On the 23rd June 2016, the proletariat rose from the ashes to break the shackles of globalisation from their ankles. To once again rescue Great Britain from the clutches of the evil European imperialists, to unleash a voice of defiance and declare this day our Independence Day…

Or so we thought.

It turns out that instead our great kingdom decided to go bungie jumping, without a harness. Strangely those ghastly remoaners often warned about such dangerous endeavours yet lo and behold their warnings were unheeded by the patriotic leavers, probably because Britain had had enough of experts. It isn’t rocket science to see why such a decision has seriously worrying repercussions. One could write a book on said consequences but I’ll focus on some of the economic impacts (for now) of Britain’s momentous vote to break away from the European Union.

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A sombre look across the Brexit Masterminds’ faces as the realisation of what they’ve done sinks in.

On the eve of the vote the pound reached one of its highest levels and just hours afterwards it plummeted, and continued to plummet until the 11th October when the pound was valued at just $1.21. Whilst it is true, a weak pound is beneficial for manufactures exporting raw materials as the cost of exporting decreases, it is also true that this has minimal effect on the UK economy. For around four decades the manufacturing industry has been pulverised so the idea that it can be suddenly revived with the renewed interest in exports is a largely farcical idea. In fact its services which make up the economy, 78.4% of the workforce is in services and almost 80% of GDP comes from the services industry. Therefore cheap imports which are achieved through a strong pound are essential to the British economy.

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The Pound continues to maintain its low value post-Brexit.

Sadly the bad news doesn’t stop there, inevitably when you have more expensive imports, firms have to ramp up the price to maintain the rate of return and counteract the effects of these more expensive imports. When 66-70% of your GDP comes from consumption you know that this is ultimately a bad thing for your economy. It won’t just be a small increase in inflation but according to the Bank of England Governor, it’s likely to go well over the 2% target, an increase of 1.4%. Effects of more expensive imports have already been felt, only recently did Unilever, one of Tesco’s largest suppliers, engage in a stand-off with Tesco over price increases on basic goods. They argued that the depreciation of the currency has meant more expensive imports therefore the cost must be passed onto the customer. It is okay for the richer individuals but those who will be hit hardest, as always, are the poorest individuals of the UK and we haven’t even left the EU yet. However it seems that consumer confidence has not been damaged after the vote and the price changes have yet to feed to the consumers.

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Inflation is on the rise and projected to increase even further.

There is also the issue of the financial sector. Love it or hate it, this questionable part of the economy does support at least 8% of the UK’s economy, it is the country’s largest industry with over 50% of its contribution coming from London. Being part of the EU Single Market gives the banking industry certain passporting rights which means it can essentially exchange and deliver its services from London to all over the European Economic Area, a 500 million citizen market. As a result of the vote and the likelihood that we won’t remain part of the common market means our financial industry will no longer have access to these passporting rights, therefore they will have to relocate to an EU country in order to deliver its services across all the other 27 countries. In fact we have already seen certain groups leaving London, whole ‘mergers & acquisitions’ departments are being moved to Frankfurt and large scale relocations are likely to begin unless the banking industry does receive a favourable deal within the Brexit negotiations. It is hard to predict the impact on the banking industry but we can’t be overly pessimistic, London still does has more favourable regulations than other EU countries which could act as a more deciding incentive to remain in London despite the potential loss of passporting rights.

The simple act of leaving the EU Single Market itself, which seems highly likely, could have serious consequences for the British Economy. As a part of the Single Market and the Customs Union the UK is allowed to conduct free trade with the other 27 EU member states, adopt a common standards policy and impose common external tariffs on non-EU countries. This allows a hub of competitive and growing free trade between the member states whilst also maintaining a high standard of goods and services. All UK businesses are forced to maintain these standards already, leaving would lead to costly differences between the UK and EU product standards. Some of this could be avoided by negotiating a Free Trade Agreement (FTA) with the EU during the 2 year period after Article 50 is triggered. However considering CETA, the Canadian FTA with the EU, took 7 years to be negotiated and still has not been formally ratified, it would be absurd to suggest the UK could negotiate an FTA with the EU in 2 years (technically 1 and a half years) let alone 48. Then there is the issue of the 48 other FTAs the EU has with other non-EU states, the UK would have to renegotiate these as they were mixed agreements and not bilateral trade deals.

