Monday, 17 October 2016

Brexit: an early audit

Now that some of the dust has settled on the British electorate's decision to leave the European Union - if only a little bit - we thought we'd take a look at how it's going. The answer? Not particularly well, though perhaps not quite as catastrophically as campaign rhetoric would have had it.

What did we say, back in the spring and early summer when we recommended a 'Remain' vote? Well, that Britain would not be able to negotiate a very good bespoke deal once it had shredded most of its influence in the European Commission and Council; that Russia would be further emboldened by the obvious division among NATO allies; that the British economy would be weaker, and its people poorer, for any decision to leave; and that the British state would creak and groan at the seams with the sheer effort of managing exit from the EU. How do those claims now look, four months on?

Can Britain have its cake and eat it? So - we said during the referendum campaign that many in Britain seemed to think that they could walk out and then still dictate terms. No-one can do that. Britain can't do that. And so it is proving. Now of course harsh words and confrontation are the order of the day when there's been an only semi-amicable divorce, but the European Commission and most of its member governments have made absolutely clear that there will be no Single Market membership without freedom of movement for people as well as goods and services. The UK government cannot possibly concede the latter, so important was immigration (and a desire to limit it) in the vote itself. So there will be no Single Market membership. Britain might continue in the Customs Union that covers actual physical goods. It might be able to 'carve out' specific sectors of the economy for special treatment. But the Single Market is gone. Now that's a blow of controversial size, but you can't pretend it's not a blow. Why would European leavers treat a defecting power with kid gloves, when that would only encourage demands from every other sceptical state in the Union? They won't. There'll be a tough negotiation that leaves Britain with worse access to the biggest free trade area in the world. And with no say over tens of thousands of rules that will govern its trade with that bloc. It's as simple as that.

The Russian challenge. We also said that Moscow would be further emboldened by this split among the Western allies. This is difficult to test, let alone to prove, but there's certainly been no let-up in the Russian push to undermine the moral and political will of the United States and its allies. They pour out propaganda on Russia Today. They speak to the Left and Right alternately when they think they have to, all the better to fire off a slick and easy anti-Americanism of every angle and every straightforward prejudice. They have influence over the higher echelons of the British Labour Party. They try to interfere in the American Presidential election. They pound the Syrian city of Aleppo to bits. And what does everyone else do? Well, nothing really - unless you count a harder and harsher semi-secret campaign of sanctions against Russia and its surrogates. As we've said before, there's no point spoiling for direct confrontation with Vladimir Putin's government. It could be counter-productive. Russia is still an adversary and a rival, not an enemy. But it has to be made abundantly clear that there is a line - somewhere. In the Baltics, perhaps, or in European financial and data security. If there's no line, we will tempt Mr Putin with our own weakness, so refreshingly (if depressingly) admitted last night by US Secretary of State John Kerry and Foreign Secretary Boris Johnson. Brexit just seems another minor, but meaningful, piece of evidence for that soft underbelly that Mr Putin spies. It wasn't a key moment. It wasn't even close to it. But it hasn't helped, has it?

A poorer Britain? Here it's important to distinguish between the merchants of doom - warning about a year-long recession, an economic ice age, the loss of more than £4,000 per household - and more realistic concerns about slower growth and more sluggish public finances. We said that the UK would be poorer if it left the EU. It probably will be, at least for a while. Growth next year will be slower than it would otherwise have been - perhaps halving the pace of progress we've experienced this year. That will drive up public sector debt and borrowing, perhaps not by the £60bn-plus that the Treasury still projects on its pre-referendum figures, but by quite a lot. One per cent of British GDP foregone? That adds up to maybe somewhere a bit shy of £19bn. Do that for a couple of years and take off the state's share of it, and you get £16bn more borrowing. Some way short of some of the worst-nightmare scenarios that would have blown the UK economy (and many family budgets) apart entirely of course, but enough to destroy a set of fiscal rules that were already under enormous strain. And that's before you add on the higher costs of government borrowing that are inevitable in such a confused environment. We're going to be poorer. Real wages are going to go down as sterling slides. The economy is going to grow more slowly. Public sector accounts are going to be gloomier. One day soon, as these things are measured, trend growth will resume. But it'll be tough getting there. People on low incomes will suffer the most as prices rise and welfare is squeezed. It's not going to be all that pretty, to be honest.

The incapable state. One of the biggest dangers we divined in Brexit was the fear that the British state would likely struggle to cope with its complexities. And so it is proving. The latest sign of this are the rumours of deep divides between the Treasury - worried about the economic effects of severing links with the Single Market altogether - and the government departments in charge of actually negotiating our way out. The Government also faces multiple legal cases, of unknown outcome. It faces potential obstruction from the Scottish and Northern Irish devolved administrations, which both have their own reasons for resisting Brexit in anything but the lightest form. It has almost no chance whatsoever of reaching a deal with the other 27 EU powers within the two years that Article 50 of the Nice Treaty stipulates for the UK to get out. All the while, the executive also faces a newly-assertive Parliament with a very small majority in the House of Commons, and while in a minority in the House of Lords. If it has to win a Parliamentary vote to trigger Article 50, there seems little doubt that it will get it. But when it tries to get its proposed Repeal Bill though both chambers, without a guillotine motion to bring debate to a speedy end? There are bound to be clauses where all its enemies unite, including many Conservatives with bruised egos who've just been sacked by Prime Minister Theresa May. The prospects for a full-scale breakup of the UK seem to be receding a little - against our predictions - for, just like everybody else, the Scottish government can read recent opinion polls that are at the moment gently trending away from independence. They must also regard the idea of a continuing UK outside the Single Market, while Scotland remains within the EU, with something close to outright horror given that a large majority of Scottish trade is with England, Wales and Northern Ireland. A separate deal for Scotland within the UK, under which it can reach some trade deals itself and run its own immigration policy, seems more likely than a risky second referendum - for now. But if the Conservatives push this too far and too fast, Scottish First Minister Nicola Sturgeon may be left with no choice but to go for a second referendum while Scotland can at least hope (however vainly) to inherit the UK's place in the EU. Whatever else we say here, some years of confused scuffling and recriminations probably lie ahead.

So that's it. When we first contemplated Brexit, we thought that if it happened Britain would be more isolated diplomatically, that Russia would get tougher, that the UK would be poorer and that governance would get worse. Now, don't get us wrong here. Russia would have been on the lookout for weakness whatever happened on 23 June. And things look worse than they might turn out. There will be a trade deal - eventually. It will probably involve tariff-free access to Britain's manufactured goods, though supply networks are so complex these days that 'rule of origin' snags when you're trying to work outside the Single Market will make that less of a concession than it might once have been. There will probably be some sort of agreement on the 'passporting' of invisible goods and services, so that the City of London remains competitive. No doubt the UK will still have to pay into the EU budget (as does Norway), though the contributions may be much less than they are at the moment. The dark noises coming out of Brussels and Whitehall at the moment are a necessary and natural part of the forthcoming negotiations.

It's not all doom and gloom. The United Kingdom's economy is strong. It will survive - though heaven help us if we're buffeted by another global economic downturn, like a merchant caravan hit by a storm in the desert far from water. With both budgetary and monetary policy nearly exhausted, and with the complexities and uncertainties of Brexit tying us up in knots, we're going to sitting ducks for quite a little while. Still, we will come out the other side, We're not forecasting - and we never projected - a complete disaster.

But any objective audit of Brexit so far demonstrates quite clearly that many of our warnings were bang on the money. But then, who wants experts? They know so little. Just so little.