The year has not started particularly brightly for UK prime
minister Theresa May. Last week's resignation of Sir Ivan Rogers, the UK's
ambassador to the EU who cited "ill founded arguments and muddled
thinking" in his resignation email, suggests that all is not well at the
heart of government. The Economist was also critical of the prime minister,
arguing in an editorial this week that the fact she has not yet articulated a
vision regarding Brexit, other than soundbites, means there is a "growing suspicion ... that the Sphinx-like
prime minister is guarded about her plans chiefly because she is still
struggling to draw them up." To compound it all, her comment in a TV
interview at the weekend suggesting that the UK would not try to keep “bits of
membership” of the EU, further spooked markets into fearing that the UK is
heading for a hard Brexit.
This is all rather worrying and chimes with the view I expressed at the end of December that what is lacking is any form of leadership. Eleven months after David Cameron suggested in parliament that the UK should trigger Article 50 as soon as possible in the event of a leave vote, we are no further forward. Three months after the car crash which was the Conservative Party conference, I had hoped that senior politicians would row back from some of their less aggressive rhetoric, but what we have heard from the PM suggests that she is quite prepared to trade off control of UK borders for any form of access to the Single Market. For a long time, I was never quite sure whether May was playing some sort of double game to try and lull the Brexiteers into a false sense of security. But now I have little doubt that she really means it when she says "Brexit means Brexit."
Lest we forget, almost half of all voters did not vote for Brexit, but it appears to me that the terms of the debate are being framed in favour of the just over half that did. In that sense, the outcome is a very binary one: There is no sense of compromise and there is apparently little attempt to pacify the pro-remainers that their concerns will be listened to. Matters would not be quite so bad if we thought that the political opposition was in any position to put pressure on the government to act in the interests of those who did not vote for a "red, white and blue" Brexit. But the Labour Party leadership has been so silent on the issues that matter that it is legitimate to question whether Jeremy Corbyn deserves the title "Leader of Her Majesty's Loyal Opposition." Indeed, his speech today was rather lukewarm on the subject although not quite as pro-Brexit as many of the newspaper headlines suggested (here).
All this political uncertainty forms the backdrop against which economists are required to offer some form of projections for 2017 (although much of the recent popular commentary suggests that maybe we should not bother). Given that politicians do not seem to know how to proceed, it should not be surprising if economists do not either. I am as concerned today as I was throughout 2016 that the government's plans take no serious account of the economic consequences of Brexit. And as much of the commentary in the wake of Rogers' resignation highlighted, the government does not seem to be interested in hearing of the dangers. Although the post-referendum car crash may not have happened, the economy may have suffered serious internal injuries, the consequences of which may only be evident later.
All this is dangerous, and is not the way I would go about tackling a problem as complex as Brexit which requires the gathering of as much intelligence as possible before deciding to go ahead. In the absence of some form of transitional deal, it is hard to see how the UK can conclude the Article 50 negotiations within the permitted two year window, let alone the 18 months which the EU is likely to demand. Markets are thus not hanging around, preferring to shoot first before asking questions later. If, by some miracle, a favourable deal can be reached, the markets always have the option of rallying – currency markets have a special knack of being able to shamelessly cast off their previous views. We should thus view the recent fall in the pound as a move by the FX market to raise the risk premium on the pound. Economists may be under fire for basing their models on the unfounded assumption of rational expectations, but in this instance I rather suspect that market fears are perfectly rational.
This is all rather worrying and chimes with the view I expressed at the end of December that what is lacking is any form of leadership. Eleven months after David Cameron suggested in parliament that the UK should trigger Article 50 as soon as possible in the event of a leave vote, we are no further forward. Three months after the car crash which was the Conservative Party conference, I had hoped that senior politicians would row back from some of their less aggressive rhetoric, but what we have heard from the PM suggests that she is quite prepared to trade off control of UK borders for any form of access to the Single Market. For a long time, I was never quite sure whether May was playing some sort of double game to try and lull the Brexiteers into a false sense of security. But now I have little doubt that she really means it when she says "Brexit means Brexit."
Lest we forget, almost half of all voters did not vote for Brexit, but it appears to me that the terms of the debate are being framed in favour of the just over half that did. In that sense, the outcome is a very binary one: There is no sense of compromise and there is apparently little attempt to pacify the pro-remainers that their concerns will be listened to. Matters would not be quite so bad if we thought that the political opposition was in any position to put pressure on the government to act in the interests of those who did not vote for a "red, white and blue" Brexit. But the Labour Party leadership has been so silent on the issues that matter that it is legitimate to question whether Jeremy Corbyn deserves the title "Leader of Her Majesty's Loyal Opposition." Indeed, his speech today was rather lukewarm on the subject although not quite as pro-Brexit as many of the newspaper headlines suggested (here).
All this political uncertainty forms the backdrop against which economists are required to offer some form of projections for 2017 (although much of the recent popular commentary suggests that maybe we should not bother). Given that politicians do not seem to know how to proceed, it should not be surprising if economists do not either. I am as concerned today as I was throughout 2016 that the government's plans take no serious account of the economic consequences of Brexit. And as much of the commentary in the wake of Rogers' resignation highlighted, the government does not seem to be interested in hearing of the dangers. Although the post-referendum car crash may not have happened, the economy may have suffered serious internal injuries, the consequences of which may only be evident later.
All this is dangerous, and is not the way I would go about tackling a problem as complex as Brexit which requires the gathering of as much intelligence as possible before deciding to go ahead. In the absence of some form of transitional deal, it is hard to see how the UK can conclude the Article 50 negotiations within the permitted two year window, let alone the 18 months which the EU is likely to demand. Markets are thus not hanging around, preferring to shoot first before asking questions later. If, by some miracle, a favourable deal can be reached, the markets always have the option of rallying – currency markets have a special knack of being able to shamelessly cast off their previous views. We should thus view the recent fall in the pound as a move by the FX market to raise the risk premium on the pound. Economists may be under fire for basing their models on the unfounded assumption of rational expectations, but in this instance I rather suspect that market fears are perfectly rational.
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