation or was it, as the FT’s man in Brussels Alex Barker reports, because the EU wants to force a reckoning? One EU diplomat even used the term ‘shock therapy‘.

Paragraph 49 of the December agreement read:

The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all- island economy and the protection of the 1998 Agreement.

That effectively means that unless the UK can suggest either a form of trade deal or a technological solution that removes the need for border checks, the UK must retain full alignment with the single market and customs union at least for Northern Ireland.

Within days of the report being published, David Davis told Andrew Marr that it wasn’t really an agreement, just a statement of intent. This annoyed the other major players in the EU who thought they’d secured an agreement which would allow them to move on to the next phase of the negotiations. The UK also failed to come up with any detailed solutions, despite insisting that it could all be sorted out somehow. In the absence of anything more concrete, the EU came up with what it described as its fallback plan; an EU and Northern Ireland customs union.

Government ministers have probably known for some time that there isn’t an easy solution to the Northern Ireland border question. If Boris Johnson really believed that it was no more complicated than administering the congestion charge between the London Boroughs of Camden and Westminster, he wouldn’t have been the slightest bit worried by the European Commission’s fallback protocol. His response would have been, “What a silly suggestion. Everybody knows it won’t come to that because we have the technology to avoid customs checks at the Irish border.” Instead, he got angry and blustered. Indeed, it is the same people who have been assuring us all along that technology would solve the border question (many of them quoting an EU report that said nothing of the sort) who have gone apoplectic at the EU’s protocol. Which was, I suspect, the whole point of it.

So far, the government has avoided coming clean about the trade-offs that Brexit makes inevitable. It has stuck to the cake-and-eat-it line whereby the UK can end free movement and negotiate its own trade deals while avoiding a hard border in Ireland and any economic damage from trade friction.

But there is no magic solution to the Northern Ireland border. As soon as the UK starts importing goods from outside the EU under its own trade agreements, there has to be a customs border with the Republic of Ireland. There is a straightforward decision to be made. Do we want the UK to have its own trade deals with other countries or do we want to maintain the current border arrangements in Ireland? We can’t have both. If we choose the hard border option, the EU’s current line is that it will refuse to discuss trade deals. How firmly it will stick to this is anybody’s guess but it certainly increases the risk of the UK leaving the EU without any sort of trade deal.

So it’s not difficult this. It’s a straightforward trade-off. We can have some of what the Brexiters promised but not all of it.

The Brexit Dilemma

As a country, we need to decide what is important to us and what we are prepared to give up to secure it. But so far we haven’t had any proper political debate about any of this. The government has maintained that we can have it all and the Labour Party has, until recently, kept quiet. Now, the EU’s protocol on the future status of Northern Ireland, whether by cold hard calculation or ham-fisted provocation, is likely to force the issue.

As a former colleague of mine used to say, “Sometimes, the only way to get people to understand the shit they are in is to rub their noses in it.”

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Away day to nowhere

It’s fashionable to poke fun at corporate away days. There’s even a Famous Five parody devoted to the subject. Many of you will no doubt be familiar with these events. They usually start with some fine words about openness and trust then finish hours, or even days later, with a set of statements on flip charts.

Such things were the original inspiration for the title of this blog. For, all too often, no-one actually believes in the things written on the flip charts. Either that, or they are so ambiguously worded that people can interpret them in any number of ways. It often takes as long to wordsmith the statements as it does to come up with the ideas in the first place. The result is that people sign up to what is on the flip charts, then go back to their day jobs and carry on pretty much as before, while slagging off their colleagues and complaining about what a waste of time the away day was. As a result everyone will start next year’s away day with even lower expectations, which will duly be fulfilled.

It sounds like the Cabinet’s away day was a classic of the genre. From what I’ve heard it had much of the usual paraphernalia, including breakout rooms. You have to have breakout rooms. And the result was predictably meaningless.

“So, we’re going with Canada Plus Plus Plus and Managed Ambitious Divergence then. Are we all happy that we are strategically aligned on these principles?”

“Yes. Looks good to me.”

“Should we have another Plus, you know, like Canada Plus Plus Plus Plus? Might that look a bit more ambitious?”

“Actually, I think we’ve already got too many pluses. Another one will just look silly.”

“But David has already talked about Canada Plus Plus Plus, so if we lose one it’s going to look weak.”

“OK, OK, let’s go with it. I’m not that fussed either way.”

