So Much for the Brexit Scare Stories
Contrary to widespread fearmongering, the UK did not fall to pieces as a result of Brexit.
Wolfgang Münchau, the avid pro-remain, pro-Europe founder of Eurointelligence writes So Much for the Brexit Scare Stories.
The collapse in UK-EU trade after January 1 was widely reported. What has not been reported nearly as much is that UK exports have fully recovered. They were up 46.6% in February after falling by 42% in January. Imports are not there yet. They were up 7.3% in February after a fall of 29.7% in January. The one prediction I am happy to make is that they will recover too. What these and other numbers are telling us is that even this bit of the Brexit scare stories will not come true. If you look at the latest IMF data and projections in the graphic above, you don’t find a discernible macroeconomic effect of Brexit in the first ten years after the referendum. UK growth fell by more last year than eurozone growth, but this will be offset by higher growth this year. The future prosperity of the UK will depend to a large extent on the future policies of the UK government – Brexit or no Brexit.
I am not sure Münchau has the recovery side correct just yet. After a 42% plunge it takes a 72.4% gain to get back to even.
After a 29.7% decline it takes 42.2% gain to get back to even.
Yet, Münchau has the right idea.
And my position all along was that both sides would suffer but ultimately the EU more. So far I believe I am on target.
OK, I did not foresee that the initial collapse in UK exports would be greater than the UK’s collapse in imports (with the EU the biggest contributor).
But some of that collapse was the EU purposely making things difficult.
Meanwhile, EU exports to the UK have a much further way to go.
Why the Bad Estimates?
Münchau discusses three reasons.
- The first is political capture by official forecasters. The UK Treasury and the Bank of England were, of course, not neutral players.
- A second group got it wrong because they allowed their political preferences to take over their economic judgments.
- A third group, largely economists, got it wrong because they relied on bad models. There was an overlap of that group with the first and second group, but this one is worth identifying separately. I am talking about models based on long-term trade flows. As Brexit introduces a small degree of friction into physical goods trade, and quite a lot more friction into financial services and agricultural trade, these models predicted a long-term welfare loss. But these models are one-eyed. They only saw what might be lost.
Regarding point 3, Münchau notes events and technologies intrude.
“In the future, we will not only be trading different products, but an increasing proportion of trade will come in the form of data. This is an area in which the UK could benefit from regulatory divergence from the EU.”
Who Is Winning the AI Race: China, the EU, or the United States?
A report from the Centre for Data Innovation looking at qualitative criteria shows that the dynamics favour the US in particular. The US is leading on all the key criteria – talent, research, development, hardware, adoption and data – followed by China. The EU had some successes when it comes to the publication of academic papers, but is lagging behind both the US and China in all the other categories. The report concluded that Brexit would diminish the EU’s AI capability further.
Alas, Münchau sticks with his pro-EU stance
I am not making the argument that Brexit will be an economic success. I don’t think it will. The best economic argument against Brexit is the one that was never made: that a UK government under either Labour or the Conservatives is unlikely to make best out of the opportunities for regulatory divergence.
Nonetheless, his conclusion is accurate.
The forecasts of unmitigated gloom, however, have been wrong and deceitful. When economists failed to predict the global financial crisis, they did not so out of malice or political bias. But their Brexit forecasts were not an innocent mistake – nor will they be remembered as such.
I strongly disagree with the pro-Europe rah-rah take from Eurointelligence.
However, when it comes to actual discussion of what’s going on (vs what they want to happen), the publication generally provides very practical and honest insights.
Mish
this is the comment
I still think the primary reason for Brexit being popular, regardless of trade, was to rid Britain of the EU’s uncontrolled immigration policies, which haven’t completely played out in terms of long term consequences…..that shit show is just beginning. The UK will look smarter and smarter as time goes on, imho.
