A slow hard Brexit

Political columnist for the Financial Times Janan Ganesh talks to David Whelan and shares his projection for the impact a hard Brexit could have on the UK economy and his concerns around failure to recognise cumulative economic decline over the long-term.

Janan Ganesh believes that Britain is heading for a “fairly hard exit”, or at least a much harder exit than was envisaged in the immediate aftermath of the referendum.

He reflects that on the morning when the result was revealed, it seemed “absolutely viable” that the Westminster Government, considering the small margins between the two voting blocs and the various special sensitivities, including Northern Ireland, would seek a soft exit.

This soft exit was envisaged to take the shape of a Norwegian-type scenario, a holding position which he understands former Prime Minister David Cameron privately refers to as ‘Norway for now’, incorporating an accommodation for access to the single market in return for regulatory observance, free movement and paying into the EU budget.

“The Norway model was not a destiny for the UK but a three, five or seven-year period, after which the UK, with more time and space to think, could decide whether to pursue a purer exit.

“What is much harder to deal with is slow relative decline in economic performance compared to [those] European competitor nations.”

“That scenario, which now seems far-fetched in the Spring of 2018, was absolutely on the cards as a discussion topic as recently as the tail end of June and early July 2016. I remember MPs, who didn’t much like Boris Johnson, telling me, ‘I’ll probably vote Boris in a leadership election because he is the one guy who can sell the country on a soft Brexit’.”

However, Ganesh explains that the soft exit option was rendered unattainable early in Theresa May’s premiership through the drawing of red lines, such as those around European Court of Justice jurisdiction and free movement, which meant a “harder exit” was the only logical outcome.

Since then, the trajectory of the negotiations has pointed to some form of third party trade deal with the EU, resembling the current Canada model.

Ganesh outlines: “My view, and the FT house view, is that the Canada deal makes perfect sense for Canada, which is on the other side of an ocean and does 10-15 per cent of its external trade with the EU. It makes much less sense for the UK, which has the European Union on its doorstep and does 40 per cent and above of its external trade with Europe, and which is historically enmeshed with the continent.”

Hard Brexit

The columnist outlines his belief that it is the long-term cumulative impact of a hard Brexit which is a concern, rather than the immediate crisis predicted by many.

“My gut instinct is that a hard Brexit does not spell an immediate and spectacular crisis for the UK economy. I don’t think there will be immediate capital flight and I don’t think GDP growth will fall through the floor.

“What I fear might happen is something almost as bad, or maybe even worse. You have to remember that with a spectacular crisis, you can see it happening and can therefore act to avert it. What is much harder to deal with is slow relative decline in economic performance compared to those European competitor nations, whom we consider our equals or who we have an edge over.”

Ganesh highlights that the practical outworkings of such a scenario would mean missing out on small and varying GDP growth year on year, which the UK would otherwise have had with full market membership. The vast majority of the population wouldn’t recognise nor would it feel particularly bad at the time but the cumulative effect of this over 10 to 20 years adds up to something quite substantial.

The decline would also be a catalyst for what Ganesh describes as “non-events”, such as the talented European graduates choosing not to reside in the UK when starting their career, the foreign investor opting to invest elsewhere and the entrepreneur setting up an operation and deciding that single market access is too important.

“Again, you don’t notice it. By definition it is a non-event,” he says. “However, the cumulative effect of lots of people like that graduate choosing not to come here will mean that in 20 years’ time we are not the talent pool which we currently are and we will have to rely on a domestic level of productivity which is, sadly, quite low compared to our neighbours.”

Ganesh warns that for those who see his view as unnecessarily bleak, there is evidence in the UK’s recent history.

“Looking at the post-war decades of relative underperformance, at no point during the 50s or 60s did Britain feel like a basket case or a crisis hit country. With the exception of the devaluation of sterling in 1967, there was no single moment of extreme negative feeling. And yet, we were growing a bit more slowly than the likes of France, Italy and Germany. By the 1970s we were a third or a quarter poorer than those countries.

“We were going to the IMF for a loan, the labour relations in industry were dysfunctional and the UK ended up voting for quite radical structural reform and looking to EU or EEC membership to fix some of those problems.

“So, we’ve already lived through a period where we almost sleep walked through a period of decline, which only manifested in the crisis at the very end. My worry is that we are about to experience something along those lines.”