“Right, so that’s agreed then.”

“Hang on, Managed Ambitious Divergence, that’s M.A.D. That spells mad.”

“Oh bugger! That’s true. Right. Anyone got another idea?”

“Er, how about Ambitious Managed Divergence?”

“Yeah, that’ll do. Just draw an arrow, Amber, so it shows we are swapping the words around to read Ambitious Managed Divergence.”

“No, write it all out again, Amber, otherwise we’ll get confused.”

“Write it in capitals.”

“Shall I use a different colour?”

“Look, get a new flip chart and write the whole thing again.”

“What, all of it?”

“Come on, Amber, it’s not that bloody difficult.”

“Well if you’re so clever, Boris, you come up here and do it.”

“Give me that pen. Look. AMBITIOUS. MANAGED. DIVERGENCE. There. Job done. Are we all agreed on that? Good. Now can we go for dinner?”

I jest, of course, though it is usually one of the women that ends up doing the flip charts. So too, it’s often a bombastic man whose contribution to the process has consisted of content-free grandstanding and rhetorical hand grenades who complains about the lack of pace and progress.

Executive team away days can work. I have seen people come up with useful stuff. I even saw one team spend an entire day-and-a-half exploring lots of ideas only to discount them all. That was time well spent because by eliminating what they shouldn’t do, it helped them to focus much more clearly on what they should. The trouble is, away days have a bad name because, a lot of the time, they simply paper over the cracks.

Team events fail for four reasons, which I call the 4 Cs: Capability, Conflict, Courage and Collusion.

  • Capability – where the team doesn’t understand the problem and/or doesn’t have a clue what to do about it;
  • Conflict – where members of the team are at loggerheads, either because of personality clashes or opposing vested interests;
  • Courage – where no-one in the team is prepared to acknowledge either of the above and challenge their colleagues, which leads to:
  • Collusion – where everyone tacitly agrees to paper over the cracks with an inane statement that all can agree on because no-one’s position is challenged.

The result of this will be that the elephants in the room are left alone and the sleeping dogs are left to lie. None of the important issues are addressed and they are still there at next year’s away day, when the whole process starts again.

How long a management team can keep going like this depends on the organisation’s external environment. If the market is changing rapidly, if there are hostile predators or if there are far-reaching regulatory changes, the management team’s inertia may get found out fairly quickly. However, if the environment is relatively benign, an organisation can trundle on for years happily avoiding any difficult decisions.

Unfortunately, our government doesn’t have that long. The EU has already dismissed the output from its away day. Ambitious Managed Divergence also contradicts what the EU thinks the UK government agreed to in December. Essentially, Paragraph 49 of that agreement commits the government to keeping Northern Ireland in some form of customs union with the EU and Paragraph 50 commits it to preventing barriers between Northern Ireland and the rest of the UK. If you follow the logic, that means the UK staying in a customs union with the EU. The contradiction between the December agreement and the away day statement will have to come to a head soon if any progress is to be made in the rest of the negotiations.

The output from away days is often rendered irrelevant by subsequent events. That from the Chequers event may be particularly short-lived. Six months from now we will probably have forgotten all about Ambitious Managed Divergence. Another flip chart consigned to the shredder of history.

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The Good Friday Agreement: an inspired fudge

Twenty odd years ago, a former colleague of mine was about to get married. She was from Northern Ireland and, while in London, she had met an Englishman called Anthony. She described, with amusement, the polite questions from her relatives. Without asking directly, they were trying to find out whether he was a catholic. Anthony, she told me, was a name far more common among catholics than protestants in Northern Ireland.  Another friend, this one a catholic called Rory, told me of an occasion when he had been out with a mixed group of friends in Belfast at an event where he knew most of the audience would be protestants. He asked his friends to call him Roy, not Rory, as his name would immediately tell others where he was from. It worked for most of the evening until one of them forgot and shouted ‘Rory’ across the room. Fortunately it was just before last orders so they made their excuses and left.

A few years later, during a late-night conversation at a conference, we somehow got onto the subject of passports. Of the two people in our team who were from Northern Ireland, one had an Irish passport and the other didn’t. As I remarked to one of my colleagues, it was obvious which one. The one with the Gaelic-sounding name had the Irish passport, the one named after a town in Scotland didn’t. For me, the surprising thing about this was how much of it came as news to some of my other English colleagues. It’s one of the many things that people this side of the water fail to grasp about Northern Ireland. You only need one piece of information about someone to be able to infer a whole lot of other stuff. As our boss, whose family are Irish, remarked, you don’t even need to know where someone went to school. Just the name of the school will do.