The UK ridding itself of an outside problem, which was influence via EU, is an obvious and right decision, now dealing with it’s own excesses and bringing the country into some kind of acceptable “happy” order is a different and possibly more difficult challenge. I don’t find any need for there to be a great disruption in trade, unless wanted by some it is not likely to occur. Those poking at UK now don’t know what state EU is in, the state countries in europe are in, and it was wise for UK to exit and regain flexibility and independence given EU’s uncertain nature .
I am a fervent anti EUr, so I do applaud Brexit…..Pity though that the UK has now become the US’ military vasal and buttlicker nr 1… A textbook example of swapping one yoke for another one ….
All the comments about the economic impact of Brexit are, IMHO, missing the forest for the trees: When one group is disenchanted with another group, separation is always a possibility, regardless of what the economy is doing. When “it becomes necessary for one people to dissolve the political bands which have connected them with another,” then a political separation will occur.
It doesn’t matter what the “spark” is that causes a desire for self-determination. It MAY be economic (I’d argue that this was a key factor in the US’s secession from the UK), ethnic (as was the case for Slovenia and Croatia in the 1990s), religious (Pakistan and India circa 1947) or some other cause. When one group is disenchanted with another group, separation is always a possibility. Indeed, those seeking separation often KNOW that there may be short-term “pain” but are willing to sustain that discomfort because they place more value on long-term independence.
Did the UK come up with an independence declaration like the US did where they enumerate the reasons why the split or did they just walk out the door?
Much like the UK’s constitution, the reasons for Brexit remained uncodified, though there were probably thousands of different reasons held by the public. That’s probably why it was put to a national plebiscite, so the UK didn’t just “walk out the door.”
The US’s Declaration of Independence is, indeed, a list of grievances against the UK. Note, however, that we didn’t conduct a national plebiscite in 1776. We had delegations from each of the 13 colonies vote on the Declaration of Independence. Given this fact, then, an enumerated list of complaints was probably necessary to garner sufficient support. After all, what may have been very important to one delegation would not necessarily be important to another.
What? Nothing about Northern Ireland or the fact that Scotland has one foot out the door? Boris has ensured the breakup of the UK – how will that play out economically?
Spot on.
Ireland will be a mess until unification.
Where is AvidRemainer?!
Congratulations to the British people for getting their sovereignty back and for not believing the politicians who told them with near certainty that the UK would collapse almost immediately if they voted for Brexit. Already with COVID vaccinations you can see how much better off the British people are controlling their own destiny.
He just kinda disappeared once Boris got his Brexit vote from the MPs.
The phrase “early days” should apply before crowing….
Official UK figures in March showed the UK recorded a record fall in trade with the EU in January, as the economy struggled with post-Brexit rules and the pandemic.
Goods exports plunged by 41% and imports by 29% as the UK’s departure from the EU’s single market had a major impact, as did additional bureaucracy and sometimes unexpected costs and taxes.
Nearly a quarter of small UK firms surveyed said they had temporarily halted sales with the EU because of post-Brexit rules, according to a report by the Federation of Small Businesses in late March.
Figures released on March 18 by Ireland’s Central Statistics Office said imports from Great Britain fell by 65% in January compared to a year earlier. Recent German figures showed imports from the UK dropped by 56%, while exports were down by nearly a third…..
….A UK parliamentary report on March 23 notes that UK food producers are facing new trade barriers with the EU in the form of health measures, extra paperwork, higher haulage costs and some “outright export bans”…
….An analysis published on March 23 by the UK Food and Drink Federation of a 75% fall in exports to the EU in January — salmon collapsed by 98%, beef 91% — cited COVID-19 and stockpiling. But it said much was “likely due to new non-tariff barriers”. The FDF added that the “collapse in groupage movements” — where different companies send goods in the same load — had hit small and medium-sized firms in particular.
“Dismissing trade disruption at the borders as simply short term ‘teething problems’ is no longer credible,” says a Brexit Impact Report by the British Meat Processors Association. “British meat companies are painting a very different picture. They are reporting systemic weaknesses in the current export system, mountains of red tape and a potential permanent loss of trade of between 20 and 50 per cent.”…..
