14 February 2023

This Brexit truce was inevitable

Hardliners may squeal, but as the economy suffers the UK needs to reevaluate its relationship with its biggest trading partner.

By Freddie Hayward

Illustration by Jonathan McHugh / Ikon Images

Some advice: if you want to hold a secret meeting, don’t do it during parliamentary recess. No one will have anything else to talk about.

Business leaders, Michael Gove and senior Labour politicians including David Lammy, the shadow foreign secretary, met at the country estate Ditchley Park at the end of last week to discuss how to improve Brexit. The secret meeting acknowledged the shortcomings of the withdrawal deal and discussed ways to build a closer relationship with the EU.

Some prominent Leave supporters have called the meeting a conspiracy to undermine Brexit. A secret cross-party meeting in an exclusive country retreat does, to be fair, scream conspiracy. Except that politicians from different parties talk and meet all the time.

This was, instead, yet another sign that the realisation is dawning after all these years that Brexit requires improvement. The agreement left out huge parts of the UK’s relationship EU, such as professional services and security. Constant talks with our closest neighbour are inevitable, whatever you think the outcomes should be.

Rishi Sunak says he was not aware of the meeting but he seems to agree. The government is edging towards a deal with the EU over the Northern Ireland Protocol to reduce trade barriers and ease uncertainty for businesses.

Part of the reason for this change is a growing realisation of the economic costs of Brexit (as Andrew, Anoosh and I discussed on a recent podcast). In a fascinating interview with the Overshoot newsletter, Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee, has said that Brexit wiped out £29bn of economic output. (The interview is also worth reading for his comments on why he’s sceptical of forecasts predicting deflation in 2024 and why inflation is hitting workers, not capital, the hardest.)

Haskel starts with the fact that business investment in the UK flatlined from 2016: we didn’t need to actually leave the EU for business confidence to be knocked. Haskel then takes historical rates of business investment and models what would have happened had investment stayed at that level. He calculates that this extra investment would have increased GDP by 1.3 per cent, or £29bn. If that is right, it’s bad news for Brexiteers and bad news for Britain.

Always take forecasts, particularly those that attribute changes to a single event, with a generous pinch of salt. But Haskel’s argument fits into a broader picture of economic gloom. The Bank of England predicts that the real size of the economy will be smaller by the end of 2025 than on the eve of Russia’s invasion of Ukraine. Such economic pain will inevitably invite questions about our relationship with the EU, our biggest trading partner.

The debate over the nature of that relationship is not going away. If you hoped that six and a half years after the Brexit vote the conversation might have moved on, I’ve got some sad news: that’s not going to happen.