When currency strategist Kamal Sharma said the pound was starting to look like an “emerging market currency”, it made headlines in the trade press but left politicians puzzled. The Tories have adopted a strategy of ignoring the downsides of Brexit, while Labor – terrified of offending Red Wall voters – simply ignores the problem.
But that was Sharma’s point. The pound’s 10% plunge on the night of the EU referendum in 2016, and its slow slide thereafter, is not the main issue. The problem is that the Bank of England, the Treasury and the Opposition don’t want to talk about the damage Brexit is doing to our economy.
Had the pound fallen as exports rose, it might have been worth the “rapid negative shock to UK living standards” identified by the Center for Economic Performance due to rising inflation. But trade also began to suffer, once the Brexit transition period ended on December 31, 2020. The number of buyer-seller relationships between UK and European businesses fell by a third, according to research from the London School of Economics. Overall, according to the Office for Budget Responsibility, the UK “appears to have become a less trade-intensive economy, with the share of trade in GDP falling by 12% since 2019, two and a half times more than in any other G7 country”.
When your imports and exports fall, one solution is to stimulate investment at home. But there too, the Brexit effect was spectacularly negative. Business investment had risen steadily during the Cameron-Osborne years, but that trend came to an end after the Leave vote. It is now 9.4% lower than in the second quarter of 2016 and has been much slower to recover from the Covid crisis than in other G7 countries.
Sterling down, trade down, investment down. These are the exact opposite of the results promised by Brexit supporters. True believers cling to the idea that this downturn – six years after the vote itself – is just a ‘Nike swoosh’: things will soon pick up speed and the economy will roar a as it adjusts to Britain’s new global configuration.
[See also: Northern Ireland protocol shows how Brexit is still destroying the Tory party]
But that won’t happen. First, all central banks are currently reducing growth by raising interest rates and the UK economy is most likely in recession. More importantly, the world for which the hard-Brexit fantasy was designed has fundamentally changed.
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Boris Johnson’s vision, outlined in his February 2020 speech in Greenwich, was for Britain to play a sort of ‘libero’ role in an increasingly globalized world market – dodging and weaving between major trading blocs , breaking open cartels and taking advantage of open niches. by thick-voiced financiers in Huntsman suits.
But globalization is on the decline. Both Russia and China have declared themselves to be in systemic competition with the Western way of doing business, with universal human rights and with the rules-based global order.
All this is obvious to market analysts. But that’s not why Sharma likened the pound to the currency of a basket economy. Emerging market currencies are weak when they become politicized: when conceited men in presidential palaces begin to overrule central bankers, and when central banks themselves succumb to political pressure.
This is the actual charge against the Bank of England. It cannot fully recognize the damage to growth, trade and investment as a result of Brexit. The Treasury, meanwhile, has been on its way out of post-Brexit stagnation, while proclaiming its belief in a small state. Confused? You should be.
Britain’s economic decision-making has become ‘politicized’ to the extent that neither government nor opposition can speak realistically about the central problem. The solution is not to join the EU in the short term. I don’t think that will happen in my lifetime. Johnson’s hard Brexit deal isn’t the biggest obstacle to prosperity either. The solution is the state’s reconfiguration of our economic model – towards the high-growth, high-wage, high-skills, post-carbon economy the Tories claim they want – combined with a rewrite of the Brexit deal .
As I have written here before, one of the reasons the Conservatives are failing to transform the economy is that they have replaced dirigisme with “suggestion-ism”. Neither they nor the officials required to execute all the major upgrading plans have the skills or powers to reshape market behavior. Meanwhile, you have a Chancellor who is willing to borrow to put money in the pockets of starving families, but who is unwilling to borrow to create millions of new green jobs in the post-carbon industries of the future.
If the UK simply joined the single market – the much-vaunted Norwegian model – it still would not prosper unless it embraced a broader European social and economic approach. This means raising billions for state-led investment drives, massively upgrading the skills of the workforce, restoring a generous and comprehensive welfare state, and actively cooperating with our trading partners, rather than trying to divide and conquer.
But Brexit was meant to be a break from all that. This would facilitate deregulation, lower taxes, lower labor standards and increased inequality. That’s why some of the richest people in Britain have backed him.
My concern is not that the Tories are in denial about this: it is that Labor are, at least in public. You could tolerate, in the name of realpolitik, that the party leadership is stingy with real commitments – even if you pay a political price for the resulting narrative void. What you cannot tolerate is Labour’s refusal to face up to the problem. Neither do the markets, if the party comes to power; investors don’t listen to focus groups.
The failed Brexit is the strategic challenge facing the UK. This is not just an economic but a geopolitical problem: it has left the government with no other logical position than to hinder European cooperation, whether on technological sovereignty, strategic political autonomy, defense or the migration.
In a world where globalization is receding and systemic competition is becoming the norm, size matters and networks matter. In this new world, Britain has become not just a rule taker in Europe, but a ‘reality taker’ – there is nothing we can do to make the EU more powerful than the UK and its rules govern the operation of our businesses.
It’s a grim record for those of us who tried to stop Brexit. I hope some of those who celebrated it – six years ago this Thursday – can at least recognize the gravity.
[Follow the latest news from the by-elections in our Live blog: LIVE: Wakefield and Tiverton & Honiton by-election results – New Statesman]