Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 31 January 2018

Brexit is fantastic project

Leavers often say they do not understand why Remainers cannot just accept that we are leaving. There are many good reasons, but the one that I keep coming back to is this. Brexit is fantastical. There is nothing about the case for Brexit that is based in reality. This is why everything Brexiters say is either nonsense or untrue.

Take, for example, the leaked government estimates of how much poorer we will be on average as a result of Brexit. There is no surprise here for economists, because the estimates are in line with the wide range of large negative long term impacts made by various groups or organisations before the referendum, including the UK Treasury. But these new official estimates are made by the department for exiting the EU, and if any massaging went on in producing them it will surely have been to promote Brexit. These new estimates include, for example, the impact of yet to be discussed trade deals with the US and others. The fact that they still come out with numbers that are not very different from those produced before the referendum is, in effect, an official acknowledgment that these earlier estimates were reality based, and not the Project Fear of Brexit spin.

So what do we get in response from the government? Just different varieties of nonsense. They say the bespoke deal the UK is hoping to get is not included. As Jonathan Portes notes, this bespoke deal is somewhere between Norway (2% GDP loss) and Canada (5% GDP loss). You have to be totally innumerate not to realise that this would mean a GDP loss between 2% and 5%.

And there is the good old ‘all forecasts are wrong’ line. I am tired of inventing new ways to distinguish between conditional and unconditional forecasts, but I guess I will have to continue to do so as long as some political journalists fail to understand the point, and economic journalists fail to make the point. Here is an example for Brexiters. Mr. Fox thinks making trade deals with pretty well anyone he can is good for the economy. That is a forecast. It is a forecast using many of the same elements as those behind the latest official estimates of the cost of Brexit. The reason that deals with all and sundry cannot replace being in the EU is down to gravity, which as Chris notes is one of the most successful and robust ideas in economics.

And then there is the even more tiresome “according to economic forecasters the economy was going to collapse” type of argument. I got wise to this kind of thing with austerity. A few allowed themselves to over-egg the impact of the government cuts and that allowed others to declare 2013 growth as a vindication of austerity, just as I predicted they would. In reality austerity caused years of stagnation and the slowest economic recovery in living memory. The reality of Brexit is that we have already lost about 1% of output, as the rest of the world including the EU leaves the UK behind.

Source: Jonathan Portes in the New Statesman here

So the economic arguments of the Brexiters are nonsense: describing them as fantasy gives fantasy a bad name. But why don’t Remainers like me accept that this is really a culture thing, and that Leave voters are willing to pay for their independence from the EU. One reason is that there is clear evidence that most Leave voters believed they would at least be no worse off after Brexit, which is of course why Brexiters continue to try and rubbish estimates of how bad the hit will be. I’m pretty sure those arguing that this is only about culture are not worrying each week about how to make ends meet.

But the ‘taking back control’ idea is itself a fantasy. Trade deals today, and the Single Market in particular, are about harmonisation and cooperation. Why is this such a terrible loss of independence when the cooperation is with the EU, but no problem when it is with the US? There is a real debate to be had about the extent to which globalisation erodes national democracy. But this is not the debate the Brexiters are having. Their dislike is with the EU in particular. I have yet to hear a single voter complain about the specific directives that come from Brussels: indeed the UK government often pretend ownership because they tend to be popular. The idea that Leave voters are objecting to a “remote Brussels bureaucracy” imposing standards to keep our beaches and air clean and to prevent workers being forced to work long hours is a myth. Voters would like to take back control, but not from Brussels or the EU.

There is even a large fantasy element when it comes to immigration. Yes, there are a few Leavers who would pay a large amount to avoid hearing a foreign language spoken in their town, but they do not represent most Leave voters. Instead there is the belief, carefully cultivated by the Conservative party, that immigration has reduced real wages and our access to public services. Large numbers voted Leave because they thought less EU immigrants would mitigate the NHS crisis. Now those EU immigrants who also happened to be doctors or nurses are leaving, and the NHS cannot fill vacancies. And, of course, those lower growth numbers mean less money to spend on the NHS: the Brexit dividend is negative.

