Theresa and Florence

Theresa May's speech in Florence yesterday was supposed to be the big one – a chance to articulate what Britain wants from Brexit. Perhaps because it was so hyped up in advance it failed to live up to expectations. For my money, it was a grade C: Not absolutely terrible, but nowhere near good enough. Journalists have convinced themselves that they heard the PM promising to stay in the EU for a two-year transition period and the promise to pay into the budget during that period. I heard her asking the EU27 for a transition period and no mention of any figures.

As for the speech itself, it was long on waffle and short on content. To be sure, it was less strident than her dreadful performance to the Tory faithful last October and the Lancaster House speech in January. But it contained many of the same appeals for unity: "If we were to ... be divided, the only beneficiaries would be those who reject our values and oppose our interests." So we should all get behind Brexit because otherwise you don't share "our" values? As for the "concrete progress on many important issues" during the negotiation period, this amounted to a recognition that "there are unique issues to consider when it comes to Northern Ireland." As Michel Barnier noted in his response, that does not amount to providing any solutions. There was one jaw-dropping phrase which acts as a reminder why the PM managed to alienate large chunks of the electorate in June: "throughout its membership, the United Kingdom has never totally felt at home being in the European Union." The PM may speak for many in the Conservative Party, but she clearly does not speak for the near-half of those voters who took a totally different view 15 months ago.

However she was more emollient on the granting of rights to EU citizens in the UK and there was a recognition that the ECJ judgements should still be taken into account by British courts. Although the PM suggested that neither EEA membership nor a Canadian style free trade agreement are appropriate for a future relationship, May did not outline what sort of relationship she does want. EEA membership was ruled out because it "would mean the UK having to adopt ... EU rules ... over which, in future, we will have little influence and no vote." Meanwhile, an FTA is a far less beneficial arrangement than the UK enjoys now. Of course, many of us have been pointing this out all along. Everything that was wrong with the speech was summed up in the PM's phrase "We can do so much better than this." Unfortunately she neglected to explain how.

With regard to the transition period, it seemed to be apologetically sneaked into the speech near the end: "a period of implementation would be in our mutual interest. That is why I am proposing that there should be such a period after the UK leaves the EU." Substitute “proposing” for “asking” and we are closer to the mark. As the PM noted, this "can be agreed under Article 50." However, that is true only if there is unanimous agreement amongst the EU27. And that is not guaranteed. So far as budget commitments are concerned, the PM said “the UK will honour commitments we have made during the period of our membership.” Whether that covers contributions during a transition period or a nod to the exit bill is unclear to me. What it most certainly was not was a commitment to pay a figure of €20bn, as many journalists have assumed.

The Daily Mail didn't like it. "May is accused of BETRAYING referendum by effectively keeping Britain in EU until 2021 as she climbs down on citizens' rights and borders with €20bn bung for Brussels in bid to revive Brexit talks." The rating agencies didn't like it either with Moody’s downgrading the UK’s credit rating by one notch to Aa2 – two below the AAA rating it enjoyed for 35 years until 2013.

Both are wrong in their assessment but it is a reflection of the rock and a hard place dilemma facing the government. The Daily Mail appeals to the hard Brexit end of the spectrum but the reality is that the head bangers who wish to see Brexit at all costs fail to see the damage that it will cause. Or don’t care. Either way, the PM could not possibly repeat the same message as she did before triggering Article 50 as she has fewer cards to play and even less authority to call the shots. That said, the hard Brexiteers in her cabinet probably prevented her from being more conciliatory than perhaps she would have liked, and Boris Johnson’s intervention last weekend may have played a role here.

The action by Moody’s was frankly a joke. I am reminded of the words of Paul de Grauwe who in 2009 posed the question “How can these agencies, which were systematically wrong in the past, have any credibility in whatever risk analysis they make?” According to Moody’s “the outlook for the UK's public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned.” Just as a reminder, since Moody’s downgraded the UK from AAA in February 2013 the UK’s public deficit has fallen from 7.2% of GDP to 2.3%. On the basis of the evidence for the first five months of fiscal 2017-18, the UK deficit is running slightly below the corresponding period in 2016-17. And as one of the more pessimistic longer-term forecasters of UK public finances, I still reckon it is possible to bring it below 2% on a five-year horizon.

Furthermore, the rating agencies consistently fail to account for the fact that the UK issues debt in its own currency. There is virtually no default risk. Admittedly the political risk is higher but we don’t need a ratings agency to tell us that. If investors get cold feet, they will simply stop buying. In any case only 25% of gilts are held by foreign investors – demand amongst domestic pension funds remains high and they will continue to buy in order to match their long-term assets and liabilities.

In summary, therefore, the Florence speech was a disappointment. But hemmed in by the needs of business and those who want Brexit at any cost, the PM was always on a hiding to nothing. However, it does nothing to change the economics. If anything, a longer transition period to Brexit should be seen as a positive – if the EU 27 agrees. In that light, the actions of Moody’s should be dismissed as the irrelevance that it clearly is.