At the root of all this are questions of history and national identity. Those from protestant backgrounds are more likely to see themselves as British and those from catholic backgrounds are more likely to see themselves as Irish. Matthew O’Toole summed it up neatly:

We might wish for a world in which more of Northern Ireland’s people shared a collective identity, but that is not is the world we live in. Nations are imagined communities, to use an old truism. The people of Northern Ireland have, over time, constructed separate psychological spaces for their identities. And part of the reason for enduring political instability is that neither monolithic identity can win. Both are inherently insecure.

People who feel Irish live in the island of Ireland, but not the state called Ireland. People who feel British live in the British state, but not on the island of Great Britain.

And, as he said, the Good Friday Agreement created a situation in which both were able to pretend. Northern Ireland remained legally part of the United Kingdom but the lack of a visible border meant that nationalists could imagine they lived in the same country as the people in the Republic.

The Good Friday agreement was elaborately engineered to reflect this. It not only instituted power-sharing, but created a legally enforceable right to identify as British, Irish or both. The agreement is fastidious in keeping Northern Ireland within the UK until a majority votes otherwise. But it is expansive when describing the right of people there to be part of the “Irish nation”. To make people who feel Irish relaxed about Ireland being partitioned as a matter of legal fact, the agreement sought to soften the border in people’s minds: to help them imagine it wasn’t there.

This softening of the border was enabled by the European Union and its single market. Once the single market had been implemented, there was no need for customs checks. With no customs checks, no security concerns and no immigration controls, people could cross the border as they pleased.

Some people were highly critical of the Good Friday Agreement at the time. Michael Gove wrote a blistering attack on it in 2000. He concluded:

Ulster’s future lies, ultimately, either as a Province of the United Kingdom or a united Ireland. Attempts to fudge or finesse that truth only create an ambiguity which those who profit by violence will seek to exploit.

He was absolutely right that the agreement was a fudge but, as Matthew O’Toole says, the fudge was the whole point. The ambiguity it created allowed people with different national identities to pretend they were living in the country they wanted to be in. Far from inflaming the violence, the peace process actually allowed most of the men of violence to back down with face-saving good grace. Here, the statistics speak for themselves.

From 1993, the peace process saw a gradual reduction in terrorist incidents and its culmination, the Good Friday Agreement of 1998, almost brought terrorism in Northern Ireland to an end. Michael Gove was wrong. The agreement’s ambiguity didn’t open up opportunities for violence, it closed them down.

Businesses needed no encouragement to imagine the border away. Over the next 15 years, the economies of Northern Ireland and the Republic became ever more integrated. The Republic of Ireland now accounts for around a third of Northern Ireland’s exports. According to the FT, no other part of the UK is so dependent on trade with a single country. A lot of this is due to cross-border supply chains.

All of this is now under threat from Brexit. The assumptions on which people have built their lives and their work over the last 20 years are about to be blown away. The UK government’s current position on its future relationship with the EU is incompatible with its assurances on the Irish border. As soon as the UK leaves the customs union there must be border checks. There is no magic technology option that will wish this away.

Now we have pro-Brexit politicians saying that the Good Friday Agreement is a failure or that it has outlived its usefulness. Politicians and commentators have condemned their remarks. You only have to look at what has happened to the level of violence and the level of cross border trade in Ireland to conclude that, whatever minor problems there might be with the Good Friday Agreement, it’s still better than what went before.

The trouble is, a lot of people on this side of the water don’t really understand why it’s a big issue. Irish commentators are outraged and incredulous at the actions of the British government and the utterances of some of its politicians but the border question gets a lot less air time over here. It was barely discussed during the referendum. What some Irish people see as British aggression is, these days, simply lazy indifference. Since the IRA stopped bombing shopping centres, the English, in particular, have forgotten about Ireland. The results of Channel 4’s vox pop, asking people to draw the Irish border on a map were unsurprising. Most people hadn’t a clue where it was. Nuanced questions of identity and the importance of a constructive ambiguity that allows people to live in two different countries at the same time are likely to be lost on many people.

