Markets to May: Britain Needs a Better Brexit Plan



If Theresa May follows through on Tuesday with details of her plan for a hard Brexit, she will be taking her country on its first steps toward an economic and social crisis.

Already, financial markets have given their verdict on the prospect of a Britain outside of the single market, the customs union and the European Court of Justice: The pound has fallen below $1.20, the yield on 10-year government bonds has more than doubled to 1.3%, and inflation expectations over the same horizon are nearing 3.7%. There will be more pain ahead.

Exiting the European Union is a delicate balancing act between the vastly different expectations of the electorate, of investors and of Britain’s European allies. Voters were told they would save money. Investors, who fuel Britain’s services and manufacturing industries, want to avoid uncertainty. European countries, Britain’s largest commercial partners, are asking for a clear negotiating strategy.

Keeping all three sides happy will be difficult. We estimate that a hard Brexit would cost at least £140 billion ($171 billion), or 7.5% of gross domestic product, from job losses, lower investment and inflation eroding wages. Promising savings to the electorate and lower taxes to investors, and asking Europe to pay the bill, as Mrs. May’s government has done, is unrealistic.

The problem runs a lot deeper than the immediate debate about the terms of Britain’s departure. The U.K. needs to rethink its entire economy to thrive outside the EU. Over the past 40 years, the country flourished thanks to the opening of the single market. Since it joined the single market in 1973, Britain became Europe’s hub for services and doubled its GDP per capita.

Yet its unbalanced economic model, concentrated on exporting services and importing goods and human capital, has also made Britain overreliant on finance and on the same countries from which it wants to sever ties. As one Chinese businessman said to me after the Brexit vote, “Britain is the door to Europe. Without Europe, it’s just a door.”

Mrs. May’s predecessor, David Cameron, identified these weaknesses in his 2015 general-election campaign and called for a plan to make Britain an industrial powerhouse. Yet while in government, he implemented a strategy based on heavy public borrowing and incentives to boost house prices. Such plans boosted confidence, house prices, consumption and GDP, but left public and private debt higher and failed to improve wages. Today, household debt levels are on their way back to precrisis highs, while housing affordability remains at record lows.

Many Britons have been left out of this asset-rich and wage-poor recovery. According to a September poll by the Money Advice Services, 16.8 million people have less than £100 pounds in savings, while the Food Foundation tells us that 8.4 million, or the equivalent of the population of London, have insufficient food. The Department of Work and Pensions estimates that 3.9 million children were living in poverty in 2014-15. Britain has become a divided kingdom, and Brexit the symptom of a prolonged economic malaise, not its cure.

Without a realistic transition strategy, stagflation will be the result of a falling currency and slowing investment. As Britain imports more than it exports, a weak pound will boost inflation more than growth. Rising household leverage will leave the Bank of England with little room to hike rates. Rather than countering the hit with a public stimulus, Chancellor Philip Hammond didn’t rule out his response could be to make Britain “the tax haven of Europe.”

What Britain needs is a new growth model, one that diversifies away from London and financial services, and promotes sustainable investment in infrastructure and research. It needs new homes, not plans to boost the prices of existing ones. It needs inclusive education, giving all children a chance, not just the ones born in the right neighborhoods. It also needs a tax system that isn’t a haven for landlords and the global rich at the expense of income-earners.

In her speech on Tuesday, Theresa May will call for unity, respect of workers’ rights and for an inclusive Britain. If she is serious about it, then the government should present concrete plans to build at least 200,000 homes a year, eliminating loopholes allowing developers to build luxury buy-to-rent properties and circumvent social-housing requirements. To reduce inequality, Mrs. May should focus on inclusive education: The top 7% privately educated graduates makes up more than two-thirds of judges and the House of Lords, and nearly half of journalists and diplomats, according to the Social Mobility and Child Poverty Commission.

Most importantly, Mrs. May should be honest about the cost of Brexit: job losses, inflation and prolonged uncertainty will hurt everyone—the poorest first. Movements in the financial markets show that investors already see through her empty promises.

The article was originally published by The Wall Street Journal, on January 16, 2017.


macrocredit © 2019 by Alberto Gallo.

  • Twitter Social Icon
  • LinkedIn Social Icon
  • YouTube Social  Icon