The UK’s Brexit negotiations may have kicked off
yesterday but there is a depressing inevitability to it all. We know that the UK’s
negotiating position is weak, and despite what David Davis’ demeanour suggested
beforehand, he has already been forced to concede on the question of sequencing
(and how many other positions will he have to retreat from before the summer is
out?). We know that Brexit will be economically damaging. We know that the
British government does not actually know what it wants. And we also know that
it does not have a mandate to pursue the hard Brexit which the Conservatives set
out in their manifesto. Apart from that, everything is hunky dory.
At least Mark Carney’s Mansion House speech this morning contained a thinly veiled jibe at Boris Johnson’s pre-referendum suggestion that his policy on Brexit is similar to his policy on cake (“My policy on cake is pro having it and pro eating it”), with Carney suggesting that “Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” Carney and the rest of the economics profession know that there is no cake at the end of this particular road.
He also implied that the idea of putting up trade barriers, which could be the result of failure to reach a Brexit agreement, was a bad idea. In his words, “Bank of England research estimates that up to one half of the post-crisis productivity slowdown could be related to the deceleration in global trade growth.” He argued that a liberalisation of services trade could be very much of benefit to the UK, given its specialisation in this area. In particular, Carney highlighted the importance of financial services: “One million people across this country work in financial services. The industry contributes 7% of output and pays taxes that cover almost two thirds of the cost of the NHS.” He did not need to say explicitly that failure to deliver a deal on financial services was a bad idea – his audience was way ahead of him – and it was a nice touch to link it to the hot topic of NHS funding.
But already there is pushback from continental Europe. London-based banks are being asked by the EU regulator to be more explicit about their plans for dealing with customers in the EU27, and only today ECB executive board member Benoît Cœuré backed the European Commission’s call for a new set of rules to govern euro clearing. Cœuré reiterated the view that the ECB, as the central issuer of euros, should be responsible for the clearing of euro transactions and not central banks outside the region. I warned in 2015 that this was likely to happen in the event of Brexit. Having failed in 2011 to force euro clearing to be conducted on the continent, after (ironically) the European Court of Justice ruled in the UK’s favour, I noted that any future attempt to “impose limits on non-euro zone trading in the event of Brexit would be much more difficult to refute, as the UK would no longer have such easy access to the ECJ, which could have significant adverse consequences for the UK’s dominant position in the FX market.”
I also pointed out that “intra-EU barriers are likely to be reduced over time as the single market for services continues to develop – something from which the UK will not benefit in the event of Brexit and which will raise potential welfare losses.” It might have seemed a fanciful notion to many people two years ago that the EU economy would ever find its feet again, but the growth differential between the euro zone and UK is projected to narrow considerably over the next couple of years, and in 2018 it is forecast by the EC to grow more rapidly. Given the shot in the arm which French President Macron has given the euro zone, who would bet against it?
It is for this reason that even Chancellor Philip Hammond, who was conspicuous by his absence during the election campaign suggested today that the needs of UK business need to be heard in the Brexit negotiations, arguing that current trading arrangements (i.e. single market and customs union membership) should remain in place until “new long-term arrangements are up and running.” Political commentators see this as an indication of the weakness of Theresa May’s position (and she still has not yet managed to come to an arrangement with the DUP, despite the fact that the new parliamentary term is scheduled to start tomorrow). Her position on Brexit was always out of tune with European political reality and with Michel Barnier reminding the UK that it is they who are leaving the EU and not the other way round, we begin to see the flimsiness of the government’s argument.
To end with, I did come across one article recently which was worth reading, by former head of MI6 John Sawers who, writing in the FT, noted that “Britain on its own will count for little on the world stage.” It is not so much that the argument is new, but Sawers put the decision to leave in the recent historical context which showed how the UK has punched above its weight diplomatically by being part of the EU. Particularly ironic was his comment that “we had two world-class leaders in Margaret Thatcher and Tony Blair, who set us back on the path of growth at home and leadership abroad … While John Major and Gordon Brown were not of the same stature internationally, they played their cards judiciously.” Funnily enough, not a mention of David Cameron or Mrs May, who historians may yet rank highly on the list of worst occupants of 10 Downing Street. And in an echo of the first post I wrote a year ago, Sawers concludes “if we can no longer help shape the world, others will do it for us. And Britain will have to lump the consequences.”