Unless the UK government has a sudden change of heart, it’s difficult to see how there won’t be a border between the UK and Ireland. The Irish government is already preparing for the introduction of customs checks. What happens if border customs posts go up is anybody’s guess. I have heard it said that the threat of violence has been over-hyped, that the terrorists on both sides are now mostly retired and that the country has moved on from the days of the troubles. That may be so but the border is long and difficult to police. Differing customs rules create opportunities for smuggling and where there is lucrative crime, violence usually follows. Furthermore, there are still armed groups operating and they seem to wield considerable power in some parts of the country. New grievances, like a  sudden hit to the economy, might bring new recruits. These groups only need a few  resentful young people and they are in business. The terrorism might look completely different too. Not bombs in the Arndale Centre but crippling cyber attacks on vital services.

It is true that Northern Ireland is a different place now. For many, sectarianism has lost its appeal. A return to 1970s levels of violence looks unlikely but any increase in terrorism will wreck lives. Even if there isn’t an upsurge in violence, the reappearance of a border will create misery and resentment which might play out in all sorts of unpredictable ways in years to come.

Perhaps there are aspects of the Good Friday Agreement which haven’t worked. Maybe some things that were agreed during the peace process need to be looked at again. But make no mistake, what Matthew O’Toole calls the “smudged sovereignty” of the agreement has served us well over the past 20 years. Of course it was a fudge. Everybody knows it was a fudge. But it was an inspired fudge. And it worked.


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Corporate governance and short-termism

The collapse of Carillion has brought corporate governance back into the headlines and with it the perennial questions about the short-termist nature of British business. Merryn Somerset Webb was in fine form, having a go at managers, analysts and shareholders alike; “short-termism at its worst”.

The collapse of construction and support-services group Carillion has left a lot of people with a lot of explaining to do. First up, the UK’s equity analysts. Even in 2015, says the Financial Times, two-thirds rated Carillion’s shares a buy – despite warning signs in its accounts. The managers are also in the firing line. Why on earth were they taking huge bonuses in the face of a failure they surely saw coming? Why did they take on so much debt (if there is one lesson for investors here, it is to avoid companies with high levels of debt)? And why did they keep paying dividends, even as their cash-flow woes mounted?

The UK’s institutional shareholders are hardly blameless either. They bore on endlessly about how they take a long-term view – so why were they demanding those dividends from a firm that was clearly stressed? Short-termism at its worst (see this week’s cover story for more on firms who pay dividends that they probably shouldn’t).

The FT’s Capital Markets Editor Miles Johnson called it “a warning to dividend fetishists“. He too criticises analysts and Carillion’s bosses but points out that this is a symptom of a deeper problem:

Income investing has a long history in Europe, more so than in the US where investors are far more willing to support companies that pay no dividends at all. As a result, institutional shareholders in the UK have over generations created a culture of dividend worship that has pretensions to valuing long-term investment, but in fact frequently enables some of the worst forms of corporate short-termism and mismanagement.

This has led to a frequent pattern in the UK market, where companies will doggedly maintain their dividends even when their business models are under threat because of the knowledge that a cut will very frequently result in a chief executive being fired.

Over the years, a number of reports have made the link between the UK’s poor economic performance and the short-term focus of corporate executives and investors. One of the most comprehensive was John Kay’s review in 2012 which, as you might expect, met with mixed reviews from the investment industry.

It is certainly true that the UK has low levels of investment relative to other developed economies. In November, the Office for National Statistics reported that the UK was at the bottom of the OECD investment league and has been for most of the past two decades.

Looking back further, the UK’s investment relative to GDP began to fall away from that of other similar countries sometime around the early 1990s which, ironically, is when the first of a wave of corporate governance reports was produced and the framework which became our corporate governance code was created.

Source: World Bank Data

When we look specifically at research and development, the picture looks even worse. The UK has consistently invested less than other major economies. 

Chart: World Bank Data

Meanwhile, payments to shareholders have generally been higher in the UK than in other developed economies. Kyle Caldwell, the Telegraph’s personal finance reporter, remarked on this a couple of years ago, noting that payouts to shareholders as a percentage of company earnings were relatively generous. I have updated his chart with more recent data.

Apart from the recession period, UK firms have paid dividends at a higher rate than in other markets and considerably higher than in the US.

Furthermore, listed companies are a more significant part of the UK economy than most others. Market capitalisation is a crude measure as it fluctuates so much but, over time, the value of listed companies has been higher relative to GDP in the UK and US than in other large economies. (For some reason, the World Bank’s data on the UK stops at the recession. If anyone has the up-to-date figures please let me know.)

