Friday, June 24, 2016

Brexit Will Reconfigure The UK Economy


Brexit will reconfigure the UK economy

Britain has prospered inside the EU but it will not do as well outside
Image of Martin Wolf
© Reuters
David Cameron, the prime minister, took a huge gamble and lost. The fearmongering of Boris Johnson, Michael Gove, Nigel Farage, The Sun and the Daily Mailhas won. The UK, Europe, the west and the world are, this morning, damaged. The UK is diminished and will, quite possibly, end up divided. Europe has lost its second-biggest and most outward-looking power.
The hinge between the EU and the English-speaking powers has been snapped. This is quite probably the most significant event in British history since the second world war. It could mark an important moment in the west’s retreat from globalisation. It is, above all, a victory of the disappointed and fearful over those confident in the UK’s ability to adapt to change and lead in Europe.
The geography of the outcome reveals that this has also been a revolt of the provinces against a prosperous and globalised London. It is also a revolt against the establishment — political, economic and commercial. Meanwhile, those who consider themselves losers and those who resent the changes in their country, notably the mass immigration, have won. They have torn down the structures built up by the establishment over half a century. The Labour party, to mention one notable casualty, must have lost a huge part of its support.
Yet the UK might not be the last country to suffer such an earthquake. Similar movements of the enraged exist elsewhere, notably in the US, with the rise of Donald Trump, France, with the rise of Marine Le Pen, and even Germany, with the rise of Alternative for Germany. Others might follow. But, in an act of terrible self-mutilation, the UK has led.
It is one of the great ironies that Tony Blair’s Labour government, with its decision to open the UK at once to migration from the new members of the EU, paved the way to an outcome that will horrify him and his erstwhile colleagues. It is now clear that the failure to introduce safeguards on migration when opening the EU to newer and far poorer members was a mistake. But that is ancient history. Its impact cannot be reversed.
It is another of the ironies that people like Mr Johnson and Mr Gove, the rising powers in this land, must now rely on the experts whose advice they scorned.
The UK is now at the beginning of an extended period of uncertainty that, in overwhelming probability, foreshadows a diminished future. The Conservatives will now end up with new leadership. Whether they will manage to produce anything that can operate as a government is another matter. They then will have to do what the Brexiters failed so egregiously to do during their mendacious campaign, namely, map out a strategy and tactics for unravelling the UK’s connections with the EU. This will probably consume the energies of that government and its successors over many years. It will also involve making some huge decisions. But one point seems evident: the UK will bring in controls over immigration from the EU. That rules out membership of the single market. At best, the UK might participate in a free trade area in goods.
Meanwhile, the rest of the EU, already burdened with so many difficulties, will have to work out its own negotiating positions. I expect them to be tough ones. Why should they treat a country that has given them such a kick in the teeth generously? Yes, Germany has a trade surplus with the UK. But it will continue to sell high-quality products that the UK does not make with ease. It is vital for the interests of the UK that it tries to make the process as easy as possible for its soon-to-be ex-partners. They will always be its neighbours.
The pound has already plunged. If sustained, which is likely, that might cushion the effect on output. If the pound’s fall generates a short-term jump in inflation, so be it. But George Osborne’s fiscal warnings were not entirely foolish. The provinces will have to learn, possibly quite soon, what the likely loss of economic dynamism will mean for the tax revenues on which they depend. An emergency Budget is unnecessary. But it is probable that the underlying fiscal position has now deteriorated because the economy will be smaller. That will demand a fiscal response, at some point, if not at once. Of course, this assumes that the loss of confidence in the UK is not so severe as to devastate belief in its capacity to manage itself. That cannot be ruled out.
The UK economy is going to be reconfigured. Those businesses that have set up in the UK to serve the entire EU market from within must reconsider their position. The City’s role in trading in euro-denominated assets will surely be reduced. But manufacturers, too, will have to consider how to readjust their structure of production. Many will ultimately wish to relocate. Businesses who depend on their ability to employ European nationals must also reshape their operations. Many, surely, will want to move within the EU single market. Such decisions will not have to be made at once. But they will adversely affect investment right now. In economic life, the future is always, to an extent, today.
In the short term, however, it will be difficult for businesses to make such decisions sensibly. They just cannot know how the complex decisions to be taken will finish up. This uncertainty has always been the most obvious result of a vote to leave. It is now with us. Only time will clear this fog. But the view that, beyond this period, the UK will end up poorer than it would otherwise have been remains overwhelmingly probable. The UK did very well during its period inside the EU. It is unlikely to do anything like as well outside it.
Yet economics are only a part of what matters. The UK’s decision to join the EU was taken for sound reasons. Its decision to leave was not. It is likely to be welcomed by Ms Le Pen, Mr Trump and Vladimir Putin. It is a decision by the UK to turn its back on the great European effort to heal its divisions. It is, for me, among the saddest of hours.
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