San Fulgencio
August 20
Dear Sir,
As someone who, had I been allowed, would have voted to remain, I find myself increasingly and curiously irritated by the many people in the Remain camp who simply pronounce that a no-deal Brexit will be an ‘economic catastrophe’ for Britain without giving chapter and verse.
They need to explain exactly what they mean. How would they measure the disaster – GDP or PPP – and exactly what conditions would be required to constitute such a catastrophe?
The 2008 global financial collapse is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.
From an historical high of $3.074 trillion in 2007, the UK saw a fall in GDP of 6% in 2008, with a further decline of 17.6% between 2008 and 2009 to $2.383 trillion. This gives a baseline for the measurement of economic catastrophe of -22.5% over a period of two years (all statistics, except where otherwise stated, are directly from or extrapolated from tradingeconomics.com).
The Office for National Statistics estimates that GDP for 2018 will be $2.936 trillion. This figure is likely to prove inaccurate, but let me assume for the sake of argument that it does turn out to be more or less around this amount. Using the above baseline, this would mean that UK GDP in 2020 would have to fall to about $2.275 trillion in order for the prediction of disaster to have any validity whatsoever.
Even this is not the end of the story. The myriad other factors involved in global trade will continue to have effect and it cannot be assumed that the whole of any decline in GDP is down to Brexit. For example, between 2014 and 2016 (prior to the referendum), there was a significant fall in GDP of 12.3% (from $3.023 trillion to $2.651 trillion). Post referendum, there was only a 2% fall in 2017.
GDP is normally calculated using the formula: Consumption + Investment + Government spending + (Exports – Imports). Obviously, all these factors, deal or no deal, will be affected in some way by Brexit but, as your correspondent, Gerald Hayes (Letters, 23 August) so sensibly observed, ‘nobody actually knows what the effect of Brexit will be’.
To be fair, it is not only those who voted Remain who argue disingenuously.
Nigel Farage recently repeated what seems to be the basic economic argument of Leavers, that the EU has more to lose and needs Britain more than Britain needs the EU. There is so much wrong with this argument, it is difficult to know where to begin.
Its most egregious mistake, one made by many commentators on Brexit these days, is treating the EU as if it were a homogeneous economic unit. This is not the case – what EU countries have in common are the rules regarding economic activity, not the activity itself. Even if a United States of Europe is created, I suspect each country would continue to seek to further its own national interest.
The argument would have a little more weight if ‘Germany’ replaced the EU; Germany’s exports to the UK ($88.4 billion in 2016) dwarf all other European countries, being more than twice as much as the French exports to Britain of $35.3 billion in 2016 (Observatory of Economic Complexity).
However, this still represents only 7.4% of German exports in total (and this is falling; only 6.6% of German exports went to Britain in 2017), and 2.5% of its GDP. Trading with 235 countries around the world last year, Germany obtained a trade surplus with 170 of them (Statistisches Bundesamt). The German economy would survive comfortably even if all trade with Britain ceased!
The argument seems to me to carry the threat that, indeed, all trade between Britain and the EU would end. Of course, this is not the case. An adjustment or realignment would take place as British and European companies reassessed their purchase decisions. It is likely that, for the 20 European countries that enjoy a trade surplus with the UK (Office for National Statistics, 2016 figures), the majority would find that the balance of trade would remain in their favour.
The argument also exaggerates Britain’s importance to Europe. For not one single country in the EU does Britain figure as the largest export market. Indeed, for 10 of those countries, it is not even in the top 5 (Observatory of Economic Complexity)!
Britain seems to regard trade as the only (or, at least, the most important) consideration in the talks regarding Brexit. I am not sure that this is the case for the EU; rather, European unity takes precedence. Just as there is more to a purchase decision than just price, there is more to Brexit than just trade.
I do not have much time for Liam Fox, but I think he was correct when he said recently that the chances of a no-deal Brexit have increased.
This is because any final withdrawal agreement will be determined under EU regulations, as stated in Article 50 of the Treaty on European Union.
Article 50 places Britain in a position that has much in common with Schrodinger’s cat – replacing ‘member/non-member’ for ‘alive/dead’. Paragraph 2 states that the withdrawal agreement, ‘shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union’, which sets out the EU’s rules for conducting negotiations with third parties. It applies to negotiations between the EU and one or more non-member states or international organizations. In other words, for the purposes of Brexit negotiations, Britain is regarded as outside the EU even though, as paragraph 3 of Article 50 suggests, it remains subject as a Member State to all EU treaties until the day of departure.
The withdrawal agreement will be decided by ‘a qualified majority’, ‘in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union’ (paragraph 4 of Article 50).
As Brexit does not stem from a proposal by the Commission or the High Representative of the Union for Foreign Affairs and Security Policy, I presume that the qualified majority will require 72% of member states (in effect, 20 countries) representing more than 65% of the EU population to vote in favour of any proposed agreement.
This means that it is technically possible for an agreement to be approved without any reference to Britain or British views whatsoever, despite paragraph 2 of Article 50 providing that ‘the Union shall negotiate and conclude an agreement’ with … (the withdrawing State)!
Either a qualified majority has been or can be obtained already or it has not. The second scenario is good news for Britain as it means there are sufficient dissenters amongst European countries to any Council proposals now on the table to offer the UK some leverage.
If the first situation applies, one needs to ask why a withdrawal agreement has not already been presented. This can only be because either the EU Council is waiting to the last possible moment, hoping that the British will toe the line, especially on freedom of movement, or it is perfectly happy for Britain to crash out with no deal.
Let us be clear, unless all 27 European countries agree to extend the period for determining a withdrawal agreement, Britain has to leave the EU on 29 March 2019, deal or no deal. There is no ‘stay’ option, there is no ‘re-negotiation of the deal’ option. Either accept the deal on offer (if there is one) or leave without a deal.
Either way, there is life after Brexit. Germany’s largest trade surplus is with the USA, and Germany trades with the USA on World Trade Organization terms.
Yours sincerely,
Joe Pilkington.
