Brexit has brought the UK and EU closer in some regards. While the prime minister began the letter to the president of the European council that triggered article 50 with “Dear President Tusk”, her missive this March was headed “Dear Donald”. But that’s about it. On the substance of the future relationship, the two sides remain deadlocked. Mrs May has her red lines. Donald has his.
What this all means is that, while we’re obviously not sure what the future might hold, if things continue down their current path Britain will leave both the single market and the customs union.
And this in turn will have significant economic consequences. Let’s be clear on this point at least. Leaving in the way the government plans to leave, assuming the EU sticks to its (supposed) “no cherry-picking” principles, our trade with the EU will fall. Economists have crunched the numbers and come up with stark forecasts as to where we might be heading.
The UK government’s own estimates suggest that Brexit will have a negative impact on economic growth in the order of 2-8% of economic output over 15 years from 2020. The Institute for Fiscal Studies (IFS) estimates that the economic impact of Brexit will weaken the public finances by £15bn per year (for the sake of comparison, remember that the net contribution the UK makes to the EU is around £7bn).
Economies are complicated. Noticing change is hard, and attributing it harder still
In a report last week for the thinktank The UK in a Changing Europe, Swati Dhingra and Nikhil Datta dig down into these numbers a little more. “Rules of origin” checks, which will have to be carried out if the UK is outside the customs union, imply costs estimated at 8% of the underlying value of the goods. The increased waiting times at ports will be a real headache for companies – notably in the automobile and fresh food industries – operating just-in-time supply-chain processes. A study in North America found that purchases of raw materials and food subject to rules of origin checks are around 45% lower.
So what does all this imply? Well, not necessarily a sudden surge of regret about Brexit. For one thing, while the figures being bandied about are large, they do not necessarily imply a political revolution. Economists estimate the drop in GDP relative to the pre-financial-crisis trend to have been as much as 10%. There was no electoral revolt against the political mainstream. Not least, that is because economists are discussing economic weakness relative to what would otherwise have been the case. This is not the economy shrinking in front of our eyes, but the economy being smaller than it otherwise would have been, which affects people in a very different way.
Third, there is the question of causality. Economies are complicated. Noticing change is hard, and attributing it harder still. As the impact of Brexit plays out, any number of competing explanations for weaker economic performance could be suggested. Take one example: Thomas Sampson argues that the combination of Brexit-generated inflation and a failure of real wages to rise has already generated a Brexit-related hit to the average household to the order of £400. But there is no clear public consensus that this has been a Brexit-related impact.
And finally, of course, on top of perception and causality, there is blame. Theresa May has spent the better part of 18 months asking the EU to be pragmatic and creative when it comes to a trade deal. The EU has spent that time essentially refusing.
Who would bet against a nationalist rather than a pro-European backlash? “They’ve done this to us” might not sound incredible to a Leaver whose standard of living has taken a hit. And it looks likely to be the leavers who will suffer disproportionately: research highlights the fact that Leave-voting regions are between 10% and 50% more dependent on EU markets than is London. Moreover, because these areas display much lower levels of diversity, skills and connectivity than more prosperous regions, their ability to respond to this kind of shock will be correspondingly lower.
So do not count on a pro-Remain backlash to the economic impacts that the Brexit on offer looks likely to engender. But perhaps do think about the dissatisfaction with politics and the economy that helped push Leave over the winning line in June 2016. Amid the bitterness and desire for retribution the referendum has engendered – “serves them right if they lose their jobs” – it is important not to lose sight of the need to build a fairer economy out of whatever emerges from this process. However the Leave-Remain dispute is settled, that should be our priority.
Anand Menon is director of The UK in a Changing Europe. The report “Article 50 One Year On” is available on its website