Therefore if this likely scenarios plays out the UK would have to resort to World Trade Organisation (WTO) rules. As part of the WTO’s General Agreement on Trade in Services (GATS) the EU would however have to give the same treatment to the UK (in terms of trade and aside from preferential agreements) as it does to all other non-EU states, this could potentially protect us from any punishing treatment. Unfortunately part of this treatment the EU has with other non-member states maintains many tariffs and non-tariff barriers on trade (excluding preferential agreements), for example its 10% tariff on cars. These trade restrictions would be extremely hurtful to the UK economy which relies heavily on imports for its largely service based economy, as well as hurting consumer spending which accounts for a large proportion of GDP.

This all seems like a quite a dim future for the UK economically, hurtful trade barriers, inflation, damage to our biggest industries… although we should not be too depressed about these prospects. There is a strong argument that the EU will have to give us a fair trade deal. The the rest of the EU has a trade surplus with us meaning they rely on the UK as market to export their goods to, even though in terms of services (which makes up nearly 80% of our economy) we export 37% to the EU as opposed to importing 22% from the EU. Hence it seems like we both need each other economically to a certain extent.

It is therefore immensely difficult to predict with certainty and confidence how the UK economy will emerge from this unprecedented vote. A lot of it relies on how the negotiations play out but we do not know the stance of our own government, neither does the market, which leads to a lack of confidence and uncertainty. Predictability is important in an open market system. This is likely to hurt investments but on the bright side it does not seem like consumer confidence has actually been damaged. So, Brexit, as eloquently put as Shadow Chancellor John McDonnell, is going to be one hell of a breakfast… a dog’s breakfast.

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4 thoughts on “Brexit Means Breakfast

  1. An interesting piece (and surprisingly fairly balanced by your standards Sarmed), but to me this still exaggerates the potential impacts of Brexit on the British economy. It is worth noting that the confidence of investors remains strong in the United Kingdom’s economy and financial services, and that there is certainly no consensus amongst economists that recession is an inevitability; both Moody’s and Standard and Poor’s now predict the U.K. avoiding recession.

    I guess my problem with your article is that you seem very focused on the potential negative impacts of Brexit (none of which bar the low pound, which as you yourself acknowledge could be argued to have benefits as well as disadvantages, have materialised) and neglect to mention any of the potential opportunities Brexit offers. I understand that you didn’t support it in the first place, but surely that is beside the point – the British people voted to leave, and now the job of government is to embrace that decision and make it the best they can. Presumably your solution to this problem would be to stay in the single market and the customs union, yet this would leave Britain unable to sign independent trade deals – surely a great benefit of leaving a protectionist political union renowned for its inability to make such deals, as you acknowledge when talking about CETA – and unable to control its own borders, which (whether you agree with it or not) was surely a major concern of a great number of Brexit voters. That is settled, then – Theresa May has little choice but to leave the single market.

    If we approach it from this perspective, then there are indeed opportunities that can be grasped outside a protectionist and failing European Union. The first of these is an escape from the regulatory zeal of the European Commission, which places unnecessary and protectionist regulations on business. The rules of the single market relate to the 44 percent (and falling year-on-year) of British exports that go to the EU, representing 15% of British GDP, but the rules still must apply under EU law to the remaining 85%. These regulations include driving up costs in the steel and heavy industries by imposing over-zealous emissions reduction targets that are agreed by climate scientists such as Richard Lindzen to make a negligible difference at any rate, and which were a major factor in driving Britain’s home grown steel industry (Tata Steel) out of business. Outside of these regulatory burdens Britain’s industries can thrive once more, especially considering that the decreased value of the pound makes exports far more profitable. What is needed is a rush to embrace these new possibilities, rather than economic stubbornness and a refusal to change the direction of the economy.

    You suggest in your article that leaving the EU would lead to costly differences in terms of British and European goods standards and consumer protections, but this seems to be based on a misunderstanding of how trade works. When selling goods to the EU, there would be no differences in product standards at all, because any country that sells to the EU already has to apply the EU’s internal standards on the goods it sells them. The point is that being in the EU forces us to apply these same standards to all our products, not just the 15% of GDP that goes towards the EU. This would lift a mountain of regulation from British businesses, leading to them becoming more competitive and economically viable.

    Furthermore, your emphasis on financial services ignores the fact that the EU presents a profound danger to Britain’s financial industry. According to the 2014, UK Government competency review on financial services, ‘Over the last 10years, there has been a roughly 10-fold increase in the volume of EU law on financial services’, and although the impacts of this are not yet felt as strongly (London remains the best place to do business in Europe), this has a major potential to blunt our competitiveness further as regulation and harmonisation becomes more comprehensive (which has been directly proposed as the next step for EU integration). Witness the debacle surrounding Apple’s tax arrangements in Ireland to understand how deeply the EU has the potential to affect a nation’s financial freedom. As the ratchet of integration rolls on, it is inevitable that for Britain to remain a great place for businesses to operate, at some point we MUST leave the EU, otherwise we will have the same protectionist standards imposed on our companies and will be left unable to compete with paragons of free trade such as the Asian Tiger economies on a global scale.

