https://www.economist.com/britain/20...pects-are-grim
A whimper not a bang
Britain’s immediate economic prospects are grim
But the real damage from Brexit will take time to make itself felt
Jan 14th 2021
For the four and a half years since the referendum on European Union membership, firms have been worrying about the impact of Brexit. But Britain’s transition out of the eu, completed on December 31st, did not end with a bang. There were no queues of lorries at Dover. Supermarket shoppers were not starved of green vegetables. And business has had other troubles on its mind.
England’s third national lockdown began on January 5th, shutting much of the hospitality and retail sectors. The government has taken steps to soften the blow. Rishi Sunak, the chancellor of the exchequer, announced a further £4.6bn ($6.2bn) package of grants, worth around 0.2% of pre-crisis gdp, for firms as the lockdown began and signalled that more support may be forthcoming at his next budget, due in early March. The job-retention scheme, under which the state will pay up to 80% of the wages of furloughed employees, has already been extended until the end of April and the Treasury has not ruled out a further continuation.
With many firms now better adapted to home working than they were last year, more retailers offering an online service and more restaurants better set up to handle takeaway business, gdp should not shrink as fast as it did in April 2020 (see chart). But schools have been closed, as they were in the first but not the second lockdown, so many parents are unable to work. Samuel Tombs of Pantheon Macroeconomics, a consultancy, reckons that the impact of the third lockdown will be closer to that of the first than the second.
But although the resurgence of covid-19 has overshadowed Brexit, the latter is causing problems. The hassle of new vat rules has prompted some businesses to halt shipments to Britain entirely. Dutch Bike Bits, an online retailer of bicycle parts, has called the new arrangements “ludicrous” and halted sales to Britain in December.
In the other direction Scottish seafood traders complain that new paperwork is delaying exports, leading to valuable langoustines going to waste. In general traffic seems to have run smoothly on the Dover-Calais route, but advance stockpiling, trucks turned away in Kent and covid-19 restrictions all seem to have eased the transition. The government has warned hauliers that delays are likely to increase as volumes rise and eu enforcement of rules tightens.
Rules-of-origin checks have emerged as a particular bugbear. Many traders were pleased that the eu-uk trade deal promised no tariffs or quotas on goods. Yet to qualify, companies must be able to certify that around 50% of any exported product originates in Britain or the eu. This catches not just Asian t-shirts or dates imported from Israel. Even foodstuffs imported from other eu countries and repackaged for export back into the bloc without significant value-added in Britain can lose certification. That is disrupting distribution hubs.
The need for rules-of-origin checks flows directly from the government’s long-standing red line of quitting the customs union and single market, so bigger companies should have been prepared even if smaller ones were not. Yet detailed new rules for each product (including a temporary derogation for batteries in electric cars) were not known until a week before January 1st. Talks with the eu could produce more derogations or longer grace periods for the toughest checks. But Sam Lowe of the Centre for European Reform, a think-tank, says Brussels will weaken its rules only to help eu members such as Ireland; it has no interest in softening the impact of Brexit on Britain.
It will care more about Northern Ireland. To avert a hard border on the island of Ireland, the two sides agreed that there should be a border in the Irish Sea between Great Britain and Northern Ireland, which remains in the customs union. Freight businesses worry that importers have not grasped how this will work. The complexity of the customs procedures has led some to give up trading or to narrow product ranges. Marks & Spencer, a retailer, has dropped several hundred products in its 21 Northern Irish stores, ranging from BrewDog beer to bin-bags. With Northern Irish politicians grumbling about empty shelves, the supermarkets have appealed to the government for help in sustaining the province’s grocery market.
Yet the real hit to the economy from Brexit is likely to come as more of a whimper than a bang. With a last-minute trade deal, Britain and the eu avoided the worst short-term chaos, but economists worry about the return of the post-war “British disease”—hence the Bank of England’s prediction that the economy will be three or four percentage points smaller in ten years’ time than it would be had it stayed in the single market and customs union.
In the three decades after the second world war, Britain’s economy declined relative to its European neighbours. That was not just because they had so much ground to make up after the war; by the 1960s, they were beginning to pull ahead. Britain suffered from confrontational industrial relations, poor management, weak productivity and low investment.
Margaret Thatcher is often credited with changing the country’s trajectory, but many economists argue that the effect of Britain’s entry to the then European Economic Community (eec—now the eu) in 1973 was at least as important. Nauro Campos and Fabrizio Coricelli of the Centre for Economic Policy Research, a network of economists, point to a similar productivity-growth pattern among the three countries—Britain, Denmark and Ireland—that joined the eec in 1973 (see chart). They suggest that Britain’s entry into the Common Market created the conditions for Thatcherism to thrive by offering British entrepreneurs access to a larger, deeper and more innovative market than was previously available to them.
Nicholas Crafts, a leading historian of Britain’s economy, argues that the real cause of the British disease was a lack of competition. The economy was cartelised in the interwar years and sheltered from international competition in the post-war decades. Thatcher, by his reckoning, deserves credit for liberalising markets and deregulating industries, but was helped by the wider exposure of firms to international competitive pressure from entry into the eec and the creation of the European Single Market in the mid-1980s. He reckons that Britain’s failure to join the eec at its creation in 1957 had a substantial cost in terms of lost productivity.
If the effect of leaving the eu is the opposite of joining it, the impact will not be a swift, painful recession, but growth forgone. Britain will be like a boiled frog, not noticing the damage until it is done.
- sometimes we even speak in English, for fun- and I teach her son and his friends.
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