9 December 2020

No Deal would be painful – but in the long term regaining control will suit Britain


Europe and the UK was always an ill-matched love affair.  How happy we all were in the early days when croissants and moules-et-frites were new and exciting. But eventually, the passion waned as we came to understand what an imperfect relationship it was. Like many, I perceived it was time to move on. Late in the day I switched and became a soft Brexiteer.

I fully expected the divorce to be messy and sub-optimal – and so it turned out. Europe hoped we would reconsider. I did not predict just how destructive the political bluff, buster and bumptiousness that accompanied the process would become. In hindsight, it should have been obvious – since there was never political unity around the subject and the process was ill-disciplined.

Now we have left, and it’s about agreeing on visiting rights and trade. Everyone still says they want the best deal for both sides. If you were trying to craft a Brexit trade agreement between divorcing nations, you would not have started from here. While the Irish argue a deal has to happen because it’s in everyone’s interest, the reality is we live in an imperfect world. Europe is now determined to apply the Hotel California clause: “You can check out anytime you want, but you can never leave.”

It’s not about how much the German car industry might suffer, how long lorries will queue in Kent, or threats of food shortages, or even how the UK will sell fish to Europe. These will be real issues, but short-term. They will be sorted.

Try to see it from the perspective of the Europeans: for decades the UK has been an unwilling but productive partner in the Grand Projet. While the Brits have pontificated about the dangers of the Brussels regulatariat, we are as responsible as anyone for codifying, writing and setting up the enforcement mechanisms necessary to regulate Europe. And now we want to do it all for ourselves? That is genuinely scary for many European nations, who recognise the dangers to their own economies from the potential of a less regulated, more productive and more competitive UK.

Britain is a potential threat to Europe across the whole economic sphere. From labour legislation to the regulation of goods and services we could backdoor into Europe if we are given the chance. If we can’t agree to a special trade deal, then WTO rules it should be, unless we can agree something better. A ‘no deal’ will be massively sub-optimal in the short term for the UK. But Europe, which fears competition from the UK exposing their own lack of competitiveness, has just as much to be worried about.

The immediate effect of a ‘no deal’ will be yet another tumble in perceptions of the UK. On the back of Covid damage, political ineptitude and the threats of break-up, the UK is screaming ‘sell’ signals to the global market.

But I wonder if the Eurocracy actually understand better than our own government what the UK has achieved by Brexit. The reason they are so nervous is because they see the prospects for the UK looking better and better:

  • The UK has re-established its grip on monetary sovereignty, (we never actually lost it), meaning we can print as much money as we require to reflate and reconfigure our economy without any threat from Europe.
  • We have fiscal sovereignty meaning we can spend that money however we wish to – on regional and industrial policy and stimulus.
  • By exiting Europe, we regain national sovereignty, which boils down to the right to determine exactly how we succeed or fail as a nation. The UK has re-established mastery of its own economic destiny. Brussels has no say.

Aside from the competitive threat of a new UK, the obvious threat to Europe is that exit might start to look attractive to nations struggling within the monetary and fiscal restrictions of the Euro.

The second point is political. In 18 months the French will be voting. It’s going to be very interesting how that plays out. The far-right Rassemblement National is likely to stand on a ‘roll back the EU’ platform, stopping short of outright ‘Frexit’, but slowing the progress towards full European monetary and fiscal unification, triggering more fault lines across the European project. Their case will be significantly boosted if the UK is seen to exit well, which is why Macron (a lame duck already) is so anxious to make it hurt.

The next few months, maybe years, are going to be painful for the UK. But ultimately, regaining full sovereignty should boost our strengths. Balance these against what Brexit costs in terms of immediate lost trade with Europe, increased administration and trade friction, and the economic shockwave it threatens to create. A hefty adjustment is on the cards – but ultimately everything is a risk.

Is the risk of a ‘no deal’ worth taking? A bad-deal will mean more internal division and time wasted to political noise. Time will tell. Which is why I reckon buying the FTSE on a dip might have mileage.

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Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge (www.morningporridge.com).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.