George Osborne, as he promised, has released a second
on the effects of a no vote on 23rd June. This time, the
target of doom and gloom was the first two years after a Brexit vote.

Sadly, Osborne decided not to attend the House of Commons to
defend the document, instead delegating to his deputy, David Gauke in a “departure
from normal procedure”.

In short, the dossier predicted the shorter term effects to the
economy. On a macroeconomic level, 500,000 job losses (a lovely round number), GDP
would be 3.6% lower and inflation would increase to 2.3% higher. Sterling would
be weaker by 12% while house prices would fall by 10% and public borrowing
would rise.

It is worth remembering that this is the Chancellor who,
when announcing the Office of Budget Responsibility said “I am the first
Chancellor to remove the temptation to fiddle the figures by giving up control
over the economic and fiscal forecast”. Sometimes, temptation is hard for a
Chancellor to resist.

The report identified 3 impacts. The first of these was “transitional
effect” i.e. “the UK becoming less open to trade and investment under any
alternative to EU membership”. The second was “uncertainty” the final impact being
“financial conditions effect”, i.e. the extent of financial market volatility.

As with the report covering the longer term, a narrow range
of assumptions were made. The language used was persistently negative. No
consideration was given to any upside potential. Once again, there were a
number of own goals.

The cycle of doom starts with consumers not consuming due to
uncertainty. Producers will not produce through uncertainty, investors will not
invest due to uncertainty. The same sort of vicious cycle is the sort that the
Treasury predicted when the UK opted out of the Exchange Rate Mechanism (ERM)
in 1992, before a decade of growth ahead of the rest of the EU.

Much of the negativity is based on a potential fall in the
exchange rate. The inflationary effect comes from increased input prices. There
is a certain logic if, but only if, the exchange rate were to fall to the extent
predicted. Osborne’s 12% reduction would nullify the suggested 10% tariff on
British car exports to the EU. The Treasury also suggests that overseas
investors will divert investment to other EU bases.

As an indication of selected bias, the report ignores any
extra incentive provided for British producers to sell into an export market
with potentially higher revenues.

Unfortunately, once again, Osborne’s Treasury do not explore
the options in the sort of detail that a truly “rigorous” report should,
particularly the opportunity costs, that is to say if investors do not invest
here, where would they invest?

A lower exchange rate has converse benefits. Any company producing
in the UK would experience a lower level of costs relative to their own
currency. If Sterling were to drop against the Euro, the relative cost of
producing in the European Union, such as Germany, becomes higher.

It is conceivable that the withdrawal of production
facilities from the UK by some of Osborne’s famous examples, the motor industry
including General Motors and Ford, will have damaged their own cost base.

There is a good argument that in recent years, the Euro
currency was undervalued for Germany, even if Germany’s exports made the Euro
overvalued for the Southern EU countries. German exports were thus more
attractively priced in the UK, hence the significant trade deficit
that Britain has with the EU and Germany in particular.

Extending Osborne’s logic, whether a trade agreement were to
exist with the EU or not, there is at least a positive reason to consider
maintenance of investment in the UK, at least for the duration of the next two
years. Afterwards, there may be more motivation for companies like Ford and GM
to return production to the UK, lost whilst members of the EU.

It is also worth considering the opportunity cost of other
investment, particularly in securities markets and government stock. The implicit
assumption behind Osborne’s Treasury model is that the Euro provides a secure

It is well publicised that Eurozone banks provide a source
of insecurity. The economic troubles of Greece, Italy, Spain and Portugal are
well documented. The Euro is by no means
a solid alternative currency in which to invest. Osborne’s pessimism may have
been misplaced.

Interestingly, the Treasury report mentions the IMF 25
times. It will be remembered that the head of the IMF, Christine Lagarde,
thanks Osborne for the Treasury’s help in compiling their pessimistic forecast
(here at 9.09). Lagarde
herself awaits the outcome of corruption charges.

Curiously, the IMF’s warning over £715billion of
non-performing loans (NPLs) among Eurozone banks was not included in the
Treasury report.

Further negativity is based on the assumption that trade
deals will be hard to come by. The UK has to agree its own trading
relationships with the EU. The point is made that the EU might be a priority
for the 50 nations looking for trade deals. By definition, at least, at least
at least 44 of those have smaller economies than the UK as a G7 member.

One thing that Osborne has got right is the uncertainty of
being able to negotiate any sort of trade deal with the EU. His leader, David
Cameron was unable to negotiate a successful outcome for reform, even with the
backing of a near £10billion net budget contribution and imports from the EU
running at £8billion per month.

The comedy value of this report was highlighted by some case
studies selected.

The first of these was agriculture, where the report
highlighted where DEFRA has seen agricultural support cut in the last 3
settlement rounds – whilst a member of the EU. The second inadvertently
highlights how some companies are relocating out of Britain into the central EU
area, even whilst members. The third reinforces this by referring to the Society
of Motor Manufacturers and Traders (SMMT), an organisation largely dependent on
revenues from importing over 2million cars last year.

In short, Osborne’s illusion is easily dismantled. He
exhibits no faith in his government to secure trade deals from a position of
strength. In running down Britain’s ability to respond to a “shock”, the
british Chancellor would risk creating a self fulfilling prophecy, wee he to
retain any credibility at all.

On the plus side at least, should Lagarde be found guilty,
he has a job to apply for where inaccurate forecasts appear welcome.