The UK’s post-Brexit relationship with the EU will be almost indistinguishable from what we have now

Written by Savvas Savouri, Toscafund Asset Management on 3 April 2018 in Comment

The cold financial facts will ensure the UK’s exit from the EU is practically seamless, says Savvas Savouri of Toscafund Asset Management

Dr Savvas Savouri, chief economist, Toscafund Asset Management

The darkest position in a tunnel is of course at its mid-point.

With this in mind, we should all be forgiven for feeling in the total dark concerning Brexit; as it is, we are one year into the two-year Article 50 process.

Those who considered themselves in the dark need only open their eyes to the facts to see the light.

These are the cold, clinical financial facts which have always ensured the UK’s EU exit would be practically seamless.

These facts relate to just how much economies across the EU27 would be harmed by what we are repeatedly warned is a likely ‘hard Brexit’. Let me summarise these.

Whether it is the exports which are made to a UK which recorded a considerable trade deficit with the EU27, or the UK tourists who swarm around Europe each year, there is widespread exposure to economic harm befalling the EU27 from a ‘bad Brexit’.

There is also the harm which would come if those great many Britons settled across the EU27 or many millions from it working in the UK, were to respectively find themselves economically disadvantaged.

One could also point to the considerable corporate earnings exposure to the UK economy which the likes of Spain’s Santander, France’s Renault (via its share in Nissan) and Germany’s BMW and VW each have.

In fact, it only needs a casual inspection of all the major stock market benchmarks across the EU27 to reveal just how important earnings from the UK happen to be.

The reality is that were Brexit matters to end badly, profit warnings and asset write-downs would be forced on a great many listed companies across the EU27 with all the collateral consequences to their real economies which would inevitably follow.

We also have to consider all of Europe’s private companies, from Denmark’s Lego and Sweden’s Ikea to Germany’s Aldi and Lidl.

As has been experienced, even speculation that Brexit will be bad has sent the pound lower, a move which is hardly welcome by those working here from across the EU27 and remitting money home, or those who rely upon us as tourists or customers for their exports.

All in all, it is in the interest of all the EU27 nations, bar one for Brexit, to be as seamless as possible. And the one outlier is the EU’s smallest nation, Luxembourg.

There are those, of course, who claim that Britain has to be made an ‘example’ of to avoid others following its lead, even if so doing does some economic harm to the EU27.

The idea that for this reason or simply mere hubris, we see a bad Brexit, flies in the face of how powerful the corporate lobby is across the EU27.

This lobby is a group which, as already noted, has a considerable self-interest in a good Brexit so as to avoid what would be certain impairment to their commercial fortunes.

So as much, then, as many would have us believe we are in the complete dark concerning what the UK’s relationship will be with the EU27 come the summer of 2019, it is perfectly clear to see what it will be: practically indistinguishable from what we have been used to up to now.

Some will argue that negotiations cannot possibly end with the status quo ante bellum when such seemingly intractable issues such as the Irish border and passporting of financial services involve conflicting demands from each side.

Here again, the facts are that it is in neither side’s interest for matters to go badly.

The UK is too important a commercial partner to Ireland and the City is no less important to many of the EU27’s financial service providers.

As it is, however, with any negotiating which has a fixed timetable, we will not finally come to see the true light until we reach the end of the two-year Article 50 tunnel.

Well, what of Scotland in all this?

The answer to this should be that once Brexit matters have been favourably settled for all concerned, Scotland’s performance continues as before. That should be the answer, but it is not.

And the reason is because Brexit will trigger the yielding by Westminster and wielding by Holyrood of ever more devolved powers.

The reality is that the SNP in Edinburgh is certain to continue plotting a course for Scotland different from that being navigated from London.

If one were looking for a striking instance of this, it would be in the area of higher education.

Once Brexit has been completed, universities across the UK will have to decide how they deal with it.

One of the most important choices they will have is whether to continue treating students from the EU differently from those arriving from beyond it.

Whilst it is not certain such preferential treatment will end, if it does, change will come within England.

Assume nationals from across the EU studying in England saw their fees rise into line with arrivals, say, from China. In this case, their numbers would almost certainly drop sharply.

What would unfold would be England’s universities seeing an ever-increasing share of non-EU students.

For their part, were Scotland’s universities to continue subsidising students from the EU27, their representation could well actually rise, doing so at the expense of higher fee-payers being charged as ‘international’.

In terms of numbers, I estimate that whereas the English Midlands will enjoy a rise of a staggering 300,000, or almost 90 per cent in university student numbers out to 2034, Scotland will see a rise of a far more modest 5,000, equating to three per cent.

The result would be towns and cities across Scotland being denied the considerable direct and collateral economic benefits accruing to those within England (for the record, London itself is likely to see a mere seven per cent rise).

Let me turn to another and more widespread reason why Brexit cannot fail to accelerate the divergence in not only Scotland’s economy from that of the rest of the UK, but dramatic changes more widely.

For the reality is that in the years ahead, London will find itself rivalled by other areas for the mantle of England’s economic growth centre.

As much as the devolution genie is out of the bottle, it has not really been noticeable in our lives. This will, however, all change from next year.

On finally departing the EU, the UK will be free from one of its most pernicious directives, that ad valorem sales taxes are harmonised within nations; part of a wider attempt to narrow them to zero across the EU.

Alone, this freedom would have a limited impact; however, alongside ever more devolution of powers to existing and inchoate assemblies and parliaments across the UK, the effect will begin to be seen ever more.

The reality is that the UK is on the cusp of becoming a mosaic of differentiated economic management across it, with Scotland leading the way but far from alone in wielding powers and having these yielded to it from a central government with little power or inclination to resist calls for powers to be ceded around to those elected more locally across the UK.

Savvas Savouri is chief economist at Toscafund Asset Management

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