Friday, 20 January 2017

Paying for hard Brexit: the first three days

Theresa May’s confirmation that Britain will leave the single market was greeted with almost unanimous approval from the British (though not the foreign) press, and with only muted opposition from politicians in her party and the supposed Labour opposition. But now the bill payable is beginning to be presented. International finance guru George Soros, who has consistently warned of the dangers of Brexit warns that the British people are ‘in denial’ about the costs of leaving the single market. Former Times Editor Simon Jenkins who wrote just two weeks ago that ‘Project Fear’ had been comprehensively discredited today (without apology) argues that it is coming true.

The reason was the first of what will undoubtedly be many job losses being announced. HSBC and UBS will move 1000 jobs each and billions of pounds worth of business from London. Goldman Sachs, J P Morgan and insurance market Lloyds of London are reported to be considering even larger shifts out of London, and no sensible person can doubt that many other financial institutions will do the same.

Few may shed tears for the loss of bankers who, since the financial crash, have been the most unpopular section of society. But losing them and their business activity will impact significantly on tax revenues and therefore public services. Financial services contribute 11% of UK tax revenues and employ 1.1M people (2015 figures). Equally, many may feel that the British economy has long been far too skewed to financial services and the City of London. But the shock treatment of hard Brexit will not re-balance the economy, it simply diminishes it.

In any case, it is not just the finance sector that has reacted with dismay to the announcement on the single market. Toyota, although not threatening withdrawal at this point, is ‘examining how to survive’ in the UK. For companies like these, the crucial issue will be whether it proves possible to negotiate the half in, half out deal on customs union membership that the government is seeking. Anyone who doubts this should read the Japanese government’s statement on Brexit last September.

The crucial point to note here is that there is no upside to the single market announcement. That is to say, whilst some companies are and will continue to pull out, and for others it will make no difference, no company is saying that they will come to the UK or expand their operations because Britain is leaving the single market. And it is not possible even in theory to imagine how leaving the single market could provide any rationale for a company to do this.

The only way of imagining that a company would make such an announcement would be if, as a result of leaving the single market, the UK were to change its tax or regulatory regimes – for example by lowering corporation tax or by scrapping EU regulations on the environment or labour protections. In due course, I suspect this will happen, and it is undoubtedly what many prominent Brexiters want. But if it does then it will directly contradict Theresa May’s claims in her Davos Forum speech yesterday that a post-Brexit global economy must work for everyone. The losers in this will be precisely the ‘left behind by globalization’ constituency that swung the Brexit vote. Indeed, to the extent that May described the Brexit result as a vote “to build a truly Global Britain” she is flying in the face of precisely the ‘nativist’ sentiment that drove both the leave campaign and many of its voters.

Apart from the reactions of some companies to the news that Britain is exiting the single market, it is worth considering the reaction of sterling. The pro-Brexit press made much of the rise of sterling during the Prime Minister’s speech, but it only amounted to a cent or so, and that on the back of falls in advance of the speech that was heavily-trailed to announce hard Brexit (and also instability in the dollar around Trump’s inauguration). Interestingly, the point in May’s speech that saw the sharpest rise was when she promised a parliamentary vote on the final deal with the EU, reflecting the remote possibility that Brexit might, even at the last moment, be reversed. Overall, sterling continues to languish some 20% lower against the dollar than before the referendum vote and, in consequence inflation has risen and will continue to rise and retail sales are beginning to fall. There’s certainly no indication that currency markets see any good news in the hard Brexit announcement.

The underlying reason for this is easy to understand, and has been re-iterated over and over again by EU leaders, most recently by the Maltese Prime Minister who is the incoming rotating chair of the EU: any exit deal from the EU must, by definition, be worse than being within the EU. That is not a ‘punishment beating’ to use Boris Johnson’s infelicitous phrases, it’s just an obvious reality and one chosen by the UK, not forced upon it by the EU. That being so, an economy that is fully integrated with the EU and heavily trade-dependent upon the EU is inevitably going to get poorer by leaving.

Since it was announced that we will leave the single market, the first few billions of the bill have been presented. That is only the start of what will be an enormous price to be paid by the UK in order to, possibly, slightly reduce what in a few recent years have been fairly high immigration levels in some parts of central England. That immigration has repeatedly been shown to be a net benefit for the economy, and far from causing unemployment the UK is now essentially at full employment.

It is hard to overstate the craziness of what is unfolding. But no one should be under any illusion: this craziness is going to cost the UK very dear indeed in lost jobs, lost taxes, lost public services. To put it slightly glibly, but essentially accurately, we are (almost) all going to be much, much poorer for many years to come to pay for the fact that pensioners in the English regions don't like hearing foreign accents and having foreign shop signs in the streets. We won't even be paying to stop them having that experience, just paying for them to record their displeasure at having it. And that is just the economic bill, of which we have just paid the first small instalment: the cultural and political bill for hard Brexit has not even begun to come in yet.

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