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The economic policy Britain needs after Brexit

8 September 2019

7:00 AM

8 September 2019

7:00 AM

So Mark Carney no longer believes that a no-deal Brexit will lop 8 per cent off our national wealth. Now he thinks the GDP hit will be a more modest 5.5 per cent. One can only guess what his prediction will be next month. He should have listened to movie mogul’s Sam Goldwyn’s advice: ‘Never make predictions, especially about the future.’

Cheap jibe? Maybe. But all this focus on whether we are going to run out of medicine or fresh lettuce in Sainsbury’s is a massive exercise in collective displacement activity.

It is avoiding the real issue. Surely what matters isn’t what is going to happen in the next three to six months but what is going to happen in the five or ten years after Brexit. If we are to take as monumental a step as breaking with our closest trading partners for the past 40 years, surely isn’t that what the debate should be about?

Introducing friction however small into frictionless trade will mean less of it. That much is Economics 101. But what economic models don’t factor in, is the fact that people and businesses are highly adaptable. Indeed, that is the strength of the market economy – its speed in shifting activity and resources to meet new realities, and the ability of individuals, companies and investors to spot opportunities and threats that governments and central banks can’t or don’t till well after the fact.

If Britain exits the EU without a deal on October 31, there will inevitably be a period of some chaos and confusion. But it won’t last for ever. Between them businesses and regulators will settle on new arrangements. There will be more paperwork and that will have a cost. Some things we currently do may no longer be possible. In other cases there may be work-arounds. We will see.

What is harder to model, if not predict, are the deeper shifts that will happen because of Brexit. Economic policy in Britain has traditionally been more expansionary, more permissive to credit and borrowing, less deflationary than Germany, whose macroeconomic conservatism dominates the EU. Once we leave, I expect these instincts to reassert themselves.

In the immediate aftermath of Brexit, we may even see a short-term bounce as a result of business moving forward with decisions that have been put on hold because of the political uncertainty. Over the next few years, the UK could outperform the EU if we embrace more expansionary policies. Yes, there may be inflationary pressures because of a weaker pound, but the Bank of England will ‘lean in’, rather than risk recession. France and Italy are already sliding into recession in the face of tight monetary orthodoxy imposed by Germany via the European Central Bank (ECB).

Over time, the UK and EU will diverge further. Without the UK to bat for the City, France and Germany’s traditional hostility towards capital markets will lead to more restrictive rules within the EU, could kill off plans for an EU banking and capital markets union, and possibly see a revival of the Financial Transaction Tax. By contrast, the UK’s market instincts will reassert themselves, and would almost certainly be buoyed by greater convergence with the US.

The UK will also have to abandon some activities which have only been economical because of imported unskilled EU labour, which will be scarcer, resulting in a refocus of investment into higher productivity activities.

Britain will, I am sure, remain an easier place to start and finance new businesses and will continue to attract bright, hardworking and enterprising individuals, as long as we don’t shoot ourselves in the foot. Politically, there will have to be tighter controls on unskilled immigration from the EU but that could yield benefits providing it is offset by a relaxation of entry requirements for individuals from Asia, the Middle East and North America who want to come here to study, work, invest and create jobs.

While the EU’s heft has no doubt attracted potential trade partners, the political clout of French agriculture and German engineering have always hindered its trade negotiations. The UK on its own will almost certainly be more flexible on agriculture, not just in the US – where a limited deal covering services and technology in return for a limited relaxation of restrictions on agriculture could be within reach – but with other major trading partners too.

With Brexit achieved, albeit with many loose ends, there will be a renewed emphasis in the UK, not just on expansionary macro policies, but on a more activist state, which invests in infrastructure, housebuilding, education and training, rural broadband and targeting ‘left behind’ towns in the North of England and Wales. The UK’s reliance on foreign-owned factories bringing jobs to dying manufacturing centres was always a short-term fix. Traditional manufacturing will most likely decline as an increased friction in trade with the EU makes marginal production uneconomic.

EU membership has put a premium on just-in-time manufacturing and sucked economic activity out of the regions and into the South East and towards the Dover-Calais corridor, which inevitably has had the advantage when time is of the essence, as the shortest crossing to the Continent. Throwing sand in the works would remove some of that advantage and also lead to greater focus on activities which are more value added and less time dependent. This would provide a much needed shot in the arm to other ports, whose longer cross-channel and North Sea crossings may become more competitive again.

With trade possibly shifting longer term away from the EU to focus on Asia and the Americas, there would also be opportunities to revive the West and North West of England, whose role in historical trade flows went into decline as the UK began to trade more with the EU.

This is the real fear of our European partners. That there is an alternative to ECB imposed deflation and the crippling economic orthodoxy of the technocratic EU establishment. The tragedy of the European Union is that for all its successes in delivering peace and entrenching democracy in Southern and Eastern Europe, it has become too rigid, too institutionally sclerotic and too wedded to its own shibboleths to give its peoples genuine political choice.

It has reached the point where the only way a country can vote to depart from the EU orthodoxy and act on that choice is to exit the Union altogether. That cannot be right.

In our collective memory we set great store by Roosevelt’s New Deal and the drive to rearm, as the levers that dragged us out of the 1930s slump. But we forget the role that Britain’s willingness to break new ground in economic policy played in restoring full employment and economic growth almost faster in this country than anywhere else in the industrialised world. It was Baldwin’s Conservative government that slashed interest rates and funded a massive house and infrastructure building programme. All of these were as much heresies in the view of the political, financial, and economics establishment as leaving the EU is now. There is a lesson in that somewhere.

Andrew Garfield is former national newspaper Brussels correspondent and business and economics writer. He now has his own communications consultancy.


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