MUNICH, 21-Oct-2016 — /EuropaWire/ — When Britain voted to leave the European Union, world markets slumped as economists predicted Brexit would push the UK into recession and the EU would fall apart. Although the sky hasn’t fallen yet, the picture is far from rosy. We speak to Allianz chief economist Michael Heise for a reality check…
Allianz.com: In June, Britain voted to exit the EU. Do we have any details on the UK’s exit strategy?
Heise: For more than three months, there was little clarity on what Brexit really meant. Now, since British Prime Minister Theresa May’s speech at the Conservative Party conference, we know a little more about her Brexit strategy. Key elements include that Article 50 will be triggered by March next year, implying that the UK is likely to leave the EU in early 2019, that tougher migration controls are non-negotiable and that the UK will no longer be under the jurisdictions of the European Court of Justice once it exits the EU. It’s still early days, but if the UK government sticks to these red lines, the country is heading for a “hard” Brexit, which means a clear break from the EU including an exit from the single market and the EU customs union. That will create significant economic damage. Ironically, better-than-expected economic numbers since the referendum have allowed Brexiteers to brush aside warnings about the economic risks of a hard Brexit. And this is making it more likely.
Ahead of the referendum, many analysts predicted severe negative implications if a majority opted for Brexit. Were those forecasts overly pessimistic?
The stable performance of the economy in the aftermath of the Brexit vote had a lot to do with a strong response from the Bank of England and the depreciation of the pound sterling, which supports the outlook for exports but is a loss of real income for the economy. This post-referendum economic honeymoon will soon be over. There is evidence that UK firms are sitting on their investment plans. This is not surprising, given the uncertain business outlook. Moreover, the sharp drop in the pound sterling against the euro has started pushing up import prices. This will feed inflation in the UK, which will reduce household purchasing power. For these reasons, we expect the UK’s economic growth next year to slow to below 1 percent. The long-term outlook will also be dampened if a hard Brexit happens.
Will the UK economy thrive outside the EU?
I still do not see the benefit of Brexit for the UK. Brexit is an immensely complex process of disentangling the UK from the EU, which will take years to complete. The most likely outcome of the negotiations is a comprehensive free trade agreement between the EU and the UK, with considerable sectoral add-ons, in particular for services. But the agreement will fall well short of the degree of integration that has been achieved within the European single market – especially if a hard Brexit happens. Key pillars of Britain’s economic success – such as the financial services industry – could lose some of its importance going forward. Other industries that require large markets for scale-up and access to international talent could also come under pressure. If the UK wants to thrive post-Brexit, it will have to reinvent itself. With the right vision and policy mix, Brexit does not have to be an economic disaster in the long term, but it is unclear to me why the situation should improve if access to an EU market with more than 500 million people is at least partially restricted.
Will the EU survive Brexit?
Definitely, though the process of Brexit is complex and the outcome of the negotiations is unclear. Great Britain will also have to pay a price. This will discourage copycats elsewhere and the EU will not begin to unravel. I am convinced that the EU will survive, but the Brexit vote has served as a wake-up call that the Union needs to reform itself. Europeans are increasingly perceiving EU as a problem, not a solution – as a bureaucratic behemoth that reinforces the pressures of globalization and is unable to tackle its crises. To address growing discontent, the EU has to do more to revive the economy, maybe through higher investments, projects for research and education and measures to promote competitiveness. The EU should focus its efforts on areas where it can really add value. So, cooperation should be strengthened on European issues, including internal and external security, counterterrorism efforts and the protection of EU borders.
Looking ahead, the EU’s coming achievements are likely to be more piecemeal and less spectacular than the big integration treaties and new institutions of the past six decades. But perhaps a period of consolidation is what is needed right now. More political and fiscal integration can only build on public acceptance in member countries. In a first step, this needs to be regained.
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Dr. Lorenz Weimann
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