Unhappy and alone?
Inflation is running at nine percent and is set to go higher. The economy stalled in February and then contracted marginally in March. The OECD thinks that the UK will have the lowest growth rate in the G20 next year bar Russia. Energy and food costs are soaring, precipitating a cost-of-living crisis. Consumer confidence is at a 14-year low.
Public services are deteriorating, from police response times to inordinate delays in getting a driving licence from the DVLA. Airports are in chaos and the railways are going on strike. There are widespread labour shortages, even though over seven million people are ‘economically inactive’ – that is, not working nor looking for a job. Taxes are rising. The NHS is on the edge. Ambulances arrive hours after they have been called. It is increasingly difficult to get an appointment with a GP. There are queues at food banks. Anecdotally, the private sector provides pitiful and worsening customer service.
There are frictions at the borders. Northern Ireland is without an administration. The prime minister does not have the confidence of more than 40 percent of his colleagues. The governor of the Bank of England appears clueless as to how to rein in the inflation that his august institution has stoked.
Welcome to Britain in the summer of 2022.
And come the winter of 2022-23, it’s going to get even worse. Not helped by this government’s obsession with net-zero carbon by 2050, many people are going to be cold as well as hungry. Industrial relations are worsening, and days lost to industrial action are growing.
Would we have felt warmer and happier if we had only listened to those wise and caring Remainers who warned us of our Brexit folly?
Inflation in context
Clearly, Brexit is not the main reason for the UK’s current inflation rate, which is at a 40-year high. If the UK were still in the EU it would stand about halfway down the EU inflation league, with Estonia at the top with 20 percent inflation, and France near the bottom with about six percent. We would be below the Netherlands, which has 10 percent inflation.
Similarly, disruptions to supply chains across the globe and labour-market bottlenecks cannot be blamed on Brexit. There have been chaotic scenes at Schiphol inAmsterdam of late, mirroring those at Gatwick. Container ports from Long Beach near Los Angeles to Rotterdam, Antwerp and Hamburg have experienced congestion this year, with ships waiting in some cases weeks to dock and unload. The surge in shipping costs has also contributed to inflation across Europe and North America – and has nothing to do with Brexit.
Supply-chain disruptions in the food sector have been aggravated by the war in Ukraine. As I discussed recently, farmers’ output prices are sensitive to the cost of the ‘three Fs’ − fertiliser, feed and fuel. These prices would have exploded this spring, Brexit or not.
One of the Brexiteers’ shibboleths was that once outside the EU, Britain would be able to strike favourable, bilateral trade deals with other major trading powers. The final withdrawal agreement was in essence a trade deal with the EU, whereby goods traded between the EU and the UK would be exempt from tariffs. But in practice, there were always going to be additional non-tariff barriers (aka frictions). The UK was able to roll over EU trade deals with a slew of different countries, so the difference in trade regimes post-Brexit was not as dramatic as feared.
It should not surprise us that all the major trade deals struck so far – in particular, with Australia – have proven unpopular with British farmers, who fear that the price of their lamb and beef will be undercut by that of Australian beef, which is reared with less onerous welfare standards. A trade deal with the US is proving elusive and is complicated by the Biden administration’s stance on the Northern Ireland protocol.
The hopes of those who, like this writer, foresaw a tightening of bonds between the four English-speaking Commonwealth countries who still (for now at least) share the same monarch as head of state, have been disappointed. The case for CANZUK has not been made. A trade deal with New Zealand is proving more difficult to finalise than anticipated.
I foresee that a trade deal with India will prove to be even more controversial than that with Australia. In late April Boris Johnson flew to India to meet Narendra Modi. It was widely reported that a quid pro quo for tariff-free access to India’s potentially huge market would be freer immigration controls on Indian nationals who wish to reside in the UK. Ironically, concerns about “out of control” immigration was one of the main drivers of Brexit sentiment. And given the scale of illegal immigration across the Channel, the issue has become more delicate than ever.
At the same time, India has remained resolutely neutral over Russia’s invasion of Ukraine and even abstained on a UN resolution condemning the aggression. Even if India is a cornerstone of the Quad (Australia, the US, Japan and India) pact (fundamentally a defensive alliance against China with whom India shares a border more than 2,000 mile long), India is still favourably inclined towards Russia, which is its largest supplier of arms. Russian arms are cheap, but after the last four months, Indian military bosses will be questioning their quality. Since the west imposed sanctions against Russia and vowed to reduce its dependence on Russian hydrocarbons, India has stepped up its imports of Russian oil at preferential rates.