To see how much of a fantasy it all was, why not take an article by Andrew Marr, who as the presenter as the BBC’s flagship Sunday current affairs programme should know what he is talking about, written just over a year ago. He writes
“some things are already becoming clearer. We will be out of the single market and will be out of a customs union – because if we weren’t, we wouldn’t be able to negotiate our own trade agreements around the world. Theresa May would hardly have created a new Department for International Trade if she intended it to have no purpose.”

All this, of course, was based around the fantasy of invisible customs posts on the Irish border. The UK committed to staying in the Customs Union when it signed the first stage agreement, but yet still clings to the fantasy that it has not. And then
“The logical conclusion is that we will see sector-by-sector agreements to allow in X thousand electricians, or Y thousand careworkers, with industry bodies given coupons by the government and allowed to issue the work visas they require.”

which fails on the simple logic that the EU could never allow such a thing. And then
“Some of the measures the left would like to take to support and protect the steel industry, or engineering, or to enhance our growing advantage in robotics, are made impossible not by British Conservatives, but by EU regulations on competitiveness and state funding. Make no mistake: an awful lot is back in play. Rail renationalisation, for one …”

Again, a fantasy, this time from the left. He then goes on to list lots of exciting things we can do, most of which we can do more easily inside the EU.

For all those who will tell me that the British people knew what they were doing (or rather the 52% who voted Leave), I ask did they really know more than Mr. Marr writing six months later? I suspect you could still find far greater flights of fancy among Leave voters. This is not because people are stupid, but because they soak up the propaganda in their newspapers, propaganda which the BBC is too timid to contradict. 

In the end, the economics is key to how the Brexit fantasy will end. No sane government or parliament will allow an outcome that makes people on average 8% worse off. That is why we have to make a deal with the EU, and the only deal the EU will allow is one that prevents a hard Irish border. That means staying in the Customs Union and much, possibly all, of the Single Market. Brexit will end with the UK becoming what Rees-Mogg describes as a vassal state. It will not be the fantasy people voted for, nor the fantasy the Brexiters had in mind. 

When reality bites, almost no one who voted Leave will be happy with the result. So should Remainers stay quiet and just wait for this disappointment to sink in, just for the sake of a particularly partial concept of democracy? To allow peoples lives to be impoverished and their opportunities to be diminished because of a referendum based on lies? There are democratic ways out of this fantasy turned nightmare, and we should take them.

Postscript (1/02/18)

Rees-Mogg suggested today to minister Steve Baker that the forecasts produced by government economists made Brexit look costly because civil servants had deliberately designed them to do just that, and Baker made no attempt to defend his civil servants. While this attack on the integrity of the civil service has gone unremarked by No.10, when minister Philip Lee said that the Brexit process needed to take account of "evidence not dogma", he was reprimanded. It is almost as if the government had decided that it needed to show that Brexit was indeed a fantasy project in which evidence, alongside 'saboteur' MPs, 'enemies of the people' judges, 'in the pay of the EU' economists and now 'conspiratorial' civil servants, are not welcome.     


29 comments:

  1. Wouldn't it be easier just to ask them why they couldn't accept the original vote to join the what became the EU?

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  2. Hi Simon, may I correct a factual derror in this piece? Marr was incorrect to say a country cannot negotiate trade deals whilst in the single market, this is untrue. Norway is in the SM and conducts it's own trade deals.

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    1. «a factual error in this piece? Marr was incorrect to say a country cannot negotiate trade deals whilst in the single market, this is untrue. Norway is in the SM and conducts it's own trade deals.»

      That was technically correct: Norway is in the EEA, but not in the EU Customs Union, so it is not in the "Single Market", which is given by the membership of both EEA and EU Customs Union. Indeed there are customs processes between Norway and the EU, while there are no customs processes within the Single Market.

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  3. The last decade has been an unsightly epoch in which Conservatism in the UK, US, and Europe has tried pathetically to massage over the great crash of 2008.

    It looks like the Labour Party is about 70% Remainers in the last election, the Tory Party about the same for Leave.

    The Tories, as Cameron knew, will have to hobble on trying to do something Leavey.