    Free trade is in Britain’s blood; in the Victorian era it was Britain that stood alone against a protectionist Continental Europe, and even in Magna Carta we find the following passage:

    “All merchants may enter or leave England unharmed and without fear, and may stay or travel within it, by land or water, for purposes of trade, free from all illegal exactions, in accordance with ancient and lawful customs.”

    Politically and economically, then, Britain has a responsibility to carry out Brexit, and the solution is clear – to carry out a liberal-minded leave in which all import tariffs, price protections for agriculture and regulatory barriers to imports are abolished. This does not need diplomats, trade negotiators or economists – all it needs is for Britain to leave the protectionist customs union (not even, in theory at least, the single market), and it would cost the taxpayer exactly nothing to negotiate. With such a clear signal that Britain is open for business, economic confidence will be assured, consumers will benefit from more choice in a competitive free market environment, and a positive message will be sent to the rest of the world that the UK is globally engaged (something which I admit has been tarnished a little by Brexit). This would make Britain a beacon of global free trade and could even in time help save the EU from itself, transforming it from an intrusive and unpopular political union into a liberal free-trade club in which tariffs are abolished.

    What other countries do in this circumstance is entirely up to them. If the EU, or any other country, decides to impose tariff barriers on Britain in punishment for leaving , their consumers and economies will suffer. If they reciprocate our liberal approach and let British imports in, their economies will prosper. This is their decision, not ours – we don’t need to compromise with protectionism and anti-competitive behaviour. We simply need to make our position clear, and be prepared to walk away from the negotiating table.

    Liked by 1 person

    1. Thank you very much for your comment Christian, I was hoping for a critical analysis and I got my wish!

      By the length of your reply perhaps you should submit a full length response on the positives of brexit?

      Anyway, to your points.

      You mention that investor confidence has not been affected and damage hasn’t materialised yet. Well firstly we haven’t actually left the EU yet and secondly we have felt damage anyway. Recently the UK inflation rate jumped to 1.6℅ very close to the target 2℅ and this is likely to exceed the target by a long shot. Furthermore factory gate prices are up and the cost of raw materials have risen which are economy depends on for our services based economy. The price of good leaving factories have increased by 2.1℅ which is the biggest jump since 2012 and the cost faced by producers for raw materials and oil reached a record monthly jump in October to 4.6℅. So clearly there has been a damaging effect to the economy. Furthermore foreign direct investment has almost halved from the start of 2016 which clearly shows a lack in confidence in the UK economy.

      You also spoke a bit about trade deals. You’re right we won’t be able to negotiate trade deals on our own and that was a problem with the EU but compared to the alternative of doing them on our own, I’ll always take the former. Simply because the UK isn’t powerful enough to negotiate trade deals unilaterally and that no country is dependent on us to such an extent that they are obligated to conduct one with us. I also think it’s wrong to declare the EU protectionist, it only acted with economic logic, an external tariff on countries it did not have a trade deal with so that it would encourage trade deals to be conducted, it was very much a free trade bloc and open to the world, hence its TTIP and CETA trade deals which would have expanded its reach across the globe. Soon the EU would have deal with a very large area of the world.

      Regarding your point on financial regulation, well I say that’s exactly what should be happening. My issue was with the fact that the city of London would no longer become a hub because it could not conduct services from London to the rest of the EU. There is nothing wrong with that but EU regulations are what is needed when banks and financial industries are contributing to volatile, dangerous economies and furthering the impacts of unprecedented wealth inequality. Frankly these financial institutions are irresponsible and regulation is needed to stop wealth inequality and potential crises like the one in 2008 which the banking industry learnt nothing from because they are continuing the same scheme they used back then.

      We can’t simply remove import tariffs and declare ourselves open to the globe. It doesn’t work like that. Firstly no other country would have the incentive to do the same to our goods so our economy would no longer be price competitive. Our economy would be flooded with foreign goods to an unprecedented extent whilst our exports would be at an unbelievably low amount leading to a severely damaging and very large current account deficit, the one we have now would be negligible in comparison. We can’t choose who to remove import tariffs for because of WTO rules, we’d have to remove tariffs to everyone whilst keeping export tariffs from other countries. There goes out of the window political tools and economic tools.

      Apart from that though thank you for your response again, I hope you enjoy the rest of the material on the site!

      Like

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