English is the lingua franca of the Indian subcontinent; but India is not part of the Anglosphere. Under Modi, one of the new breed of nativist strongmen, India has become less liberal and less democratic. Culturally and politically, we are much closer to our European neighbours than to India, despite our deep historic links.
On Wednesday (8 June), the economist Jim (Lord) O’Neill observed to the BBC that global trade has bounced back this year and yet UK trade with Europe is well down. That, he suggested, had to be caused by Brexit. True, the EU’s interpretation of the withdrawal agreement is tediously legalistic and unconstructive – the wish to punish the UK still lingers, especially in Paris. And in the short term at least that is not going to change. In the meantime, many small and medium-sized UK exporters have given up trying to trade with Europe, concluding that it is just not worth the hassle.
But that is not the whole story. A recent report by the National Institute of Economic and Social Research (NIESR) reckons that the UK trade deficit with the EU will stabilise at one third of its pre-Brexit level because, over time, imports will fall more than exports.
It is significant that, since the Russian onslaught on Ukraine began on 24 February, the terms of trade for the EU have declined more severely than they have for the UK. The EU enjoyed a trade surplus until the hike in gas prices in the last quarter of last year. Since then, it has been running a trade deficit. Overall, exports are steady, but the price of imports has soared. The UK’s trade deficit is now smaller than that of France for the first time in years. If Europe is really serious about weaning itself off Russian hydrocarbons (and if it doesn’t, we have a major geopolitical problem) then its terms of trade will worsen further in the medium term.
The mercantilist German economic model seems particularly vulnerable to the shift in the terms of trade. Since the inception of the single currency, Germany has run a trade surplus which at one time amounted to eight percent of GDP. Now, with the price of inputs rising – including microprocessors, as well as energy – the German trade surplus is diminishing, even though the euro has been relatively weak. The country is overly dependent on manufactured goods, some of which – like internal combustion engines – are now threatened with extinction. It has a dearth of digital and software companies and is behind in the race for AI. China, once the top market for its goods, has slowed as a result of its zero-Covid policy. The UK no longer has an insatiable appetite for German manufactures.
If this new, EU trade deficit endures, then Europe will no longer be able to command favourable trade deals indefinitely. Also, the ECB has announced that it will raise interest rates for the first time in 11 years. The economic weather may be bad here – but it is bad in Europe too.
A return to the single market?
Recently, the Tory backbencher, Tobias Ellwood MP, who is chair of the Defence Select Committee, proposed that the solution to our current woes would be to rejoin the EU single market. That would resolve the arguments surrounding the Northern Ireland protocol at a stroke. Currently, the people of Northern Ireland are subject to EU directives while having no say at all about how they are framed. That is not democracy. And it would greatly alleviate the frictions experienced at Dover and elsewhere.
Rejoining the single market would restore freedom of movement which would ease labour shortages in the UK and would be welcomed by the many Brits who own holiday/retirement homes in France, Italy, Greece and beyond.
Did we vote to leave the single market on 23 June 2016? As Dan (Lord) Hannan pointed out recently, until the protracted nightmare of Theresa May’s government, most opponents of the EU assumed that the UK would remain in the single market – which, for all its faults, was very much a British project. The mantra of many of those who voted to leave the EU on 23 June 2016 was: “We entered a common market but ended up in a prototype federal state”. The referendum of 2016 was on very different terms to that of 1975 (in which I was unable to vote – just. That did not stop me, aged 17, from campaigning for ‘YES’).
I agree with Lord Hannan that the most natural evolution would have been for the UK to leave the EU but to join EFTA (the European Free Trade Association). However, that option was torpedoed by the guerrilla tactics of the Remainers who were absolutely determined to overturn the result of the referendum altogether and who would brook no compromise other than a second referendum. If David Cameron, the instigator of the referendum, had ordained a constitutional convention, EFTA membership would almost certainly have been the outcome, and it would have been achieved swiftly. Instead, we endured four years of fighting like ferrets in a sack and ended up with a harder Brexit than many who voted Leave expected.
Returning to the single market would close off options that we might pursue – such as scrapping VAT on domestic fuel. The real issue is that the UK has not even started to use its new-found freedoms.
Great Britain, but not Northern Ireland, escaped from the jurisdiction of the European Court of Justice (ECJ) on 1 January 2021 – right in the thick of the coronavirus pandemic. We remained in the European Convention on Human Rights and thus our laws remain under the scrutiny of the Strasbourg-based Court of Human Rights (a quite separate body from the ECJ). Nevertheless, the Johnson government with a majority in the House of Commons of 80, could have seized the day.
The name of the game should have been widespread deregulation, by which I mean the elimination of unnecessary and excessive regulation; the simplification of our tax code; encouragement of new domestic and foreign investment; and the establishment of free ports with state-of-the-art customs technology.
