” If I can not have you the way I want you, I do not want you at all ” Dr. Feelgood

Brexit has been launched. Mainstream consensus is going through the typical phases of anger (“this cannot be”), shock (“only uneducated, old, and fascists have voted exit”), denial (“it will be stopped by parliament or the commons”) and now we approach, slowly, to the phase of acceptance .

And there it is: Article 50.

The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened. The consensus estimated negative impacts if Brexit won the referendum that did not appear anywhere. The devaluation of the Pound is nothing more than losing the premium it reached with against the Euro on fears of the Eurozone crisis, and GBP-EUR trades at average levels of ten years. All other indicators, in the EU and UK, have been strengthening. Growth and job creation in the UK have been revised upward by the Bank of England and investment banks.

The UK economy continues to grow, with a 20bps increase over post-referendum estimates, bringing GDP growth for 2017 at 1.6%. In addition to the recent revaluation of the Pound against the Euro, we have seen a similar improvement in estimates for the European Union, where GDP growth expectations have been revised up to 1.6% for 2017 and 1.8% for 2018.

So all is good, is it not?

The truth is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes the risk much lower. But we cannot forget that the arrival in the US of the Trump administration adds an essential support to the UK that mitigates risks.

The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long and hard negotiation in which both sides have very different positions. Add to all this the calls for referendums from Scotland and Northern Ireland. In the UK, oddly enough, many see a separate Scotland as a historic opportunity for Labor to disappear from the options of government in England, as Scotland is a stronghold of the left.

It seems that the process of reaching agreement can last between two and three years, a period that will surely be full of aggressive messages in the media.

The European Union will not want to leave a bad example of weak negotiation in order not to generate a domino effect, as it faces the rise of internal Euroscepticism. If the European Union was smart, it would use this opportunity to strengthen as an area of freedom, flexibility, attractive investment and global trade. If it falls into the mistake of using the excuse of Brexit to advance in what some call “more Europe” -which means more bureaucracy and interventionism-, the EU is bound to fail. More Europe should be more investment, better employment, and stronger growth,

More Europe should be more investment, better employment, and stronger growth, fewer taxes and burdens, not more committees, taxes, and subsidies.

Expect a couple of years of uncertainty, but let’s be honest in narrowing expectations, both optimistic and pessimistic ones.

Exports and imports

UK production only reduced 0.4% using official data, in the first months of 2017 , due to a decrease in the pharmaceutical sector of 0.9% due mostly to the uncertainty of the Trump healthcare plan, not from Brexit.

The UK trade deficit has fallen to 4.7 billion pounds in the three months to January. Exports have grown at the fastest pace in ten years in the quarter, reaching a record high, and imports have also skyrocketed. Therefore, the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.

Who pays?

The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the others, and Spain, for example, would have to pay around 1 billion euros more per year.

Immigration

An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012, according to a report by Capital Economics, reaching 185,000 people. Total net immigration has also skyrocketed, reaching more than 320,000 people, compared with a historical average of 150,000, according to the British government.

The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.

Trade

Nearly half of UK exports go to the EU, but -disaggregated- of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.

The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.

Financial sector

With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the finance sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.

Regulation

According to Capital Economics and Open Europe, the cost to the UK of the 100 most expensive rules and regulations of the European Union is 33 billion pounds a year. Excessive bureaucracy and high taxes have limited potential growth and investment in Europe, particularly in the past eight years.

If the European Union does not take the initiative and begins to dismantle the bureaucratic ‘leviathan’ it has built, this cost will be a problem for many countries. But then, we must not miss out on the fact that the UK is already one of the leading countries in ease of doing business. Therefore, eliminating unnecessary regulation and bureaucracy is one of the aces up the sleeve to attract investment to the UK post-Brexit .

Foreign investment

The European Union accounts for almost 46% of foreign investment to the United Kingdom, mainly due to the purchase by multinational companies of other British companies. This flow is not expected to be reduced and, of course, could be easily replaced. European investment has already reduced in recent years and has been more than offset by other countries.

UK investment into the EU will not likely be reduced due to Brexit. If anything, it will increase, given the opportunity to develop activities within the EU and move part of some businesses abroad.

We are approaching a period of maximum uncertainty, but the opportunity is enormous. The European Union can come out of these negotiations strengthened, learning from its mistakes, reducing bureaucracy and attracting investment and capital. It is also an opportunity for the UK to thrive.

I believe Brexit is not going to be a zero-sum game. The challenges presented are only opportunities. If we take them, it is a chance to grow, be more prosperous, and regain leadership. If the bureaucrats see an opportunity to advance in the wrong union project, consumed by interventionism and high taxes, all Europeans will be guilty of our own failure. I believe that the European Union should leave its cave and become a world leader in trade, growth, employment and investment attraction.