    I still await the leadership challenge from the Redwoods.

    And then Labour can move.

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  4. Question: If the UK went the Norway route , why is there 2% GDP loss, given that Noway has all the same trade and free movement of people conditions as EU members ?

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    1. I would imagine it's because Norway is in the single market only but not the customs union. To be like Norway, the UK would have to leave the customs union which means border checks with Ireland and a retardation of trade to some extent (Norwegian trade with Sweden for example is high, but the customs procedures do make it a bit more difficult for trade than say Danish-Swedish trade). Hence a loss of GDP compared to what would have happened had the UK remained in the EU.

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    2. «If the UK went the Norway route , why is there 2% GDP loss»

      Customs costs and other frictions due to being out of several other regulatory regimes. Only around 25% of EU rules are shared with Norway and other EEA non-EU members.

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    3. No customs union for Norway for one thing.

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  5. As James O'Brian said on LBC yesterday the mendacity of people who criticise Mark Carney's post Brexit forecast is astounding; when he then took immediate steps to mitigate the effects of the leave vote. His forecast was wrong because he saw the risk and reacted as he should. So you can't trust forecasts!!!

    AFZ

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  6. Great piece, as ever, Simon. Frustration fully understood: it's like the intellectual equivalent of wrestling with porridge.

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  7. "But the ‘taking back control’ idea is itself a fantasy. Trade deals today, and the Single Market in particular, are about harmonisation and cooperation. Why is this such a terrible loss of independence when the cooperation is with the EU, but no problem when it is with the US?"

    Goodness. Simon, Goods can be traded across borders, and because economies of scale have some advantages there may be advantages to harmonising goods regulations -- or there may not. It depends on the particular situation and what is demanded. And these advantages may not be big enough. The democratic legitimacy of our EU membership has always depended on this belief in facilitating cross-border trade.

    However, over seven tenths of our economy is not traded across borders. A huge proportion of *that* cannot by its very nature cross borders. And yet it's still organised according to EU regulations. Why do the EU have any control over our housing, or our domestic railways, or whether or not we put VAT on tampons or ebooks? It has no bearing on trade, and therefore has no democratic legitimacy -- and yet we cannot change it. Brexit is a call for democratic control over what happens on our territory and who is on our territory. Where what happens on our territory has cross-border implications then we are prepared to compromise where justified. Because we are very reasonable people. It is incomprehensible how many economists fail to grasp these very basic points. Even after so many, so many months.

    You link to a terrible Guardian article about the case for Lexit that points out that the WTO also has constraints on industrial strategies etc. Do you really believe there is no significant difference between what Germany is allowed to do and what China is allowed to do? Do you, Professor? Do you? If not why do you summarily dismiss the case for Lexit as a fantasy?

    As for the leaked forecasts proving that the pre-referendum forecasts were reality-based and not dodgy attempts to influence, it may have escaped your attention but there is a battle royal going on over what type of Brexit to pursue. Does not the mere fact that it was leaked suggest that somebody has an agenda? Apparently no copies were supposed to be made of this paper and yet it leaked -- does that not suggest that the leaker was someone who helped to produce it? I assume that you're not normally this credulous; I don't know why you are in this case.

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    1. So tampons and e-books are not traded across borders? When I purchase an e-book from a company based in another country, that isn't trade? Because I get a product (the e-book) and pay for a service (internet delivery) to obtain such a product and the money for the product (and possible the service) go to the company in the other country.

      As for railways, I would imagine that is because transportation does affect trade traditionally. The single market is about ensuring similar conditions across the market - so if UK railways differ in conditions to say French and German ones, this might have an effect on the transport of UK goods to ports to be traded to France and Germany and an effect on the transport of French and German goods brought into UK ports for distribution around the country ---> in turn this can affect the prices, possibly making French and German goods cheaper in the UK than the equivalent British goods might be in France or Germany when shipped along similar distances (or vice versa).

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    2. This is an asinine piece, but I'll hit at "It has no bearing on trade, and therefore has no democratic legitimacy". Of course it does; if a country has a 20% tax paid by the consumer, and another has a 5% tax, do you expect you'd sell more in the first or second country? Do you feel it may be in the interests of a fair trading body to intervene if this is causing significant disruption?