Chart: World Bank Data

The historic data on Page 15 of this University of Chicago paper suggest that a similar pattern held true for much of the last 100 years. Publicly traded companies have loomed larger in the UK economy than in most other developed economies for some time.

McKinsey’s report on short-termism in US firms last year found that those firms with a more short-term focus invested less and, over time, performed less well than those with a longer-term view. The study also found that a majority of executives believed the pressure to deliver short-term results was increasing. Andy Haldane, the Bank of England Chief Economist, reckons something similar is happening in the UK.

The other side of the coin to high pay-out ratios from internal funds is low investment. There is both direct and indirect evidence of investment having been adversely affected by short-termism on the part of either investors or managers or both.

Chart 6 shows some diagnostics for a matched sample of public and private UK companies (Davies et al (2014)). In line with US evidence, it suggests that investment is consistently and significantly higher among private than public companies with otherwise identical characteristics, relative to profits or turnover. In other words, shareholder short-termism may have had material costs for the economy, as well as for individual companies, by constraining investment.

Overall, then, there is some strong evidence that corporate short-termist behaviour is, in Andy Haldane’s words, “far from benign”. In the UK we seem to have a particularly severe case of it.

What I’m less convinced about, though, is whether corporate governance reform can do much to solve this. As Andy Haldane says, sometimes well-intentioned changes to corporate governance can have unintended consequences. The 1980s emphasis on shareholder value is a case in point:

[T]he shift to equity-based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal/agent problem between shareholders and managers. But it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified risk-shifting incentives from shareholders to creditors and to wider society.

Linking the remuneration of corporate managers to shareholder value was supposed to have  reduced the risk of executives managing companies for their own gain and aligned their interest with those of  shareholders. Most observers now agree that it made the problem of short-termism worse and often didn’t work particularly well for shareholders. In 2009, Jack Welch, one of its early proponents called it “the dumbest idea in the world”.

Might something similar happen if corporate governance regime were altered to favour a broader range of stakeholders? As Stian Westlake said, reflecting on the Haldane speech, employees might prove risk-averse, preferring to save their jobs for the next few years rather than risk an investment that might only pay off years later. Likewise, customers might prefer continuity and low prices to the promise of innovative products in future.

Furthermore, while we often imagine shareholders to be individual investors, nowadays few of them are. Just as there is separation of ownership and control in companies, there is a separation of ownership and control in the investment and management of shares. Many investors have only a vague idea of which companies their fund managers are putting their money into. As the Kay review noted, in 1963 individual investors owned 54 per cent of UK firms. That figure is now around 12 percent.

The term“share ownership” is often used, but the word “ownership”must be used with care.It is necessary to distinguish:

  • Whose name is on the share register? (often a nominee)
  • For whose benefit are the shares held? (e.g. a pension fund trustee)
  • Who makes the decision to buy or hold a particular stock? (normally an asset manager)
  • Who effectively determines how the votes associated with a shareholding should be cast? (this might be an asset manager, a pension fund trustee, or a specialist proxy voting service); and
  • Who holds the economic interest in the security? (i.e. who is the saver who bears the gains and losses from investment?)

It is possible, and in fact common, for each of these rights of ownership to be held by different people.

The Kay review emphasises the need for the long-term stewardship of companies and one of its recommendations, the abolition of quarterly reporting, has already been implemented. Even so, I wonder whether the engaged investor with a long-term interest in the company is a will o’ the wisp. Sure there are some but are there enough of them? This piece by corporate governance adviser Paul Frentrop summed up the problem:

Out in the open market, cold-hearted, distant investors count on liquidity to realise the ‘outperformance’ they promised their clients. And in this harsh climate, no steward can survive.

So, yes, we do seem to have a problem with short-termism in the UK that is affecting our wider economy and the country’s long-term prospects. Carillion was en extreme example of it. But I’m not convinced that changes to the corporate governance regime, even major ones, will make much difference. After all, we have implemented a new corporate governance code every few years for the last quarter century. OK, things might be been worse if we hadn’t but, whatever else it might have achieved, the overall long-term investment picture looks pretty much as it did 20 years ago. Even our 1990s and 2000s productivity catch up may turn out to be ephemeral.

Having said all that, I’m happy to be convinced otherwise. Answers in the usual place please.

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