Rethinking Europe

How Britain Punishes Itself

Theresa May’s Brexit plan will do some significant damage to the British economy.

Credit: M-SUR Shutterstock.com

Takeaways


  • The notion that the UK could turn itself into Europe's Singapore, a rich free-wheeling low-tax service is fantasy. ‎
  • For the EU27, preserving its own cohesion is the priority and not preserving preferential access to the ‎UK market.
  • If "Brexit means Brexit" (Theresa May), then "out means out" (Wolfgang Schäuble).
  • A Trumpian "great trade deal" with the US will do little more than to preserve the access to the U.S. market.

Beyond Theresa May’s mellifluous rhetoric in her Lancaster House speech, there are some harsh realities that determine Britain’s negotiating path — but that she is either deliberately overlooking or making light of.

  1. There is no significant evidence that EU membership has held back the UK in an economically meaningful way. Instead, the UK economy has done well within the EU, even somewhat better than Germany or Sweden on many counts.
  2. The notion that the UK could turn itself into Europe’s Singapore, a rich free-wheeling low-tax service and trade center at the edge of the continent, is largely fantasy.
  3. The UK is simply in the wrong time zone to be the services center of Asia. It needs Europe as a major market.
  4. The more the UK deviates from European norms, the more the EU will regulate and restrain its imports from the UK.
  5. Whatever the economic merits of tax dumping, foreshadowed by Philip Hammond may be – i.e., the more the UK tries to be an offshore tax haven — the more will the EU see to it that the goods and services the UK offers will also stay offshore. That means they cannot be sold easily in the EU.
  6. The UK needs trade with the — much bigger EU27 — more than vice versa. Whereas the UK earns 12% of its GDP by exporting goods and services to the EU27, the reverse flow accounts for just 3% of EU27 GDP.
  7. Geography is destiny. For all the talk about limitless globalization, the actual conduct of trade is amazingly region-based – meaning that nations end up doing most of their trading with nations nearby (and not those very far away).
  8. For the EU27, preserving its own cohesion is the absolute priority. Preserving preferential access to the ‎UK market is nowhere near the top of priorities.
  9. The EU27 will take a hard line without wanting to genuinely punish the UK. If “Brexit means Brexit” (Theresa May), then “out means out” (Wolfgang Schäuble).
  10. Losing the UK’s €12 billion net contribution to the EU budget would be somewhat unfortunate for the EU27. But relative to the size of the EU27 economy (about €12 trillion), the sum is small. With its fiscal surplus, Germany could easily take a little more than its fair share of that.
  11. If the UK wants to preserve any element of preferential access to the EU market, it will have to pay into the EU budget in return, just as Norway and Switzerland do.
  12. To argue that the EU27 will suffer more from Brexit – and that the EU would thus want to offer the UK a sweet deal in order to reduce the supposed damage to the EU27 – is a typical “tail wags dog” delusion.
  13. A Trumpian “great trade deal” with the United States will do little more than to preserve the access to the U.S. market which the UK enjoys at the moment. Thus, it has no positive economic effect.
  14. The Brexit plan devised by Theresa May will hurt the British economy.
  15. The UK could offset some of the Brexit damage through pro-growth reforms. However, the UK is already lightly regulated in many areas. Thus, the scope for further liberalization is very limited.

    Also, the political climate in the UK with its strong populist streaks (think UKIP, Jeremy Corbyn, Boris Johnson) does not suggest that the UK will embark on a massive deregulation drive soon, reducing “workers rights” and the like on a major scale.

Conclusion

The very fact that the EU27 finds it difficult to agree makes it unlikely for the UK to get much of a “bespoke” deal.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

Responses to “How Britain Punishes Itself”

Archived Comments.

  1. On January 17, 2017 at 3:46 pm Rolo Tamasi responded with... #

    Having been running manufacturing business located in many EU and non EU countries for some decades I had difficulty finding anything here that I recognised as valid.

    The root disconnect is apparent in 9 “out means out”. That is exactly what May has been telling you and today made absolutely clear. We are leaving, going out and looking for no favours.

    Now EU, do you want to trade with us on mutually beneficial terms?

  2. On January 18, 2017 at 5:19 am tini responded with... #

    all this presumes that the EU27 stays together, which is in serious doubt given the ongoing divergence and indiscipline. Hence, the benefits of Brexit may only become apparent when Europe comes apart (quite possibly before Britain concludes its exit) and provide Britain the option to tailor relations without many of the drawbacks.

  3. On January 18, 2017 at 7:15 am 20eric responded with... #

    I am pretty sure it won’t be the EU that suffers from the ramifications of Brexit.