      I will again note the amusement value of someone claiming to support democracy and parliament squawking about how unfair it is that, err, the public and parliament be allowed to see the facts on subjects it's consulted on.

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  8. The question I think that needs consideration is whether the poor relative performance of the UK economy is due to people (consumers, businessmen) holding back because of all the negative commentary and developments around Brexit. That is, it is not inherently a function of Brexit but of self-fulfilling negative expectations around it.

    Henry Rech

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    1. «whether the poor relative performance of the UK economy is due to people (consumers, businessmen) holding back because of all the negative commentary and developments around Brexit.»

      Recent fluctuations are mostly just "fluctuations", even if the effect of announced exit on investment and spending has happened. There is no need of negative commentary for that to happen: "uncertainty" is amply sufficient.

      Also, “the poor relative performance of the UK economy” and other "mature" economies may have begun well before 2016, with the entry of China in the WTO. This graph is particularly interesting:

      https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=eg_use_elec_kh_pc&scale_y=lin&ind_y=false&rdim=region&idim=country:DEU:ITA:POL:GBR:FRA:ESP:CHN:JPN:USA&ifdim=region&ind=false#!ctype=l&strail=false&bcs=d&nselm=h&met_y=eg_use_elec_kh_pc&scale_y=lin&ind_y=false&rdim=region&idim=country:DEU:ITA:POL:GBR:FRA:ESP:CHN:JPN:THA:MYS:KOR:GRC:TUR:BRA:CHL:URY&ifdim=region&hl=en_US&dl=en_US&ind=false

      In particular look not just at the sharp difference between the countries with consumption per head peaking in 2002-2005, and those where it is growing, and in particular at the sharp turn upwards for China in 2002-2005.

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  9. I think we may be missing something here. The Brexit fantasy will be seemingly made real for 21 months starting at the end of March 2019. At that point the UK WILL have left the EU, but nothing will have changed. Hence the GDP loss between March 2019 and December 2020 should be fairly minimal (I would expect there to be some sort of loss given the continuing uncertainty affecting business investment decisions and the loss of EU agencies and migration of some banks and other financial businesses that would have started in 2018). It might be so small as to be less than 1% and give the impression that all those other estimates were just indeed junk.

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  10. If the gravity model is so compelling then why do we export less to the EU than 20 years ago? With more members you would expect more, not less; exports to the EU are now 45% as opposed to 55% in 1999.

    Also I'm sure you're aware that the gravity model's correlations may be more to do with the nearness of shipping networks rather than strict geographical nearness; in other words, and in terms of cost at least, once you're on a shipping network the costs are the same irrespective of distance. Therefore the correlations you see may have more to do with this factor.

    With regard to immigration there is a difference between absorbing 5 million over ten years rather than fifty years so the xenophobic argument is weak; the 5/10 is likely to have effects on culture which the 5/50 is much less so.Many in the EU believe there is a difficulty with immigration; this is not just the UK.

    It also seems to me that your distinction between an unconditional and a conditional forecast erects a straw man argument. No one would question the difference but what people want to know (perhaps quite unreasonably) is: are things going to bee better or worse in say 40 years time? You would say that this cannot be done; it is an unconditional forecast and, although you may be right, that is the question that people want answering, yes, unreasonably, even stupidly but that is the case.

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    1. "With regard to immigration there is a difference between absorbing 5 million over ten years rather than fifty years so the xenophobic argument is weak; the 5/10 is likely to have effects on culture"

      And where would our great union be with other cultures influencing it? Why, we might have french words corrupting our mother tongue, or be using german printing presses, or ending up with architecture influenced by distant countries like Italy or god forbid India! It's vital, clearly, we stop all cultural exchange. Maybe we should start from the beginning and get rid of the idea of roads and drainage; bloody italians building stuff in OUR country without OUR approval.

