BREXIT: The flowers will really have wilted
By Will Hutton
Three commercial property funds worth £9bn suspending further withdrawals underlines that Britain now confronts an existential economic threat. It is becoming clearer by the day that a long drawn out process of disentangling the British economy from the EU and the Single Market with no clear end in sight risks a recession at best, and a slump at worst. Unless the new conservative leadership can find a fast settlement — staying inside the EU until there is instantaneous membership of the European Economic Area and Single Market membership — the grave danger is that the whole system could unravel in the weeks ahead, with accelerating weakness in the property market as investors reassess the future of British property values sparking a banking crisis similar to that in 2008/9. Lack of certainty about the country’s wider financial architecture, coupled with inexperienced political leadership, could allow the crisis to morph into a first order economic depression.
Britain’s financial and economic structures are profoundly intertwined with those of the European Union — whether bank passports that allow British banks to trade everywhere in the EU or the system of agricultural support. On top, the country has a current account deficit of more than 5 percent of GDP that can only be financed by inflows of capital, which, whether to buy property or companies, were dependent on EU. This enmeshed set of relationships cannot be unravelled without huge risks. The comment from JP Morgan could hardly be more apposite. “In our view,” declares the bank, “leaving the EU’s single market is like smashing a crystal flower vase, and then trying to glue the pieces back together again. You may be able to do it, but the result may not hold water, will not be pretty and the flowers will wilt in the meantime.”
JP Morgan could be accused, if anything, of over-optimism. The first problem is that gluing the pieces back together may be impossible. The least bad option is membership of the European Economic Area — the so-called Norway option — which would at least allow trade, financial and capital flows to continue and avert the risks of the downward vortex of a banking crisis. But this requires the UK government to accept freedom of movement of people — precisely the opposite of the referendum result. Nonetheless working towards this end is the only rational response. The EU must make a face-saving offer on freedom of movement of people to allow the package to be sellable in the UK: and Britain must accept the compromise package, however difficult politically. Until then it should stay an EU member and not trigger Article 50.
It may even need to hold a second referendum or election to seal the deal; the notion that everything is now set in stone because the people have spoken — even in the face of calamity — is absurd. It is a democratic nonsense to argue that the people cannot revisit a decision if it is obvious it means their economy is going over a cliff. Such a deal might even do better than just holding the line: after turbulence, the EEA could be a half way house that also allows Britain to do trade deals with other countries and muddle through. There yet could be an opportunity.
If not, Britain will have to opt for complete exit. But this will take years to negotiate, and prolonged economic stagnation at best — depression at worst — as it is worked out. UK banks in particular face disaster, as their share prices predict. They will lose their bank passports and thus a crucial source of revenue. Zero interest rates will hit them again. And write–offs of property loans will hit them further. Once the credit crunch sets in, Britain will experience all that it did in 2008/9 — but with no wider stable financial and economic architecture.
Inward investment will fall away. Companies will move activities to within the EU. Consumers will become ever more cautious. Investment projects will be deferred or cancelled. The government can only offer limited offsetting stimulus without damaging its own creditworthiness — more important now given the size of the current account deficit. This is the recipe for depression.
Nor are the government, leadership candidates or the Labour party beginning to measure up to the scale of the risk. Chancellor George Osborne’s promised corporation tax cuts offer the prospect of the UK’s future as an offshore tax haven. But this will neither work nor offer any future to the left behind communities and voters who opted for Brexit. The flowers, to rehearse JP Morgan’s quote, will really have wilted.
Equally, any reconstituted vase will look pretty ugly. British science and British universities fear funding cuts and marginalization. British farmers will never be so well off again, with falls in land prices certain with knock-on consequences on banks. The revived motor industry, dependent on access to EU markets, will have to retrench. Poorer parts of the country, many of which voted Brexit, will find that the lost EU funding will never be replaced. All of this needs to be settled with a new framework established before Britain leaves the EU — not worked afterwards in an atmosphere of gathering crisis and lack of confidence.
Future historians of our times will find it hard to explain the madness that descended on the country — the readiness of Leave campaigners to disseminate such disinformation and outright lies to win and the lack of ability for them to be countered by Remain. Lies have consequences. We are about to discover just how serious they are.
Will Hutton is political economist, journalist, author, Principal of Hertford College and Chair of the Big Innovation Centre. Will’s many books include ‘The State We’re In’ (1996), ‘Them and Us: Changing Britain — why we need a fair society’ (2011), and ‘How Good We Can Be: Ending the Mercenary Society and Building a Great Country’ (2015).