Photo: Ben Stansall/AFP
For thirteen blogs, I have followed the facts, rationalisations, illusions and total madness about a possible Brexit; now it is final. The British turned their backs on the EU, albeit only politically for now. After joining the European Economic Community out of bitter economic necessity in 1973, cooperation has become too political for them to feel at home within the EU and now are exploring a new relationship.
The British are very much attached to their ‘special status’ as islanders, and it is possible that the glorious British colonial past also plays a role in the desire to be relieved from foreign influence or interference (read: "Brussels"). The December 12 elections were mainly Brexit elections. Muddling along no longer was an option; something had to happen. It’s this sentiment that Jeremy Corbyn's left-wing fraction within Labor has completely misread, resulting in Labor's biggest election defeat in nearly 90 years.
There was unmistakable relief, even among fervent "remainers," to get away from the stalemate that kept politics and citizens alike in a deadlock and threatened to tear the country apart. Johnson's Conservatives, with the newly acquired 43 seat majority, were understandably euphoric with their victory. This overwhelming majority came at a very high price, however: for once politicians must deliver on their promises.
The promises, which come with a personal guarantee from Boris Johnson in the Conservative Manifesto 2019, include:
✔︎ "get Brexit done";
extra funding for the NHS with 50,000 more nurses and 50 million more GP surgery appointments per year;
20,000 more police officers and stricter penalties for criminals;
an Australian-style points-based system to control immigration;
millions more invested every week in science, schools, apprenticeships and infrastructure while controlling debt;
reaching Net-Zero by 2050 with investment in clean energy solutions and green infrastructure to reduce carbon emissions and pollution;
no increases in the rates of income tax, VAT or National Insurance.
The purpose of the promises was to secure the Brexit. This objective now achieved, it is time to make agreements with the EU on mutual relations and possible cooperation in the future.
Johnson cannot afford many setbacks in this area. Indeed, the quality of the relationship with the EU is possibly more critical than ever.
It is a fact that the EU exports considerably more to the UK (2018: €301.3 billion) than the UK export to the EU (€193.9 billion). Even though British exports to the EU only represent nearly half of its total exports worldwide (this amounted to €412.1 billion); it doesn't make the British any less vulnerable. Trade between the British and the EU is mutual in many product groups; for example, the British export whiskey to the EU, but they also import large quantities of wine from the EU (look here for the total overview). Both sides gain from the mutual trade relationship, even when skewed. The production of cars may serve as an illustration.
In the UK, Honda, Nissan and Mini account for the lion's share of exports to the EU (total EU exports represent roughly €20 billion, out of total of almost €45 billion worldwide), but at the same time, the UK imports cars with a value of €60 billion from the EU. Despite this skewed relationship, the British are probably more interested in being able to sell cars produced in the UK free of duties to the EU, than vice versa. Quality luxury cars by Mercedes, BMW, Audi, Ferrari, etc. sell better in the UK, than commodity cars like Honda, Mini and Nissan do in the EU. Import duties affect the sale of luxury cars less than it will affect commodity cars if import duties apply. The British car industry, except for Landrover I presume, therefore, is much more vulnerable to price pressure which imports tariffs typically present. The British desperately need a trade agreement with the EU. All export focussed producers have threatened to close their UK factories, should negotiations fail. In anticipation, producers have already shut down production lines in the UK. Without an agreement, the UK not only loses its export to the EU but also, with factories closing, forfeit all of its non-EU automobile exports. With a direct employment of 168,000 people and a multiple of them in the supply industry, a lot is at stake.
From this perspective, it is all the more remarkable that Johnson stipulated in the UK EU Withdrawal Act that whatever happens, the transition period to break free of alleged EU chains will end on December 31, 2020. If he has done this to put pressure on the EU, I think he is making a strategic mistake. The value of exports to the UK is 5.5% of the total internal and external exports of the EU (which amount to a total of €5,484.6 billion). The EU will not sacrifice the "sacred" principle of the EU, that there must be a "level playing field" (everyone plays under the same EU rules and conditions) for the sake of 5.5% ‘turnover’. Should the UK not wish to comply with the EU's level playing field principle, and therefore with EU trade laws and regulations, then no agreement will be reached, leaving the UK no other choice then reverting the WTO rules. These rules allow the UK to trade under the same terms and conditions as those negotiated by the EU with other countries. The British have expressed their enthusiasm for this approach, time and time again. The reality, however, is that although this rate at the EU border "only" averages 1.5% tariffs vary widely. The import tariff for cars, for example, is 10%, which drives up the price and undermines the attractiveness of importing vehicles from the UK to the EU. From an employment and economic perspective, this hardly is an attractive prospect. Besides, given tariffs are dependent on quotas, customs procedures and other restrictions in the treaties concluded and which vary by type of product.
The whole Brexit adventure, according to Bloomberg economists, so far has cost the UK up to 2019 £130 billion (compared to the situation where there was no Brexit) in lost GDP, and the pain is not nearly over yet. By the end of this year, the loss to the economy in Bloomberg’s calculations goes up to £200 billion. This loss to the British economy caused by the Brexit in four years almost equals the cumulative membership contributions paid to the EUduring the period 1973 through 2018 (£211 billion).
Given the other promises made by Boris Johnson in his party's election manifesto (see above), a small miracle happens must happen, for Brexit really to work. Without incurring more debt, it is unclear how Johnson thinks he can fund all of these costly promises, one of which is not to raise tax rates on citizens. It is also interesting how the messaging regarding Brexit has changed over time. Currently, Brexit is about sovereignty, limiting immigration and restoring British values, which sharply contrasts the messaging during the Leave-campaign: we better spend our money on the NHS than on the EU (which according to Leave even cost £350 million per week at that time!). The reality is that the British contribution to the EU in 2016 was £192.8 million net per week while, according to the Confederation of British Industry, the membership brings in an additional £1.75 billion benefits to the British economy every week. The British voters have been lied to, time and time again. The promises made in December fall in the same category. Conflicting and virtually impossible to deliver on. Does anyone care, nowadays?
