When the foreign-exchange strategist Kamal Sharma said the pound was starting to resemble an “emerging market currency” it generated headlines in the specialist press but left the political class nonplussed. The Tories have adopted a strategy of ignoring the downsides of Brexit, while Labour – terrified of offending Red Wall voters – simply ignores the problem.
But that was Sharma’s point. Sterling’s fall of 10 per cent on the night of the EU referendum in 2016, and its slow slide thereafter, are not the main problem. The problem is that the Bank of England, the Treasury and the opposition don’t want to talk about the damage Brexit is doing to our economy.
If sterling had fallen while exports had risen, it might have been worth the “swift negative shock to UK living standards” identified by the Centre for Economic Performance as a result of higher inflation. But trade, too, began to suffer, once the Brexit transition period ended on 31 December 2020. The number of buyer-seller relationships between British and EU firms has slumped by a third, according to research by the London School of Economics. Overall, says the Office for Budget Responsibility, the UK “appears to have become a less trade intensive economy, with trade as a share of GDP falling 12 per cent since 2019, two and a half times more than in any other G7 country”.
When your imports and exports are falling, one solution is to boost investment at home. But here too the Brexit effect has been spectacularly negative. Business investment had been rising steadily in the Cameron-Osborne years but this trend ended following the Leave vote. It is now 9.4 per cent lower than in the second quarter of 2016 and has been far slower to recover from the Covid crisis than in other G7 countries.
Sterling down, trade down, investment down. These are the exact opposites of the results that Brexit supporters promised. The true believers cling to the idea that this downturn – six years on from the vote itself – is merely a “Nike swoosh”: things will soon pick up and the economy will roar once it adapts to Britain’s new global configuration.
But that’s not going to happen. In the first place, all central banks are currently reducing growth by raising interest rates and the UK economy is most likely in recession. More importantly, the world the hard-Brexit fantasy was designed for has changed fundamentally.
Boris Johnson’s vision, outlined in his February 2020 speech in Greenwich, was of Britain playing a kind of “libero” role in an increasingly globalised world market – ducking and weaving between the major trade blocs, breaking open cartels and profiting in the niches opened up by plummy-voiced financiers in Huntsman suits.
But globalisation is in retreat. Both Russia and China have declared themselves to be in systemic competition with the Western way of doing business, with universal human rights and with the rules-based global order.
All this is apparent to market analysts. But that’s not why Sharma likened Sterling to the currency of a basket-case economy. Emerging market currencies are weak when they become politicised: when vainglorious men in presidential palaces start to overrule central bankers, and when central banks themselves succumb to political pressure.
That is the effective charge against the Bank of England. It cannot fully acknowledge the damage being done to growth, trade, investment as a result of Brexit. The Treasury, meanwhile, has been borrowing its way out of the post-Brexit stagnation, all the while proclaiming its belief in a small state. Confused? You should be.
Britain’s economic decision-making has become “politicised” to the extent that neither the government nor the opposition can talk realistically about the central problem. The way out is not rejoining the EU in the short term. I don’t think that will happen in my lifetime. Nor is Johnson’s hard-Brexit agreement the biggest obstacle to prosperity. The way out is the state-led reconfiguration of our economic model – towards the high-growth, high-wage, high-skill and post-carbon economy the Tories claim to want – combined with a rewrite of the Brexit deal.
As I’ve written here before, one reason the Tories cannot achieve economic transformation is because they have replaced dirigisme with “suggestion-ism”. Neither they nor the civil servants required to execute all the grand plans for levelling up have the skills or the powers to reshape market behaviour. Meanwhile you have a Chancellor who is willing to borrow to put money into the pockets of hungry families, but unwilling to borrow to create millions of new, green jobs in the post-carbon industries of the future.
If the UK simply rejoined the single market – the much-touted Norway model – it would still not prosper unless it adopted a broader European social and economic approach. That means raising billions for state-led investment drives, massively upskilling the workforce, restoring a generous and comprehensive welfare state and actively co-operating with our trading partners, rather than trying to divide and rule.
But Brexit was supposed to be about a break with all that. It would facilitate deregulation, lower taxes, lower labour standards and higher inequality. That’s why some of the richest people in Britain backed it.
My worry is not that the Tories are in denial about this: it’s that Labour is, at least in public. You could tolerate, for the sake of realpolitik, the party leadership being miserly with actual commitments – though you pay a political price for the narrative void that creates. What you cannot tolerate is Labour’s refusal to face the problem. And neither will the markets, should the party come to power; investors don’t listen to focus groups.
The failure of Brexit is the strategic challenge facing the UK. It’s not just an economic problem but a geopolitical one: it has left the government with no other logical position than to hinder European co-operation, whether on technological sovereignty, strategic political autonomy, defence or migration.
In a world where globalisation is in retreat, and where systemic competition is becoming the norm, bigness matters and networks matter. In that new world, Britain has become not just a rule-taker from Europe but a “reality-taker” – there is nothing we can do about the EU being more powerful than the UK and that its rules will govern how our businesses operate.
That is a grim balance sheet for those of us who tried to stop Brexit. I hope some of those who celebrated it – six years ago this Thursday – can at least acknowledge the grimness.
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