Economic Insights – 20/04/2018

Brexit: Single Market or bust

The economic negative impact of Brexit has so far arisen from uncertainty’s inhibiting business investment and consumer spending but, of course, major disruptions have not yet occurred because the UK is still a member of a trading block that has been faring rather well by its own standards. Figure 3 shows the IMF’s expectation of a gradual withering on the vine rather than collapse but it is unsettling nevertheless to see the UK in the sub-2% growth club of Japan, Italy, South Africa and Saudi Arabia so relatively soon after the heady days of 2015 and 2016. Although the IMF has consistently taken a pessimistic view of Brexit these latest estimates actually represent modest upgrades for 2017 and 2018 and no change for 2019. (NB as with all forecasts, it is the direction and pace that matter more than any precise figures).

Regular readers will be aware that I am becoming increasingly convinced that the UK will end up remaining indefinitely in the Single Market. I realise this is somewhat controversial but I believe it will come out of sheer necessity rather than popular demand. I am also not yet sure how it will happen but most likely out of fudge and delay, rather than conviction and, far less, properly-developed strategy. Even if the UK and EU can reach broad agreement there are a host of important details such as who can live where, who can do business, under which laws and regulations and indeed what sort of business (Services?). Then there are the practicalities of maintaining, replacing or even abandoning supply chains and sales networks. This could take many years and HMRC have already indicate it needs 3 years to sort out their arrangements (make that 5 years?).

David Davies, with uncharacteristic perspicacity, appears to have suddenly realised that awkward practicalities could hold things up and is threatening to send armies of negotiators to Brussels to sort everything out by next March.  In contrast, the EU believes the issues are so many and varied that it will be difficult to resolve them all, even by the end of the transition period. There is only some gamesmanship in this when one considers that the UK is seeking a bespoke deal that includes Services, continuing membership of selected European agencies, no Irish border and freedom to import genetically modified food products from the US and Australia: i.e. ‘cake and eat it’ is still on the table.  It seems almost churlish to point out that a number of non-EU countries, most recently China, have made clear that they only wish to discuss a trade deal with the UK once all has been settled with the EU. Another thorny problem is that the Scottish and Welsh governments are disputing what powers currently vested in Brussels should devolve to them.

On Wednesday the House of Lords voted by a big majority against the Government in an amendment that post-Brexit. would keep open membership of a Customs Union with the EU. Much as the Government pretends otherwise, this is more than a symbolic defeat to be briskly overturned in the Commons. The Lords is a House of experts, albeit some of them in political infighting, who are surgically exposing legislative defects and omissions in order to force the Government to face reality. More defeats are likely in the Lords and this will surely strengthen the resistance of Tory rebels in the Commons. Moreover, it looks a slippery slope from a customs union to the Single Market and, as it happens, the Global Futures think tank published on Monday a study suggested that there were significant financial advantages. Rather provocatively, the study presented its findings in a format mimicking that of displayed on the notorious Leave campaign bus (Figure 4). Experts, eh?

Mrs May, having been famously immutable as Home Secretary, is proving to be the most pragmatic of Prime Ministers, albeit only abandoning some of previous publicly-stated positions at the thirteenth hour. Accepting some sort of ‘temporary’ delay to departing the Customs Union would seem the next logical concession she has to make in order to avoid the next crisis. This, of course, will not go down well with the Brexiteers but she has less to fear from them now that Mr Corbyn’s credibility as an alternative Prime Minister is waning rapidly. In fact, she can rely on the support of the ‘Remainers’ inside and outside the Cabinet who must be rather pleased with the way things are going. It still seems probable that the UK will leave the EU next March but perhaps not the EEA, which would indeed mean staying in the Single Market and, of course, that would pose the question ‘why bother at all?’.  In the meantime fudge, anyone?

Figure 4 Lies, damn lies and experts