Brexit monitor 3rd quarter 2019
That brings us to the economic impact of the Brexit up to and including the third quarter of 2019. My Brexit monitor follows the British economy in its economic development since January 1, 2015, and tracks it against that of the Netherlands and the EU as a whole. For this purpose, I have selected six parameters from the real economy and two that are indicative of confidence in this (see the separate indicators listed below).
The decline of the British economy that started in the fourth quarter of 2018 continues unabated. In a year, the British have lost 1.4 points in my monitor and have surpassed the EU. The exchange rate of the British pound has more or less stabilised in the past year, and the effect of this translates in the lower value of British exports. It reflects the apparent inability of the UK economy to compete internationally. The EU and the Netherlands are developing positively, but there is a certain degree of stabilisation compared to a year ago.
Changes compared to last quarter and a year ago
The movements in the index are still mainly determined by changes in consumer confidence and economic sentiment. Often they anticipate developments in the real economy, and as such, they are considered indicative of what is to come. Here, too, the higher one is, the harder one falls, when expectations drop. The Netherlands is a point in case. Over a year, consumer confidence, in particular, has fallen relatively sharply (from 106.4 a year ago to 96.0 now), although it did stabilise in the past quarter. The Dutch development in house prices (from 122.0 to 129.9) follows a different track. The British continue to amaze with the actual continuous increase in the volume of wages in the financial sector (plus 5.3 over the past year). The decline in economic confidence in the UK is particularly striking. With a decrease of more than 17% over the past year, that is a clear indication that the business community does not share the confidence that Johnson et al. Place in the British economy.
The overview above shows the relative values, with the second quarter of 2016 as the benchmark (index = 100). The table below shows the absolute values for the third quarter of 2019, which makes it possible to gain a better insight into the order of magnitude in which the outcomes move.
I also always look specifically at the development of house prices in London, the beating heart of the British economy. House prices there have fallen by an average of 0.4% in the past year. In the most expensive district of Kensington & Chelsea, house prices fell by 11.4% in the past year (average house price now ₤1,229,175) and in the second most expensive district, the City of Westminster, this decrease was even 12.3% (average house price) now ₤897,094). Of the 32 London boroughs with a statistically representative sufficient number of transactions, only ten managed to record (modest) growth in house prices over the past year. In Hounslow, prices rose the most by 6.1% (average house price in September ₤412,065).
Development of exports from and to the United Kingdom with the Netherlands and the EU
I separately monitor the exports between the Netherlands, the United Kingdom and the European Union. Calculated from June 2016, the volume of exports in GBP from the United Kingdom to the Netherlands and the EU has increased considerably (plus 39.5% and 26.7% respectively). This increase is mainly due to the fall in the exchange rate between the GBP and the euro. Since 2015 exports from the Netherlands to the United Kingdom have grown by 16.9% (from the UK to NL that is plus 10.3%) and exports from the Netherlands to the rest of the world increased by 24.1%. The adverse "Brexit effect" that Dutch exporters feared so much does not seem to materialise (as yet) as a result of substitution effects from the aggregated figures.
Finally, a cautious look ahead
The Brexit now is a political reality and as such irreversible. Its economic success depends to a high degree on the outcome of the negotiations between the UK and the EU. "Taking back control" suggests that there is absolute freedom setting up things at one's discretion. The modern world is geopolitically interconnected and interwoven by trade to the extent that such an attitude can easily simply is quite naive. When will economic reality finally prevail over political wishful thinking? The sooner, the better, in my view. For reasons mentioned in the first part of this article, Johnson cannot afford disappointing employment numbers, particularly now that he has made impactful electoral gains in northern England and Labour may rid itself of its Corbynite image. If so, Labour will likely focus on every negative bit of post-Brexit related news.
A lot needs to happen in the coming months. Both parties, the British and the EU, must define their red lines and commitment for the negotiations. Given the December 31 deadline set by Boris Johnson, and both parties having an interest in achieving at least a basic trade and cooperation agreement before that time, I expect both sides of the negotiating table to choose a realistic approach. The agreement to be concluded before the end of the year will still, however, contain many loose ends, which will require a lot of hard work from the negotiators to resolve after December 31, 2020.
Commentators speculate that Johnson wants to pursue a deal similar to the Canadian - EU free trade agreement. Interestingly enough, this is precisely what Michael Barnier, the chief EU-negotiator, has predicted in October 2017 (more than two years ago!). It will not simplify negotiations, though. One can expect the EU diplomats to show their usual sharp insistence in a "level playing field" in future dealings. It will put a lot of tension on the negotiations, but ultimately the UK will need to accept that EU trade rules will continue to apply to them when they want a deal. Ironically, as long as adverse employment effects stay at a minimum, citizens (read: voters) will not notice it too much in the long run.
The financial sector must fight its own battles. It is hardly conceivable that the EU will allow the British to operate in the EU without being bound by a European supervisory framework. The London bankers, insurers, lawyers and accountants will have to forge their success by pursuing the scenario described in my previous Brexit blog (Singapore-upon-Thames). The only constant in this story is that everything is still uncertain (except that the Brexit is now a political reality). We will see. I will report again at the end of April!
THIS ARTICLE WAS TRANSLATED FROM THE DUTCH ORIGINAL, USING GOOGLE TRANSLATE AND GRAMMARLY