Government plans to leave the European Single Market at the end of December will lengthen the corona recession, says Paul Teasdale
In the months ahead politics will be dominated by coronavirus and its aftermath, and there is a danger that the challenge of Europe will not get the attention it needs. It is absolutely crucial that we do talk about Europe. First, Brexit is not “done”; second, decisions on Europe are critical to how well the economy recovers from this massive downturn; and third, leaving the EU is likely to have the greater effect in the long term.
So many people wish the debate on Europe would go away and will try to use the virus crisis to avoid the subject. When the general election produced such a decisive result there were people, on many sides, expressing a hope that politics would get back to normal – what mattered to ‘real people’. In the election the Labour leadership tried to avoid the issue. Whenever it arose, they changed the subject. They either believed, or pretended to believe, like Johnson, that leaving would have no effect on the economy or the capabilities of government. Some now seem to think that we should accept that Johnson has a mandate to get Brexit done, and the Labour Party can focus elsewhere. For instance, the coronavirus opens up opportunities to discuss the size and role of the state.
I fear that the difficult economic times that are certainly ahead will be explained as the lasting effects of the coronavirus alone. That would be a mistake, but it will suit the Government if they can blame poor performance on the effects of the worldwide epidemic rather than on their own policy of leaving the Single Market.
There is no such thing as “getting Brexit done”. Leaving the EU at the end of January was just a step in a long process of administrative and economic change. Government, Parliament and the civil service need time to develop new regulations, new legislation, new institutions and new trading agreements. This could be expected to take up most of the legislative and administrative time available for the next five years.
The economic effects of leaving the Single Market will take years to work their way through. It is not like a shock that might cause a recession but is followed by a recovery as the economy gets back on course. Leaving the Single Market may not produce an immediate downturn but it puts the economy on a new course of slower growth – so the consequences become cumulatively worse.
Departure triggers a number of forces which reinforce each other. The main element is a loss of export markets. In recent years, the UK has exported to the EU about 15% of everything produced. In manufacturing it is much more. When the UK leaves, the EU will have to impose the tariffs that it sets for all other countries – unless there is a deal. That is about 10-20% on manufacturing and more on food products. With such price rises it is certain that demand will fall. To put broad numbers on this: a 10% fall in exports to Europe would be the output of 500,000 workers. Some of the loss will be felt immediately, some will take time as customers find cheaper sources. The impact will be greatest on manufacturing and agriculture. This loss of sales will be reinforced by a drop in investment, particularly direct foreign investment (as the UK is no longer a base for sales in Europe). This reduces productivity growth, which makes UK products less competitive, so exports fall further. That reduces the value of the pound and so feeds into inflation. Nobody really contested this argument. The Leavers just asserted or hoped that new industries would emerge as Britain would be able to abolish regulations and develop a new entrepreneurial spirit.
So, from a variety of processes, UK growth will be lower than it would be otherwise. Forecasts before the referendum suggested that, within 2-3 years of leaving, the effect of tariffs etc would be the economy being 3% smaller than it would have been, with the gap rising to 7-10% after fifteen years. Analysis at the end of 2019 suggested that even before the imposition of tariffs the UK had already sunk 3% below trend (seen alongside countries on a similar long term trend). For a year or two this may not be noticed. But in ten years, we would begin to see that living standards in the UK have fallen below those of its neighbours. Slow growth means that government revenue will not keep up with the demands for expenditure created by a growing population of elderly people – for pensions and health. If the Government were to keep up with demands for NHS expenditure, that would mean a further heavy squeeze on social services. So public services and infrastructure would be much poorer than in Europe.
This was all known at the start of the year. Despite its clear majority the government was vulnerable on the economy. However, now everything will be seen through the prism of coronavirus. It will be very hard to identify a distinct negative effect of leaving Europe and the immediate effect will be small compared with the one-off shock of coronavirus. This could provide some insulation for the Government and create tactical problems for those trying to hold it to account.
However, continuing on the Government’s path to leave the Single Market and Customs Union in the current circumstances will make a bad situation worse. The process of leaving the EU will be much harder than it would have been anyway. Dealing with the consequences of coronavirus is likely to take up most of the time that might have been spent on post-EU arrangements. It will be even harder to find new trading arrangements in a world shaken by coronavirus. When the world economy is limping along, a (self-imposed) reduction in the UK growth rate could mean no growth at all.
Perhaps more importantly, recovery from the coronavirus recession will be much more difficult for the UK, separated as it will be from its main trading partner and established customers. It is therefore likely that the UK recession will last longer than it would do otherwise, and longer than elsewhere.
In the longer term, leaving the EU is the more significant influence on the economy. But it may be hard to make that case right now. The impacts will be visible only after a time. I fear that Government, opposition and media will attribute a poor economy to the coronavirus. It will be therefore important to see how other economies are performing. Just as in the late sixties it will become clear that living standards in the UK are being overtaken in our neighbours, and we shall, in time, see the quality of public services and infrastructure falling further behind the rest of Europe. The issue of membership will have to be reopened. The Labour Party needs to be in a position of being able to say “we told you so”.
Labour should accept neither the Government’s agenda for departure nor that the debate is over, even if the Remain campaign is no more. Any relaxation of the argument weakens Labour’s stance in the longer term. Even outside the EU, the UK economy can still remain closely aligned. Every step away from the Single Market imposes new costs, raises prices, loses jobs. In Parliament, the Labour Party must contest every effort to create regulations that diverge from Europe; even if they are in effect the same standards, that still imposes a bureaucratic cost.
Priority for the new Labour leadership – as a central part of the efforts to deal with the coronavirus – should be to get the government to extend the transition period – preferably for two years. The economy is now in perhaps the deepest recession ever, and that will worsen if the Government sticks to its plans to end the transition period in January. It makes absolutely no sense to break existing trade links with our neighbours. The Government should review this only when the economy is showing signs of being back on its feet. Labour can argue that the efforts of the government and administration should be devoted to rebuilding our economy and reinforcing public services, not on coming up with new regulations that add costs to businesses and cut them off from the Single Market.