At least Mark Carney’s Mansion House speech this morning contained a thinly veiled jibe at Boris Johnson’s pre-referendum suggestion that his policy on Brexit is similar to his policy on cake (“My policy on cake is pro having it and pro eating it”), with Carney suggesting that “Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” Carney and the rest of the economics profession know that there is no cake at the end of this particular road.
He also implied that the idea of putting up trade barriers, which could be the result of failure to reach a Brexit agreement, was a bad idea. In his words, “Bank of England research estimates that up to one half of the post-crisis productivity slowdown could be related to the deceleration in global trade growth.” He argued that a liberalisation of services trade could be very much of benefit to the UK, given its specialisation in this area. In particular, Carney highlighted the importance of financial services: “One million people across this country work in financial services. The industry contributes 7% of output and pays taxes that cover almost two thirds of the cost of the NHS.” He did not need to say explicitly that failure to deliver a deal on financial services was a bad idea – his audience was way ahead of him – and it was a nice touch to link it to the hot topic of NHS funding.
But already there is pushback from continental Europe. London-based banks are being asked by the EU regulator to be more explicit about their plans for dealing with customers in the EU27, and only today ECB executive board member Benoît Cœuré backed the European Commission’s call for a new set of rules to govern euro clearing. Cœuré reiterated the view that the ECB, as the central issuer of euros, should be responsible for the clearing of euro transactions and not central banks outside the region. I warned in 2015 that this was likely to happen in the event of Brexit. Having failed in 2011 to force euro clearing to be conducted on the continent, after (ironically) the European Court of Justice ruled in the UK’s favour, I noted that any future attempt to “impose limits on non-euro zone trading in the event of Brexit would be much more difficult to refute, as the UK would no longer have such easy access to the ECJ, which could have significant adverse consequences for the UK’s dominant position in the FX market.”
I also pointed out that “intra-EU barriers are likely to be reduced over time as the single market for services continues to develop – something from which the UK will not benefit in the event of Brexit and which will raise potential welfare losses.” It might have seemed a fanciful notion to many people two years ago that the EU economy would ever find its feet again, but the growth differential between the euro zone and UK is projected to narrow considerably over the next couple of years, and in 2018 it is forecast by the EC to grow more rapidly. Given the shot in the arm which French President Macron has given the euro zone, who would bet against it?
It is for this reason that even Chancellor Philip Hammond, who was conspicuous by his absence during the election campaign suggested today that the needs of UK business need to be heard in the Brexit negotiations, arguing that current trading arrangements (i.e. single market and customs union membership) should remain in place until “new long-term arrangements are up and running.” Political commentators see this as an indication of the weakness of Theresa May’s position (and she still has not yet managed to come to an arrangement with the DUP, despite the fact that the new parliamentary term is scheduled to start tomorrow). Her position on Brexit was always out of tune with European political reality and with Michel Barnier reminding the UK that it is they who are leaving the EU and not the other way round, we begin to see the flimsiness of the government’s argument.
To end with, I did come across one article recently which was worth reading, by former head of MI6 John Sawers who, writing in the FT, noted that “Britain on its own will count for little on the world stage.” It is not so much that the argument is new, but Sawers put the decision to leave in the recent historical context which showed how the UK has punched above its weight diplomatically by being part of the EU. Particularly ironic was his comment that “we had two world-class leaders in Margaret Thatcher and Tony Blair, who set us back on the path of growth at home and leadership abroad … While John Major and Gordon Brown were not of the same stature internationally, they played their cards judiciously.” Funnily enough, not a mention of David Cameron or Mrs May, who historians may yet rank highly on the list of worst occupants of 10 Downing Street. And in an echo of the first post I wrote a year ago, Sawers concludes “if we can no longer help shape the world, others will do it for us. And Britain will have to lump the consequences.”
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