Let us not fall into the mistake of thinking that the European Union is marvelous and the British are wrong, that the union must remain a bureaucratic dinosaur. As they say in England, “hope for the best, but prepare for the worst “, because the combination of arrogance and ignorance is very dangerous.

Daniel Lacalle is a PhD in Economics, fund manager and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).

Image courtesy Google Images, starecat.com

The European Union is 60 years old today, and it faces enormous challenges.

One wakes up every week with news about the European Union that do not help at all to improve its credibility and popular support. Brussels and the EU seem so detached from the reality of economies and citizens that their top leaders do not even blink or wonder if it is a good idea to say things like “taxes cannot be lowered” (Schaeuble), or that “Brussels dismantles the Spanish government’s excuses to resist raising VAT.” Thank you, Euro-bureaucrats.

It is very dangerous that a European Union, which has unquestionable advantages and must become a global power of growth and prosperity, puts obstacles and expels citizens and companies just to perpetuate a bureaucratic monster.

Brussels estimates that increasing VAT would “barely” affect low income families and that the increase in inequality – “only” of 2.6% – could be offset by social transfers. That is, raising VAT “barely” affects low incomes but, as it actually does and also increases inequality, they propose to mitigate it with more subsidies via spending. Bravo. Brilliant. .

For Brussels there is never a negative effect on consumption, employment or economic activity of raising taxes. It never questions government spending. And then they wonder why the EU grows less and has more debt and unemployment than its peers.

The reality, already demonstrated, is that increasing taxes has a direct impact on potential consumption, the purchasing power of families and, in addition, reduces the job creation potential.

Brussels should recognize that it has been wrong for years in its growth and employment forecasts, and analyze why. Applying a bureaucratic directed economy model everywhere impacts growth, prosperity and productivity.

The European Commission loves non-finalist taxes. The so-called “green” ones are a real joke. The consumer still pays the massive “green” subsidies, but they also pay for added “green” taxes. EU citizens pay twice. For the subsidies, and for being so mean as to use a car.

In spending and taxes, the pattern is always the same. For Brussels, to harmonize is raise taxes and spending. It does not question the economic suffocation that takes place in France or other countries. It demands the other EU nations to reach an average -always in tax burden and spending- that France increases disproportionately.

The reality is that, often, the recommendations of the European Commission do not seek to reduce imbalances and promote competitiveness, the creation and attraction of capital and employment. What they do is to perpetuate a “dirigiste” model copied from France that only generates stagnation and greater discontent.

Even in the document where the European Union “explains” why it is not a bureaucratic and excess spending entity, it “clarifies” that “states and local governments will continue to control tax increases” (note that it does not say “manage” or “cut” taxes, but only “increases”). Thank you. It also “explains” that it “only” spends 1% of the wealth of the countries, and that these countries – thank you – spend much more.

The European Union has many enemies, and – let’s be clear – some are at home. Those that defend and justify a model of increasing tax burden and higher interventionism as unquestionnable. Those of us who criticize the EU’s obvious mistakes want a European Union that solves them, not one that follows the ostrich policy of blaming others for its problems.

The tax burden in the European Union has reached historical highs – of 40% of GDP – while ease of doing business deteriorates due to bureacracy and massive regulatory burden. At the same time, while companies and families struggle, the bureaucrats in Brussels reject to make any change that allows the economy to breathe.

The best way to combat those who unjustly criticize the European Union is with actions. Lowering, not raising taxes, as citizens, companies and the ECB demand.

Against the voices accusing the EU of interventionist and bureaucratic, the EU must take action to improve efficiency dramatically and improve ease of doing business. Focus on the countries that grow and are world leaders, not equalize imbalances in a model that only creates stagnation.

We have a golden opportunity in the face of external and internal threats . It is not an opportunity to justify that “there is room” to raise taxes, nor an opportunity to confuse “more Europe” with “more bureaucracy”. It is not an opportunity to attack those who grow, have surplus and create jobs . It is a chance to drastically improve in economic freedom, ease of doing business, open market and increasing disposable income for families, letting job creators do their work.

The EU has in its hands all the tools to be better and more competitive. More Europe is not more bureaucracy.

The European Union cannot continue to settle for being a low growth, high debt, huge tax burden area, penalizing its citizens and companies, the same ones who have bailed-out the bureaucratic leviathan from the crisis.

If we do not wake up immediately from the comfortable deification of bureaucracy and fiscal robbery, the European Union, which is a project worth fighting for, will perish in the face of its own inaction. I do not want it to happen. But I assure you that, if it does happen, I will not blame the EU’s  collapse on the outside enemy excuse, when we have had in our hands all the tools to be stronger, better and more competitive.

Citizens and businesses are not ATMs to pay for political excesses, they are the clients of a European Union that must be at the service of the economic agents who contribute and create jobs, not at the service of bureaucracy.

Daniel Lacalle is a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).