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Hard Brexit Promises a Rough Ride for UK economy

Friday, October 21, 2016

Hard Brexit Promises a Rough Ride for UK economy

Patrick Low, Fellow of Asia Global Institute, speaks of the high price of Brexit for the UK's political leadership and its economy.

Two weeks ago this column discussed the merits of "hard" and "soft" Brexit solutions to the UK's departure from the EU. Since then, the dye has been cast, taking many by surprise and provoking some harsh reactions.

At the Conservative Party's annual conference in early October, Prime Minister Theresa May made it clear that hard Brexit is the order of the day.

Britain will limit immigration of EU citizens, release itself from the jurisdiction of the European Court of Justice and the reach of European law, and by implication leave the customs union.

The economic damage that results from "taking control of our own destiny", as May put it, will depend greatly on how successful Britain is, at negotiating the terms of its reformulated, diluted access to the EU's single market, along with dozens of other modified trade relationships across the world.

The PM is going to trigger Article 50 of the Lisbon Treaty by March 2017 at the latest. At that point the clock ticks on a two-year negotiation for the UK's exit.

A hard exit might be quicker, but it will be a lot rougher. Comments from some EU politicians have become more strident. President Francois Hollande of France has said that there must be a threat, a risk and a price for the UK as it leaves the EU.

Chancellor Merkel of Germany has explicitly insisted that access to the single market requires full acceptance of the four freedoms of movement of labour, capital, goods and services. The same sentiments prevail among many member states.

Despite relatively healthy economic indicators immediately post-Brexit, things are starting to look less good. Sterling has lost 20 per cent of its value since Brexit and is the worst performing major currency so far in 2016. Its trade-weighted value is the lowest it has been since the launch of the euro in 1999.

Weak sterling is good for foreign tourism and exports, but it risks provoking inflation and stymying any further monetary easing by the Bank of England, resulting in lower growth.

Currency depreciation also means lower real income and wealth. Moreover, evidence continues to mount of delayed investment decisions and reconsideration by companies of where to locate investments.

Disturbing analysis has just emerged from the Centre for European Reform, a think tank, which shows - contrary to a lot of popular perception - how poorly the UK economy has performed in the 21st century against other European economies.

British GDP per head has grown more slowly than German, French and Spanish over the period, surpassing only Italy among the large EU economies.

In comparison to the average income of the 15 existing EU members prior to the 2004 enlargement, the British are no richer than they were 15 years ago. The UK's productivity has also been lower than the E-15 average since 2000. These are salutary findings for a country taking on the challenges of the sea change called Brexit.

Socially and politically, things have also grown uglier. Hate crimes have more than doubled in the last three months across the UK. Amber Rudd, the UK's Home Secretary, suggested that firms should be required to report the number of foreign workers they employ as a name and shame tactic to discourage employing foreigners. The ensuing outcry apparently led to a reversal of the policy.

The Foreign Office told the London School of Economics that it would no longer take advice from non-British citizens on Brexit. This was later denied.

On the political front a row is in the making over the Government's refusal to let Parliament vote on the terms of Brexit. On an issue so fundamental to the future of the country, critics challenge the government's very legitimacy.

David Davis, the Brexit Minister, has said that "there is no downside to Brexit, only considerable upside" and that negotiating advantages are "incredibly stacked" in Britain's favour. No wonder the legislature, and doubtless the public at large, are troubled by a lack of transparency.

This article first appeared in the South China Morning Post on October 12, 2016 as Britain's decision to go for a "hard" Brexit promises rough ride ahead

The views expressed in the reports featured are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.


Patrick Low

Senior Fellow, Asia Global Institute

Patrick Low


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The University of Hong Kong
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