Last week, alongside the US Federal Reserve and the European Central Bank, the Bank of England raised its base rate by a half-point to 4%. You are quite entitled to ask, “why, pray, a week after the event are you telling us something that is already very old news?”. Forget about the announcement itself (that is indeed old hat); just concentrate on those four words: ‘the Bank of England’. The reason for telling you is because we can. We can still talk about the Old Lady of Threadneedle Street, however arthritic and decrepit she might be, as the central bank of a sovereign country. Are her days of meaningful relevance numbered? Many might wish so. 

Reversing Brexit: back on the agenda  

Yes, folks, if you thought that seven years after the Brexit Referendum, and three years after Boris pronounced Brexit “DONE!”, we had all moved on, think again. A head of steam is slowly but surely building for “Brexit the Sequel: Bre-entry”.

 

Committed Remainers have refused to let their candle be extinguished; they have been biding their time before redefining themselves as Re-joiners. As for former Brexiteers, a growing number appear increasingly disillusioned that the “sunlit uplands” outside the EU, as promised by Boris, remain shrouded in a low-lying fog, hidden from view (that for all but two months of that three year period there have been the significant distractions of a pandemic and a war in Europe and a little local self-imposed difficulty in the Westminster kindergarten getting in the way is beside the point).

 

Boris, the Brexit cheerleader, has been ditched. Greg Hands, an inveterate Remainer has just been appointed Tory Party chairman. Two polls out in the past week show that 55% and 58% of respondents respectively believe that Brexit was wrong. Last week, Michel Barnier, the former EU chief Brexit negotiator said in a speech that if in the UK’s ‘bonfire of EU regulations’ there were too much legislative divergence from Brussels, the UK’s chances of re-joining would be increasingly limited; however, he also emphasised the corollary: the door is ajar, and the more we remain aligned, the greater the chance of being allowed back in the club. There is absolutely no coincidence that this firm encouragement from Brussels was given, timed to influence the passage of the government’s Retained EU Law (Revocation and Reform) Bill on its second reading in the House of Lords; the Tories do not have a majority in the Lords and the majority of that House’s members are Remainers. On Tuesday, the unapologetically anti-Brexit Financial Times published an opinion piece by Gideon Rachman about why and how Brexit can be reversed, he suggests the outcome of future referenda is helped significantly by the inexorable passage of time taking its toll on the senior cohort most likely to be Eurosceptic, being replaced by a younger generation of voters more likely to be in favour of hitching up with Europe again.  

Politically toxic but it won’t go away  

This is not a can of worms either the Conservatives or Labour wish to re-open as policy. It is toxic for both. But that does not mean the debate will not gather a momentum of its own. The Tories are struggling to make a convincing case that Brexit was worth it, bogged in technocratic detail and rapidly losing sight of the goal; presented by Boris with what at the time seemed an unassailable majority to see Brexit completed and exploited and notwithstanding the immense difficulties of the past three years, it is a considerable failure of leadership that has allowed the Conservative 2019 Eurosceptic supporter base not merely to suffer doubts about Brexit but in increasing numbers now to consider it to have been wrong.

 

Equally, Labour has its own elephant trap: it tried every ruse possible to undermine Brexit every step of the way yet Keir Starmer, who was Labour’s chief spokesman on the subject under Jeremy Corbyn, now as Labour leader has said that there is no policy intention of reversing Brexit, knowing full well that Labour lost the 2019 election when its natural constituency switched in swathes to Boris to “get Brexit done” in the key Eurosceptic ‘Red Wall’ seats.

 

Party politics would still play a role (it’s the innate nature of the beast), however this is largely a common problem/opportunity (depending on one’s point of view) in England. It most certainly is a party-political issue in both Scotland and Northern Ireland, deeply divisive and weaponised by all sides. Depending on timing, the argument to re-join would of course be used to shoot Nicola Sturgeon’s fox: she claims legitimacy for IndyRef2 on the basis that Scotland voted against Brexit in 2016; she maintains Scotland wants to join the EU; logically, were the UK to join the EU, she would have no legitimacy to claim independence from Westminster. As for Ulster, re-join and magically in a puff of smoke the Northern Ireland Protocol problem disappears. In reality, neither the bid for Scottish independence nor the Irish nationalists wanting a united Ireland was caused by Brexit; Brexit merely accentuated already entrenched positions which will remain whether we are in or out of the EU in future. 

Fact: we will not be re-joining. We would be applying to join. The two are very different!  

