Trying to find a serious leader of any major business who thinks that Brexit is a good idea, and is now anything more than a damage limitation exercise, is akin to providing the proverbial needle in haystack. And this includes many of those who have, in the past, led the criticism of the EU.
As the point of no return approaches in March 2019, the main concern in the business community appears to be the complete absence of even an outline, let alone a detailed, plan which shows how the cost of achieving the stated ambition of leaving the Single Market and Customs Union will be offset by new trading relationships.
It’s this which makes business uncertain and nervous about the future with prudence demanding that contingency plans are put in place and that planned investment is either reviewed or postponed.
Although the headline figures show the economy continuing to grow, you don’t have to look far beneath the surface to see how the effects of business anxiety are already being felt. The consensus is that the U.K.’s growth rate would be between 0.5% and 1% higher than it is today, had people not voted to leave the E.U., and the country would have remained at the top of the G7 growth tables.
Debating the impact of a half percent here and there of GDP is normally the terrain of economists and policy makers but we need to be clear that these are jobs that have not been created and a real term loss to the economy of at least £10 billion, and almost certainly more, since the referendum.
That’s enough to increase investment in the NHS by around £300 million every week…. of course, that’s a figure we’ve heard before albeit in an arguably more misleading context.
And this is all BEFORE we have actually left the European Union.
This is quite a reversal of fortune for an economy that so recently sat atop the G7 growth table, outstripping that of the United States, and was on course to be the world’s third biggest by 2030. Instead, the U.K. now lags at the bottom of that group with a historically modest growth rate which is undoubtedly being propped up by the sensible, post referendum, intervention of the Bank of England and a European and World economy that is performing strongly.
Look even more closely and one will find that the achievement of almost full employment in the U.K. distracts attention from the dependence on low skilled positions and zero hours contracts. In addition, our productivity rate, one of the best indicators of economic strength, is extremely poor by G7 standards. It should disappoint everyone that Germany, a country subjected to the same EU laws and regulations that have supposedly held us back, could stop working on Thursday and still produce more than we do in the working week.
Arguably, the economic benefits we have derived from EU membership have masked this, to a certain extent, but post-Brexit the low productivity rate is going to matter greatly in terms of the competitiveness of the economy and, importantly, attractiveness to invest.
Speaking on behalf of Japanese business leaders in Downing Street last week, that country’s Ambassador was clear that no company will continue to invest in the U.K. if it sees its profitability being eroded. It is clear to Japanese investors, as much as to anyone else, that trading under WTO rules, (in a no-Brexit deal scenario), cannot offset the benefits of Single Market and Customs Union membership, especially when factors like productivity are so low.
For all that is good about the Government’s Industrial Strategy, it cannot compensate for the lack of an overarching, compelling plan, that enables business to identify opportunities through potential new trading relationships that offset the enormous cost of voluntarily restricting access to the world biggest free trade area and a trading partner which dwarfs all others. It’s these realities which leave business shaking their heads… and more worryingly, enacting their contingency plans.
When the leaders of global capital, like Goldman Sachs’ Lloyd Blankfein or JP Morgan’s Jamie Dimon say that they have to, “start liking Frankfurt because we have to”, we better take notice. We may not always care to recognise it, but their capital provides the oil for the economy not to mention the tax receipts for the Exchequer. Where they base themselves matters and guys like these just don’t take a punt on governments that are so bereft of basic economic planning as this one.
But they are not alone. Across the economy, from financial services to pharmaceuticals, from chemicals to automotive, companies that have stayed their hand, waiting to see what will happen, are now starting to enact their contingency plans.
Without Single Market membership, there is no E.U. financial passport for the Banks that base themselves out of London, and are the biggest contributor to the U.K.’s economy.
Without Customs Union membership, the just in time delivery systems that our manufacturers and retailers rely on won’t work anywhere near as well as today. It is still surprising to see how little understanding there is of how integrated time bound supply chains have become since the advent of the Single Market. Quite simply, a crunch or short delay at Dover doesn’t just mean traffic jams on the M20, it means turning right or left at Lille and diverting to grateful factories in Belgium or France.
Nobody is suggesting that this will all have an immediate acute impact, particularly if the much vaunted transition agreement is eventually signed, (which is not a given following the Government’s apparent attempts to unpick certain aspects and the clearly conflicting position with the E.U. on what is required for an open border in Ireland). But we should be extremely wary of underestimating just what an opportunity we have presented to our continental partners interested in capturing more of our inward investment and GDP.
M. Macron may not yet have the policy substance or results to back up his sales pitch but it sounds mightily attractive to those in the international business community thinking about where to lay their next bet.
It’s true that the future is very hard to predict but the overwhelming consensus appears to be, including from the Government’s own analysis, that leaving the Single Market and Customs Union, will make the country poorer. In its defence, the Government says its preferred option of a bespoke trade deal has not been included in these forecasts. Whilst this is true, the EU has made clear that that deal, even if somehow conjured up, is not going to be better than Single Market and Customs Union membership. Even if we were to retain these two components of E.U. Membership, the forecasts clearly and consistently predict at least a 2.5% fall in GDP, (which, for comparison, is far greater than the traumatic recessions of the 1980s).
And which are the places that will suffer the most? Ironically, those in the Midlands, the North West, and North East, which heavily supported the decision to Leave.
So, where do we go from here?
In the absence of another close look at the decision to leave, which arguably should be done as the true costs become known, it seems clear that the wellbeing of the economy and livelihoods of our people, depends on a final agreement that preserves as much of Single Market and Customs Union access as possible. The facts and data tell us that the alternatives will be painful with a very discernible drift of existing investment away from the U.K. and a significant opportunity cost of that which never came.
As the Cabinet meets to discuss its options, clarity is needed as quickly as possible on the government’s final, preferred destination for Brexit. Without that, business will continue to make alternative plans. If the Government cannot agree amongst itself on the final destination in the short to medium term, then membership of the European Economic Area, surely has to be the best fall back option, and certainly an alternative to the uncertainty of a prolonged transition.
Its time for party politics and ill informed positions based on ideology to be put aside or marginalised. The E.U. will not bend the rules, putting its own survival at risk, at the behest of corporate Germany’s desire to sell us more BMWs or Mercedes. It’s time that this is recognised and for strong political leadership, grounded in economic reality and pragmatism, to come to the fore in the national interest.
If it doesn’t the social and political divisions in our society, will be driven wider by unfulfilled promises and an economic downturn that could take a generation or two to reverse.