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  11. Let us just remind ourselves of the case for Remain. We were going to stay in the EU on the basis that we weren't going to participate in the one thing that is the primary purpose of the EU (Ever Closer Union); on the basis that the one thing the EU said would happen to us (an extra 16 million people between 2013 and 2050/60) wasn't going to happen, and on the basis that the one thing the Remain camp had said they were going to do if we stayed in the EU (reform the EU) had been specifically ruled out by the bloke who runs the European Commission.

    All that Brexiters want is to be a country like just about any other country that makes its own laws, elects its own government, and has agreements freely entered into with other nations. Lots of other countries do this, it is only the EU that has plans to destroy nations and replace them with a superstate. It is the Remainers who had fantastical dreams, not the Brexiters.

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    1. «We were going to stay in the EU on the basis that we weren't going to participate in the one thing that is the primary purpose of the EU (Ever Closer Union);»

      The case for "Remain" was to have the *option* of ever closer union of the european peoples, and that in the long term such close union of the european peoples had more advantages than disadvantages, resulting in greater sovereignty and independence for those *peoples*, instead of being part of small states more easily dominated by Great Powers.

      «All that Brexiters want is to be a country like just about any other country that makes its own laws, elects its own government, and has agreements freely entered into with other nations.»

      Many "Remainers" especially those born with EU citizenship, think that country should be the EU, because in the age of continental powers small countries have little independence or sovereignty (e.g. England having given control of security, military and foreign policy to the USA).
      For many "Remainers" counties, regions, states are artificial constructs: they were made for the people not the people for them. Someone born and raised in Guilford of dutch and english parents, married to an irish person, and working in Glasgow, has a complex set of "I belong to" feelings. Just like during the English Empire there were people born in Calcutta of english and scottish parents, married to an australian, and working in Rhodesia, and considering themselves "Imperial Citizens" more than english citizens.

      Am I making the "anywhere" vs. "somewhere" argument? The "cosmopolitan" vs. "little englander" argument?

      No, because I have never read or heard a "Leaver" who was actually a "little englander" and therefore considered the English Empire a giant mistake like they consider the EU a giant mistake, and would have preferred for englishmen to keep close to their hearths, without wasting time travelling far to "bring civilization" to New England, Canada, Australia, India, China, Kenya, Egypt, South Africa, etc.

      Indeed the idea of a big EU state giving more practical independence and sovereignty to european peoples than a set of smaller states going back and forth between the "spheres of influence" of the Great Powers was also the idea of the English Empire; as Churchill said, it was the Empire that for two years stood alone in WW2 against fascism, not just England.

      With a big difference, which I think is after all the real reason many "Leavers" feel EU membership of the EU as a national humiliation: that in the English Empire the role of England was "top dog", making laws and rules unilaterally in Westminster and Whitehall for the whole Empire, instead of merely being a "big dog" within the EU having to negotiate laws and rules with other 2 "big dogs".

      I think that the feelings of so many "Leavers" towards the EU are pretty much the same they would have had if the Raj had continued to exist by giving the vote to the indians, and thus the Imperial Parliament, continuing to rules the Empire from London, ended up with 80% indian MPs and an indian PM and the cabinet and Law Lords also became 80% indian.

      My impression is that most english "Leavers" were/are very proud of the English Empire superstate and its supranational laws and institutions, or of the UK superstate and its supranational institutions, they object to superstates and supranationality only when England is not in sole control as its "top dog".

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    2. So the real divide is not cosmopolitans versus parochials, but positive-sum thinkers versus zero-sum thinkers?

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    3. grateful as I am for a reply from the esteemed Blissex this does seem to start badly and get worse.

      Good luck thinking you could be one member of a club of 28 who doesn't want to do the thing the other 27 want to do. My view was that ultimately we would not be able to resist. All those things the EU is threatening us with for leaving they would have threatened us with for resisting federalisation.

      And then "that country should be the EU". Well that's a point of view, and a number of people have this view, but it is inconsistent with thinking the UK should remain a separate nation and not part of a Federal EU. It is a classic Remainer argument; it isn't going to happen, and anyway it would be a good thing if it did happen.

      And then just off into fantasy. Empire blah blah Raj blah blah. Its is Remainers who have delusions of Empire, an elite diplomatic corps playing off nations against each other, doing cunning deals, "punching above our weight", global influence blah blah. It's over. We don't have an empire. Stop behaving like we have one. Start standing up for the people you represent.