As for Europe, Brexit was a signal political failure: letting the world’s sixth-largest economy and the second=largest in the EU escape to independence was a significant blow. The question is, does it want us back? And on what terms? The answers are yes, but not unconditionally. The EU wants to recover us but it would make belt-and-braces sure that we were never in a position to change our mind again. There would be no return to the status quo ante in 2016 and we simply carry on where we left off: notably we would not be allowed our former opt-out from the euro. Becoming an ‘accession’ country, even if a long-time former member, now includes a binding commitment to join the single currency. Returning to our opening paragraph, the Bank of England would be a mere regulatory branch office with no monetary policy powers to set interest rates. The reality is that we would not be re-joining the EU but joining on a very different premise.

 

The economic condition of joining would be that we satisfy the basic qualifying fiscal measures of debt/GDP not exceeding 60% and the budget deficit not exceeding 3% of GDP. In context, our current ratios are 99.7% and 7.3% respectively. As with the most recent accession countries, you join the EU, become immediately subordinate to the ECJ as part of the common trading area and the single market (all very familiar); you keep your own currency and interest rate but only until such time as membership of the eurozone is agreed. Delinquents and shirkers are given a firm shove in the right direction by the Commission so as not to be deliberate laggards happy in a permanent half-way house. The key question at that point of entry in to monetary union is at what exchange rate are you locked in? Germany locked at a lower euro rate than would have prevailed with the Deutschemark; as a big exporter it allowed an enduring and significant competitive benefit from a relatively weak currency. Italy, on the other hand has been blighted by two decades’ worth of economic repression also as a major exporter of capital goods, having been locked into a stronger euro than would have been the case with a free-floating Lira. The timing of when the rate is locked is not in our sole gift; it is a very big risk with enduring and irreversible consequences.

 

Then there is the question of how much it will cost. Guaranteed is that the UK will be a net contributor to the EU, not a net beneficiary. This was the case without exception during the entire period of our earlier membership. In 2020 our net contribution was £12.6bn; over the five years from 2016, the aggregate sum was £49.4bn, more than the UK’s annual defence budget (and we will let it pass that the payments go to an organisation whose accounts habitually fail to be signed off by its own auditors).  

Definition of a camel: a horse designed by committee  

In these columns we have on many occasions described the significant structural fault lines of both the EU and the eurozone as currently configured: a semi-finished political project on the path to a united Europe but with no idea how to complete the task; monetary union for 19 members but not the other eight; monetary union in the eurozone but no complementary fiscal union creating an unstable economic system with no joined-up plan; within the eurozone, a single interest rate and currency (but now a two-tier QE programme partially exploding the entire notion of monetary union) applied to 19 countries each with its own unique economic, social and governance characteristics, foibles and idiosyncrasies creating economic tensions with the usual national safety valve of a domestic currency removed.

 

It creaks and groans audibly under pressure; as a bloc it is uniquely vulnerable to self-inflicted financial crises to which unitary sovereign countries with a homogenous economic system are not immune but are far less prone; its decision making is sclerotic and horrendously slow; when it comes to policy, Brussels’ natural proclivity is one of homogenisation, pasteurisation and sterilisation. It dictates and regulates rather than innovates.

 

The result is that competitively, the bloc has conceded around ten points of share of global GDP in 30 years, falling from nearly a quarter of world economic share in 1990 to around 15% today.

 

In a functional democratic system, taxation and representation go hand-in-hand. There is an essential prerequisite to the EU’s fiscal union: political union. Currently power resides with the Council of Ministers, the Commission (the civil service) and coming up a poor third and little more than a navel-gazing, rubber-stamping, talking-shop, the European Parliament. Root and branch reform of electoral representation returning power to the electorate is required that will underpin an economic system with real legitimacy and duration. The risk is the wider the democratic deficit is allowed to become, the greater the likelihood of political instability. We might not like our government at any particular time but at least we have the ability to vote it out of office and replace it with another; in an EU context while strictly speaking not disenfranchised, the reality is that voters’ influence barely registers.  

Why not make the most of what we already have?  

In any future debate as to whether the UK should join the EU, the onus will be on the Joiners to make the case that irreversibly hitching our cart to the EU horse is of itself a ‘Good Thing’. But the key is sovereignty and the ability to be in control of one’s own destiny, however much of a meal we might make of it in its pursuit. But surely, rather than go through all the energy-sapping upheaval again, far better would be to get a move on outside the EU, directing that energy to making the best of the significant opportunity that is in front of us!

 

And with the Old Lady, warts and all, presiding over our monetary policy.

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.  

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. 138