Instead, the government embarked on a spate of half-baked environmental measures – the infatuation with clunky heat exchangers and windmills is something about which I have written here. And then it hiked taxes. Admittedly, there was always going to be a cost of Covid – remember Test and Trace which cost £37bn and left nothing behind? But few people believe that the social-care levy will solve the problem of social care – it will just be poured into the NHS.
The government should have invested in infrastructure which boosts productivity; instead, its touching devotion to HS2 will, it now seems, generate minimal returns. (The Elizabeth Line is another matter, despite coming in four years late and over budget). There has been no substantive reform of the NHS nor local government. The renewed commitment to nuclear power was half-hearted and we now face a medium-term future of severe energy insecurity. The levelling-up agenda has resulted in numerous local schemes of very dubious merit.
Under the post-Brexit Johnson government, France has overtaken the UK as Europe’s preferred destination for foreign investment. Meanwhile, the government advances trivial proposals such as a return to imperial measures.
There is probably not much that a British Home Secretary can do to stop the flotilla of migrants crossing the Channel without the cooperation of the French – which is not forthcoming. But why does “Global Britain” force foreign visitors to stand in queues for hours when arriving at passport control? It’s not a good look.
Thew appointment of Jacob Rees-Mogg MP to the newly created post of Minister of State for Brexit Opportunities in February this year signalled that the Johnson government is aware that it needs to do more.
But there is still a tendency to interfere in the market for questionable aims. For example, as part of the battle against obesity, the government was poised to ban supermarkets from making buy-one-get-one-free (“BOGOF”) deals available to customers. Fortunately, in my view, the government decided to drop this ban last month in view of the soaring cost of family grocery bills. Again, the requirement that all newly built houses must ensure “a net gain in biodiversity” just makes starter homes more expensive for people trying to get on the housing ladder. In Brighton and Hove, the Green-controlled council requires all new homes to provide nesting sites for bees.
Larger companies are required to publish a modern-slavery statement and a gender pay-gap report. Well intentioned, no doubt. It could be worse: Labour would probably require companies to publish even more pay-gap reports. Publicly listed companies also now must publish net-zero transition plans. And so on.
The EU’s General Data Protection Regulation (GDPR) directives, which require us to accept cookies every time we click on a website, are a telling example of unnecessary EU regulations which have cost us money. According to a study by the economist Carl Benedikt Frey of Oxford University, the GDPR package has significantly reduced the sales and profits of smaller European tech companies, while the tech behemoths like Facebook and Apple have been largely unaffected. GDPR pushed up compliance costs. That means that raising finance for new start-ups becomes more difficult.
As usual, the UK legislated to enforce the directives ahead of the pack – even though we were in the departure lounge. We should now scrap these rules. Of course, the EU has threatened to restrict the transfer of data between the EU and the UK if we do – but that might just hurt them more than it hurts us.
What the markets are telling us
For all the relentless bad news, the FTSE 100 has held steady of late. It stands at around 7,400 at the time of writing, even as Wall Street continues to slide. The London equity market has proven to be remarkably resilient. The pound has lost ground against the dollar this year – but so have the euro and the Swiss franc. The pound still buys €1.17 – well above its post-Brexit lows. The markets do not think that Brexit was a disaster.
It’s still too early to say if Brexit was a mistake – especially since the waters have been muddied by pandemic, war − and now widespread stagflation. What we can say with confidence is that the same political class that, through treaty creep, burrowed us deeper and deeper into “the European project” is still disinclined to reform our country now that we are out. It is evident that there is a huge amount of inertia in our civil service which is highly resistant to any kind of radical change. That is why, as Lord Frost has intimated, root-and-branch civil-service reform is essential. It is time for Sir Humphrey to retire.
No doubt we could have enjoyed a quieter life if we had remained in the EU. Undoubtedly, the energy and political capital expended in getting Brexit done were exhausting. But, without wanting to rehash the arguments, I still don’t see how we could claim to live in a democracy if our elected representatives outsource their powers to a supranational legislature over which we exert no control.
It might well turn out that different skill sets are required to “Get Brexit Done” than to “Make Brexit Work”. That is exactly what the Tory parliamentary party is now pondering.
I watched Boris’s Blackpool speech live on Thursday (9 June). It was surprisingly impressive. The language was characteristically ‘Borisian’, but the degree of analysis and insight was unexpected. It was delivered with a high degree of urgency and yet with empathy. He touched on two primal themes which I have urgently tried to unpack for my readers here – energy security and food security. I don’t know if the PM has a new team but – at last – there was some suggestion here that he has grasped the fine detail of the challenges ahead.
He had even had a haircut.