…Deadlock over fishing rights was one of the main obstacles in post-Brexit trade negotiations, with the EU pushing to retain access to UK waters while London insisted on “taking back control”.
But the deal brings many “long-term” barriers, the Lords report says, dismissing the government’s description of early problems as temporary.
The impact of new demands for customs declarations and other paperwork hit UK exports immediately. Delays saw catch values halve and often made fresh fish shipments unviable.
UK environment minister George Eustice told a committee of MPs on March 25 that the EU’s ongoing ban on the imports of live shellfish was unlikely to change. UK producers have been unable to sell mussels, oysters and scallops to the bloc — and have been told to invest in purification material or seek new markets for frozen shellfish.
…There was huge relief in the car industry on both sides of the English Channel when the Brexit trade deal was sealed, keeping the EU-UK market free of tariffs and quotas. A grace period over rules of origin — delaying a requirement to declare where parts come from — has also been welcomed, although this is due to expire at the end of 2021.
However, concern over the impact of non-tariff barriers on supply chains continued into the new year. “That does not mean zero cost,” Mike Hawes, CEO of the Society of Motor Manufacturers and Traders (SMMT) told a House of Commons committee on February 23.
“I would characterise all the industry as paddling furiously below the water to keep things going,” he went on. “In terms of general day‑to‑day operations, moving parts in and out, it is difficult. The administration is significant… This is the new normal; we accept that. Ensuring the entire complexity of the supply chain can continue to operate is a major challenge.”…
Paul Everitt, Chief Executive of the ADS Group, had a similar message concerning aerospace and defence. Companies were experiencing “a day‑to‑day battle to make the new arrangements work and to find their way through this,” he told the committee, citing delays and extra transport costs.
He added that key parts of the industry “are not able to do business, and some of them are actually losing business”, because of uncertainty over the future EU-UK relationship on aviation safety and regulation.
British manufacturers reported a near-record increase in supply chain disruption and rising costs, attributed to Brexit and the pandemic, in an IHS Markit/CIPS survey carried out in February.
“This disorder was primarily created by shipping delays, transportation shortages and customs border commotion. Though it was difficult to see clearly where COVID disruption ended and the Brexit muddle began,” said Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply….
…The UK has unilaterally waived batch testing requirements for products coming from the EU for two years. But the EU is still imposing testing on medicines going the other way.
The Association of the British Pharmaceutical Industry (ABPI) has warned that this results in repeated testing “that complicates the supply chain and can delay the batch of medicine reaching patients for an average of 6 weeks and costs £1,500 per batch”….
…The Brexit deal contained only vague commitments on services and left financial services to a separate process.
The UK and the EU have reached a “memorandum of understanding” — as had been expected by the end of March — on future cooperation. It’s thought it could help City of London firms regain some access to the EU lost when the UK left the EU’s single market.
However, this goes nowhere near returning the full “passporting rights” giving blanket access to EU markets. And a decision on the lesser form of access — given when the EU accepts a third country’s regulation to be “equivalent” to its own — rests in the hands of Brussels.
The immediate post-Brexit period in 2021 has seen a flight of share trading activity from the UK into the EU, while since the 2016 Brexit referendum hundreds of UK-based financial firms have moved at least some operations to the bloc….
When you’re talking about disruptions, the “early days” tend to be the worst. Then come the adjustments.
I guess the conclusion one can make is that economic forecasts about important events are hardly ever right and when they are right it is by pure luck.
What is this european union that is not even able to protect one of its members (Cyprus) which has 1/3 of its land occupied by a non european country ?
Cyprus joined the EU on 1st of May 2004 which was long after Turkey’s invasion which took place in July 1974. Are you suggesting that the EU fight Turkey for something that happened way before the EU itself was created?
At least not try to include in UE a country that occupies 1/3 of the land of one of its members…
Well France still occupies Alsace-Lorraine according to some Germans so it’s just a matter of point of view.