Brexit At 3 Months: Border Control Over The Economy?

An economically disastrous “hard Brexit” is looking more likely, as May prioritizes border control

Europe is still waiting for Britain to give it some answers. — Illustration: R. A. Di Ieso
Sep 21, 2016 at 1:35 PM ET

They say a week’s a long time in British politics, but the three months that have passed since the referendum on Brexit have felt like eons. By early July, Brits had witnessed the resignation of their Prime Minister, of UKIP leader (and chief Brexiteer) Nigel Farage, and of almost all of the opposition Labour cabinet.

Prime Minister David Cameron’s two most likely successors, Chancellor Michael Gove and London Mayor Boris Johnson, flamed out of the Tory leadership race, leaving Theresa May, the last politician standing, and now Britain’s second female PM. While the trio she has installed in her new Brexit department — including Johnson as Foreign Minister — were all in favor of leaving the European Union, May herself, supported the Remain campaign.

Even so, she has been swiftly decisive on several fronts, the opposition Labour Party continues to wage its own bitter leadership battle. Brexit is really happening, May is adamant. There will be no parliamentary vote or second referendum on the decision. There will be no “running commentary” on negotiations about the terms of the departure. A key priority will be limiting immigration from Europe.

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While formal talks aren’t likely to begin until 2017 when May is expected to start the clock running on a two-year exit process, the European bloc has also made its position clear. No automatic rights for EU citizens to live and work in the UK means no access to the single market for the British. It’s a hotly-debated issue; four Eastern European countries — Poland, Hungary, the Czech Republic and Slovakia — have said they will veto any deal that doesn’t preserve the free movement of labor.

Immigration was a major discussion point among Leave campaigners in the run-up to the referendum, and May knows that backing down on that issue would sorely disappoint anti-EU voters, observers say. But the single market, which allows international trade within its borders that is free of tariffs and other obstacles, is vital to the UK economy, which sent 44 percent of its exports to Europe in 2015. British think tank The Institute for Fiscal Studies estimates that the worth to the UK of access to the single market is 4 percent of the country’s GDP. If Britain gives this up, it will badly need new trade deals in place by the end of the two-year exit period — but these deals can take a decade or more to hash out.

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It’s also been suggested that May could trade away one key asset in return for control over Britain’s borders and laws: Britain’s financial supremacy in Europe. EU membership allows banks to operate across the continent without having to be authorized in each country, an arrangement known as “passporting,” a privilege other countries like Switzerland and the U.S., also enjoy. Frankfurt and Paris are both vying to replace London as Europe’s financial capital, and if Britain lost passporting rights it would be disastrous for the British economy — London is the world’s biggest financial center, and finance has been estimated as accounting for 10 percent of the country’s GDP — although that may not provoke the wrath of voters, who are not particularly fond of bankers.

With so much riding on these negotiations, businesses and politicians are scrambling to gain influence over the process, or at least lobby for more transparency. Scotland, which had a majority of Remain voters, is looking less likely to hold a second referendum on its own independence from the UK, but its First Minister, Nicola Sturgeon, has been outspoken on the “lost decade of uncertainty and turmoil” she sees looming ahead. She’s criticized what she calls the “cloud of secrecy hanging over the UK government’s negotiating position.” Labour’s embattled leader Jeremy Corbyn has said that he’ll push for access to the single market, but also suggested he’d welcome freedom from some E.U. obligations, stoking further controversy within his party.

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The only thing that’s certain right now is that the uncertainty surrounding Brexit is going to drag on for months, if not years, and nothing’s worse for business confidence. The pound, which lost 10 percent of its value against the dollar on the day of the referendum result — the currency’s worst day on record — hasn’t recovered, and hedge funds have been betting on a further decline. The three main credit rating agencies have all downgraded the UK’s AAA rating, which may make borrowing more expensive. The Bank of England has cut interest rates to a record low of 0.25 percent, and may reduce them further to 0.1 percent in November. It is still predicting a significant slowdown of growth in the third quarter of of 2016, from 0.6 to 0.3 percent.

While businesses and banks may be quietly panicking, Brits themselves are holding up surprisingly well. Inflation hasn’t had an impact yet, the housing market is starting to recover, people are still spending as much as ever, and more than half of the country wanted Brexit anyway. Anti-E.U. tabloids are cheerfully talking about a return to Imperial measurements and old-style navy-blue passports. There’s a sense that, after that apocalyptic week in June, life is starting to get back to normal, and the worst of the storm has passed. Of course, that relief is delusional. The real storm is yet to come, and no-one knows its size.