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  12. These fanciful remarks are indeed disappointing coming from someone of the calibre of Andrew Marr. This sort of thing, however, seems to be endemic among the elite: one only has to remember a lot of the hubris and fantastical things said about Britain's economy and future before the financial crisis, even in the midst of a long period of decay that has accompanied deindustrialisation. There is almost complete blindness at seeing what most of Britain has long looked like.

    NK.

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    1. Attention, children: Andrew Marr is an elite. Jacob Rees-Mogg, daughter of a mayor and newspaper editor and former Etonian, is just a simple, honest, salt of the earth sort.

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  13. «The UK committed to staying in the Customs Union when it signed the first stage agreement»

    As often happens, reading the small print gives a different impression, and I read somewhere that the text was carefully wasel-worded to allow for "full regulatory alignment" only on the six trade areas of cooperation mentioned in the Good Friday Agreement: education, environment, health, tourism, transport. Also, as worded any post-exit further agreement, even just one on the trade of peat, fulfils its conditions.

    «The reason that deals with all and sundry cannot replace being in the EU is down to gravity»

    It does not need to, and of course even gravity and regulatory barriers can be overcome: all it takes is a significant fall in labour costs. That is how China itself deal with trade gravity, managing to export a lot to very far away countries.

    «No sane government or parliament will allow an outcome that makes people on average 8% worse off.»

    That is 8% over 8-10 years, or a halving of growth, it will be pretty imperceptible by voters, and in 10 years things will happen, like a recession that will be blamed etc.

    Also lots of right-wing voters could not care less about 8% over 8-10 years, they care a lot only about house prices and share prices.
    In practical politics the only thing that can result in many people regretting exit is a house price crash, that would mean another crash of the City, and no politically sane government will prefer that to losing 8-10% of growth over 10 years.

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    1. On the Good Friday Agreement, as the Supreme Court case showed, the passing mention of the EU in the GFA does not require the UK and Republic to have regulatory alignment in those areas. Nobody in NI cares about the cross-border bodies at all, including nationalists (I live in NI). Any loss of cross-border trade would be damaging of course but that pales into insignificance compared to having a sea border between NI's trade with GB.

      The cross-border bodies simply have the ability to implement EU law where relevant. We are not required to have EU law.

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  14. «Why is this such a terrible loss of independence when the cooperation is with the EU, but no problem when it is with the US?»

    My tentative answer to that is: seen from the tory and whig points of view the USA are considered a protector from communism, socialism, trade unionism, and thus indispensable, while the EU is considered as a soviet organization that imposes "real socialism" on members (e.g. the endless criticism of the "working time directive" confiscating the great right of english citizens to work 80 hours a week).

    I also think that there are widespread ridiculous wishful thoiughts that the USA are "New England", that the transfer from England to "New England" of the Empire kept it in the "family", and that England is the intellectually dominant partner over "New England" and thus really never lost the Empire.

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    1. Blissex, please remind me exactly how much we pay to the USA every year for the privilege of importing their products, and I must admit I was unaware that laws passed in the USA automatically become UK law.

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  15. "why we have to make a deal with the EU, and the only deal the EU will allow is one that prevents a hard Irish border"

    But even if the 8% loss is correct, not all Tory MPs believe that or are united in how to avoid it. The UK's weak hand in negotiations could lead to a British surrender but could also lead to no deal.

    There is no reason to think the EU will not allow a hard border. The southern Irish are still Europhiles (or emigrants), but the EU has crushed their economy with the Eurozone rules. 15% unemployment during the recession, instead of 9% in the UK. And the number of Irish living overseas is still double the percentage of Brits.

    The harder border = terrorism thing has been put about by nationalists and Remainers but it's stupid. Customs posts do not have to be invisible, and dissident republicans cannot attack them. Those "micro groups" as Adams calls them are weak, small and unpopular, and attacking customs posts means killing civilian bystanders in their cars. This is why dissidents have not so much as threatened this. This argument may have been OK in the run-up to the referendum when it could not be disproven but in real life it will be.

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