The EU faces many difficulties, but Brexit is not one of them | Lorenzo Codogno

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Two years after the official entry into force of Brexit on January 31, 2020, and one year after the United Kingdom’s exit from the single market and the customs union, we can attempt a provisional economic balance sheet for both parties.

Nearly 52% of British voters backed Brexit in the 2016 referendum. Nearly 100% of citizens elsewhere in the bloc were shocked by the result, and the primary concern was that Brexit could mark the collapse of the whole European project. This did not happen: quite the contrary. Even in the most Eurosceptic countries, there has been an increase in support for the European Union, a sort of closing of ranks. There was a clear risk that the EU would become disunited in the preparations for Brexit. But again, that didn’t happen. All countries have given a strong mandate to the European Commission and have remained united.

Today, British politics seems increasingly inward-looking, and the British economy is arguably less outward-looking than before the referendum. Countless issues remain unresolved with the commission, and mutual trust between London and Brussels has long since crumbled.

From the EU, the drama of the Brexit negotiations was watched with mixed feelings. The initial regret turned into a desire to limit the damage. Some economic opportunities to fill the gaps left by the UK have opened up. Brexit was clearly going to be a loss for everyone, but far greater for the UK than for any continental European economy.

The negative impact on trade, so far, is substantial for the UK. The Center for European Reform recently estimated that Brexit had an 11.2% negative impact on trade. The UK’s share of world trade has fallen another 15% from pre-referendum projections.

Assessing the impact of Brexit on the EU presents a challenge, as macroeconomic data is contaminated by the pandemic shock. However, when digging into the details of trade flows, there was a noticeable negative effect on certain countries, sectors and companies. This has been particularly important for small producers who previously had unrestricted access to the UK single market. Today, the extra paperwork discourages companies that do not have the critical mass to absorb the additional fixed costs of handling non-EU trade procedures. Over time, the situation may well improve, but some companies have already given up. British consumers paid the price, European consumers much less.

A clearer picture of the geographical and sectoral composition will emerge once the EU funds intended to compensate countries for the impact of Brexit are distributed.

Since 2016, the flow of workers from the EU to the UK has been declining. This process accelerated last year, causing major imbalances in hospitality, agriculture, transport and health, but also in some highly skilled jobs. The corresponding impact in the EU is a larger pool of labor in some countries and less brain drain, which increases unemployment but becomes a positive supply-side phenomenon over time. Again, while the impact is significant for the UK, it is very diluted in continental Europe.

Although the impact of Brexit on the City of London is not yet significant, the possibility of maintaining an unchallenged dominant position in increasingly integrated European financial markets is in jeopardy. On the sidelines, job vacancies in the financial sector in London have shifted to continental Europe and some businesses have moved.

The historically Eurosceptic wing of the Conservative Party wanted Brexit to free up more of what were seen as unnecessary constraints and bureaucratic burdens imposed by Brussels. A minority ultra-liberal wing naively dreamed of an even more open, deregulated and low-tax environment to increase economic dynamism and turn the UK into a Singapore-like paradise. This has raised fears in the EU of unfair competition through access to the single market, particularly given the non-cooperative approach to negotiations chosen by the UK government. Again though, these risks have generally not materialized and concerns are dissipating.

The illusion of reviving the British economy through lower taxation has come up against new needs for public spending on health, the fight against the climate crisis, investment in infrastructure and the various electoral promises to the point of constraining the government to raise taxes. Instead of diverging, UK and EU policies increasingly resemble each other.

Finally, there are the non-tangible effects. In the past, the British government has obstructed various initiatives aimed at strengthening the architecture of the EU and achieving greater economic and political integration. It withdrew from programs designed to mitigate the impact of the financial and economic crisis on Greece and other economies. Would the ambitious €800bn (£665bn) pandemic stimulus package even have been possible with the UK government still around the table? Some in Brussels would say that would have been inconceivable.

The economic effects of the pandemic inevitably merge with those of Brexit, so it is only after the dust has settled that the damage can be properly assessed. Among the many issues currently facing the EU, Brexit has thankfully come to the fore.

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