  4. On January 18, 2017 at 7:56 am cybernaut62 responded with... #

    Good article. It all seems pretty accurate. Schmieding is telling some Brits what they don’t want to hear. The bet is of course that the EU27 will fall apart before a Brexit deal is done. It’s not a bet that many of us outside Ukip circles want to take.

    Trade is geographical, and while the relative importance of the EU27 to the UK is falling, gradually putting oneself outside the customs union because of immigration is a bad idea.

    And the furore over migration is misguided. Look at the current non-EU migration figures to the UK that suggest even when the UK has control over EU27 migration, the actual numbers aren’t going to be very different from now – assuming we have the ‘open UK ‘Ms May says she wants. Best Cyber

  5. On January 18, 2017 at 7:57 am cybernaut62 responded with... #

    Indeed…

  6. On January 18, 2017 at 7:57 am cybernaut62 responded with... #

    Not a bet many of want to take – but we are now committed to it. I’d still not stake your shirt on it though.

  7. On January 18, 2017 at 9:34 am judith responded with... #

    No, they are too busy trying to flex their muscles, or more correctly having toddler tantrums at the loss of part of their empires/toys. Some of the threats from politicians are so stupid that one wonders how in the hell they got elected in the first place, certainly not based on brains or strategic thinking..

  8. On January 18, 2017 at 12:48 pm 6Story5 responded with... #

    Well, HS, has put his ideas down on paper. Lets see. I once wrote a paper on peering into the future through a dark glass. >I think I’ll stick to that.

  9. On January 18, 2017 at 4:32 pm blueboypaul1 responded with... #

    13. Essentially he’s saying a free trade deal “has no positive economic effect”. Just that line, from an economist, means that this tripe is going in the bin as the garbage it undoubtedly is.

  10. On January 18, 2017 at 5:19 pm blueboypaul1 responded with... #

    For Christ’s sake, I can’t believe the number of people still going on about this. (For the umpteenth time) the population of the world is roughly 15 times greater than the population of the EU (ex UK)….the actual numbers of immigrants are similar. Therefore, all other things being equal, if the same rules as apply now to non-EU citizens were to be extended to EU citizens it is not unreasonable to expect a decline by a factor of 90% in EU immigration.
    Of course, all other things are not equal. But against the factors on the one hand of proximity to our European neighbours and the close business ties built up in recent years, you can counter the close links to our Commonwealth cousins and the USA. The issue is that the UK would be able to decide who it allowed in without discriminating against non-EU citizens.
    Whatever, please don’t keep repeating this tired, flawed arguement

  11. On January 18, 2017 at 5:48 pm blueboypaul1 responded with... #

    The EU’s share of our exports has been declining for 20 years so, in that respect, you are right. That decline will increase, and a similar effect will happen to our imports as we are able to trade without the common external tariff. We will thrive, although I accept it may take a little time before we reap the full benefits. The EU, if it continues on the federal route it is pursuing at the moment, will find that, the Euro being the end of the beginning, Brexit will be the beginning of the end for the whole project. We will be glad we departed when we could, in an orderly fashion.

  12. On January 18, 2017 at 6:49 pm 20eric responded with... #

    Keep on dreaming it beats reality any time.

  13. On January 18, 2017 at 6:52 pm 20eric responded with... #

    Ditto, keep on dreaming it beats reality any time.

  14. On January 19, 2017 at 6:17 am 20eric responded with... #

    If it will be anything like Britain trying to go metric, your future doesn’t look all that bright.

  15. On January 19, 2017 at 8:09 am cybernaut62 responded with... #

    Sure the UK will be able to decide who comes in, but if you’re expecting EU27 migration to fall by 90% you are going to be very disappointed because not all migrants are equal.
    And assuming our economy doesn’t tank if the Brexit exit talks go badly wrong, businesses are still going to want to take in similar levels of migrants. I’m not the one with the flawed argument on that.
    To help the UK should take overseas students out of the figures, though, as they skew the data unnecessarily – following the USA which has done this. best Cyber

  16. On January 19, 2017 at 8:11 am cybernaut62 responded with... #

    Well you could certainly make that argument about the current UK crop of politicians…. Merkel and Hollande by comparison are pretty reasonable. It’s some in the UK who’re having the tempter tantrums.

  17. On January 19, 2017 at 8:12 am cybernaut62 responded with... #

    No sadly it doesn’t look bright, there is going to be an ongoing economic drag on the UK for probably a decade to come

  18. On January 23, 2017 at 1:40 pm Doaa Roma responded with... #

    What a great piece, had the European Commission put out info vs Brexit this concisely things may not have come to this! Unfortunately the Commission has been terribly ineffective in fighting Brexit…