The dark shadow of Brexit on the British economy

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As the June 2016 referendum approached, Brexit supporters promised that leaving Europe would be like a walk in the park. Three and a half years later, the reality has turned out to be very different from the rosy Brexit scenario sold to the British electorate.

During the Brexit referendum campaign, Boris Johnson never got tired of saying that in its Brexit negotiations, the UK could have its cake and eat it too. It also offered the alluring image of the UK becoming a thriving Singapore on the Thames once freed from Europe’s onerous regulations and once the UK was free to enter into its own free trade agreements.

And then the UK was assaulted by reality. The UK has yet to secure a Brexit withdrawal agreement requiring it to ask Europe for a further extension of the Brexit negotiation period until January 31, 2020 in order to avoid collapse outside Europe without agreement. Needless to add, the UK has not yet entered the next and more difficult phase of Brexit negotiations with its European partners, which will determine the UK’s long-term economic relationship with Europe.

Meanwhile, Brexit has already upended British politics for the worse, as evidenced by a deeply divided parliament that was unable to accept a Brexit deal. Unfortunately, with the country now heading for general elections on December 12 against a backdrop of great political fragmentation, there is no certainty that the UK will break its political stalemate. Nor is he sure he will avoid the prospect of another hung parliament once again unable to agree a Brexit deal.

Equally troubling for the country’s long-term political prospects is the impetus Prime Minister Boris Johnson’s Brexit deal has given for a second referendum on Scottish independence.

Accepting the idea that the UK’s border with Ireland would be drawn in the Irish Sea and that after Brexit Northern Ireland would remain de facto in the European single market, one wonders in Scotland whether it should not be given the same treatment as Northern Ireland.

Specifically, there are questions about whether Scotland should be allowed to hold a second independence referendum to decide whether or not to leave the UK and stay in Europe after Brexit.

On the economic front, the Bank of England continues to warn of the disastrous consequences of the United Kingdom leaving Europe without an agreement. Fearing that a no-deal Brexit could severely limit the UK’s access to the European single market, which buys around half of the UK’s exports, the Bank estimates that over the next two years the UK’s GDP United could fall more than 5% from where it would have otherwise reached.

While the Bank of England’s grim economic warning of a no-deal Brexit is debatable, there’s no denying that the economic and political uncertainty surrounding Brexit has already taken a heavy toll on the British economy.

Indeed, the country now appears to be on the cusp of an economic recession, as in the past three years it has gone from being the best economic performer among the G-7 countries to being the weakest. At the same time, while the level of investment in G-7 countries has increased by around 10% since 2016, investment in the UK has barely increased.

It is to be hoped that the next UK election will break the country’s current political deadlock, allowing it to finally secure parliamentary agreement on a Brexit withdrawal deal. It is also to be hoped that in the next phase of the Brexit negotiations, the UK will be able to quickly agree with its European partners on a reasonable end destination for EU-UK economic relations that will maintain the favorable access of the United Kingdom to the European market.

But judging by Boris Johnson who now appears to be campaigning on a hard-Brexit platform to fend off an electoral challenge from Nigel Farage’s Brexit party, I wouldn’t advise betting the house on an early lifting of economic uncertainty in UK. I would also not advise betting on an early reversal of the UK’s recent political and economic decline.

Desmond Lachman is a resident scholar at the American Enterprise Institute. He was previously Deputy Director of the Policy Development and Review Department at the International Monetary Fund and Chief Emerging Markets Economic Strategist at Salomon Smith Barney.

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