Economic Letter

David Bond

Britain’s two colossal mistakes

The new prime minister of Great Britain, Boris Johnson, has promised to leave the European Market even without an agreement (the “no-deal Brexit”) on Oct. 31.

That will be the second colossal mistake Britain will have made in its long and often brilliant history. The first, as you may recall, happened in the 18th century when the arrogant aristocracy threw away its American colonies. In the 21st century, Brexit bids fair to throw away the country and its economy.

That Brexit will exact a steep price on the UK economy is evidenced by the continuing decline in the value of the British pound. Investors and businesses are taking steps to minimize any losses that could result.

Europe is, after all, Britain’s largest market and a no-deal Brexit would mean substantial tariffs on British exports to the EU. Thus exporters will — if they have not already — establish production facilities on the continent and a precipitous decline in domestic investment in the UK will continue.

But, even greater impact will be felt elsewhere in the economy and in the very structure of the nation. Since the revival of Europe after the Second World War, London has been the financial hub of Europe. U.S. banks contributed hugely to the city’s growth because they started to hold and lend U.S. dollar balances held in London by both American and foreign entities.

Those dollar balances reflect a desire to avoid both high U.S. corporate tax rates and other controls in the United States. London built a well-trained and flexible labour force to support this financial sector. Brexit will see that activity transferred en masse to European centres.

There will be other significant impacts on Britain’s labour market as well. The influx of skilled labour, primarily from Eastern Europe, will be curtailed and perhaps even reversed. There will be a distinct decline of employment opportunities for younger British skilled workers who have moved to mainland Europe. Canada, Australia and New Zealand should expect substantial increases in immigrants from the UK.

Northern Ireland, along with Scotland and the major urban areas including Greater London, voted to remain in the EU in the 2016 referendum. With a no-deal Brexit, the very political structure of the UK could change.

For Northern Ireland, the return to an official “hard” border will encourage a move to leave the UK and achieve some sort of official relationship with the Irish Republic. The long period of religious violence between the north and the south was ended with a peace treaty in the late 1990s and it is doubtful that there would be enthusiasm for a return to what essentially was a civil war.

There will also undoubtedly be a referendum in Scotland to seek independent status and remain in the European market. This region is highly dependent on the EU market and could become an important financial services centre. All this will leave the UK smaller in total size both geographically and economically and likely suffering a severe recession immediately after leaving the EU.

Johnson is certain that the EU will be willing to negotiate a better deal with him than the one Theresa May achieved. However, there is reason to believe that the EU will stand by its oft-stated position that they will enter into no further negotiations.

This intransigent stance by the 27 remaining members is understandable. They are worried that giving into UK demands for a better deal will cause other nations to seek departure deals as well. Germany and France will work tirelessly to see that this does not happen.

Looking at the current situation, with less than 100 days until Oct. 31, a no-deal Brexit is becoming ever more likely. Should it happen, Britain, the once powerful and respected nation, will become a minor economic and political power. The older segment of the UK electorate, who predominantly support the Conservative party, will enjoy their victory briefly since the Conservative party will be greatly weakened by defections to the Liberal Democrats.

The strong and rational thinking that has been the hallmark of British foreign policy over the past half century will be lost to a world where liberal democracy and competent diplomacy are increasingly endangered.