Brexit: A Mixed Initial Assessment

Is the UK about to undergo a profound transformation? While Keir Starmer has just been elected Prime Minister after a landslide victory, his investiture has been the subject of much controversy. The most striking, and the one he has been most criticized for, remains the distinction between his party, Labour, and the distinctly more liberal positions his political label suggests. Is he capable of turning the country around, despite particular circumstances? Does he have sufficient room for manoeuvre?

After fourteen years without the Labour Party in power, Starmer's challenge is immense. Following the obvious failures of the previous government, but above all the succession of crises since 2008, the country is prey to numerous challenges: public debt has reached almost 100% of GDP, local authorities are bankrupt, the tax burden is close to the record level reached after the Second World War (at 37% of GDP), public spending is at an all-time high (at 45% of GDP), real incomes have stagnated for a decade, housing shortages are hitting the country, and the social divide is growing. Finally, public services are deteriorating year after year (particularly the NHS), the population is aging rapidly, and the British people's loss of confidence in their representatives is reaching unprecedented levels.

Against this backdrop, Brexit is naturally the subject of growing skepticism. More than one in two Britons now believe that leaving the European Union was a mistake. And, if the polls are to be believed, only 22% of people consider leaving the European Union to have been a good decision.

During these weeks of campaigning, Starmer, like his main rivals, was careful not to raise the subject. The new occupant of Downing Street said he was opposed to a return to the European Union, while asserting his desire to renegotiate cooperation agreements with the Old Continent. 

An initial assessment of Brexit

But what assessment can be made today of Brexit? At first glance, the results are not very pleasing, although difficult to assess. Firstly, growth has been weakened for a long time. Since 2016, EU GDP has risen by 24%, while UK GDP has grown by just 6%. Conversely, before Brexit, the EU was lagging significantly behind the UK.  

Naturally, the same applies to GDP per capita: since 2016, the EU's GDP per capita has increased by more than 2% every year compared to the UK.

Secondly, it's true that on the issue of borders (one of the Brexiters' main demands), the exit from the European Union has not produced the expected effects. The number of migrants has more than doubled in the last three years, as the UK replaces European immigration with immigration from other countries. In 2022, the number of migrants even reached a record level, with 745,000 people arriving in the country, mainly from Afghanistan, but also from Iran and Turkey.

Leaving the European Union has had a particularly negative effect on foreign trade and investment. A sharp slowdown in trade was observed as soon as Brexit was implemented in 2020, including a decline in trade with the EU (its main trading partner). More broadly, trade in goods underperformed other advanced economies by around 15%. 

But at the same time, the loss of membership of the Single Market has given the UK more room for manoeuvre, enabling it to sign new partnerships with Australia, Singapore and New Zealand, among others, as well as becoming the first European country to join the Trans-Pacific Partnership Agreement (TPPPA). Negotiations remain difficult, however, for the promised major trade agreement with the USA. At the end of 2023, exports to non-EU countries remained stable, while imports fell by around 10%.

In terms of investment, British companies, particularly small and medium-sized ones, have been heavily impacted by the exit from the European Union. Brexit forces them to pay fees on every product category due to new national rules that are not unified. In total, the country's businesses are paying out nearly £330 million a year... Obviously, this is having an impact on investment, which has slowed by around 20% compared with the pre-Brexit period. 

Despite this glaring fact, and the fact that British companies have to contend with sometimes burdensome administrative complications, they have also emancipated themselves from European standards and are thus able to implement certain patentable strategic innovations. This is a major gain for the country.

Mixed results

While the effects of these two items - trade and investment - are hardly disputed, the results are more mixed on many other subjects. For example, while the labor market has tightened, with a significant shortage of workers (particularly in the healthcare, hotel, catering and transport sectors), the unemployment rate is still extremely low, at less than 5%, whereas it exceeds 6% in the eurozone. 

From an industrial point of view, while the Old Continent is de-industrializing at an unprecedented rate due to the divergences intrinsic to the European model, Brexit seems to have been a good thing, as British industry is booming. With productivity in the sector not only growing significantly faster than in other OECD countries, but also enabling the UK to overtake France as the world's 8th industrial powerhouse.

Last but not least, in the financial sector, which accounts for 10% of national GDP, London has finally retained its position as Europe's leading centre, despite the relocation of thousands of employees to Paris by the major US investment banks. Brexit has led to a temporary loss of confidence, since London's major financial center, the City, continues to deliver to the country and its companies a major comparative advantage in investment finance as well as in accounting, taxation, auditing, etc. Despite a slowdown in the exchange of goods, exports of services are therefore booming, with an increase of 12%, compared to the average of 9% in the rest of the G7 countries since 2020. This is a point that has been largely overlooked in the Brexit debate: the exit from the European Union was not only driven by political means, but also by the financial sector, thanks to members of shadow banking (hedge funds, money market funds, etc.). Through massive support for pro-Brexit candidates, they were major players in the decision to leave, with the aim of emancipating the country from European financial regulatory constraints.

The UK also remains, and always has been, master of its monetary policy and therefore of its currency. If the pound sterling has become more volatile, after a historic fall in the wake of the Brexit implementation, this is nothing compared to the euro's continued decline. In the end, the pound sterling remains relatively strong, rising steadily against both the euro and the dollar over the past two years. And that's with industry in the best of health. 

What's more, the high inflation of recent years has been effectively curbed. After having exceeded 10% in the country (due to heavy dependence on oil and gas), but like the overwhelming majority of advanced economies, it has now fallen back to 2%, although it still remains above the ECB's target in Europe. The decision never to join the eurozone means that the UK can make its own monetary policy decisions, particularly with regard to interest rates, although the Bank of England remains independent. Thus, despite the upheavals associated with Liz Truss's investiture, the central bank has managed to maintain financial and monetary stability. Ultimately, however, it faces the same dilemma as all the world's central banks: choosing between a definitive return to price stability, or a major financial crisis.

Positive long-term effects?

Taking stock of Brexit also means recalling the historical events of the past few years. The poor economic results are in fact as much attributable to Brexit as to the many recent crises, ranging from the health crisis to the Ukrainian-Russian war and geopolitical tensions around the world. While the UK economy has slowed more than it would have without the exit from the EU, and despite last year's recession, it grew by 0.7% in the first quarter, the fastest of any advanced economy. This suggests that leaving the EU could have positive long-term economic effects. Indeed, exports are set to outstrip imports over the next decade, albeit at the cost of a reduction in overall trade.

It should also be remembered that the UK chose Brexit out of a desire for independence and sovereignty, first and foremost. The British have always been separated from Europeans by the famous feeling of exceptionalism. For centuries, they have wished to emancipate themselves from the Old Continent, and more than ever since the European Union. Their historical loyalty to Anglo-Saxon capitalism makes them much closer allies of the United States than of Europe...

In these particular circumstances, the new Prime Minister has outlined his economic program, which has the merit of clarity. To this end, he has teamed up with the new Chancellor of the Exchequer, Rachel Reeves, whose background as an economist at Oxford University and then the London School of Economics suggests that fiscal rigor is her motto. In several stages, they set out the country's economic program as follows: make growth a pillar of the mandate, reduce the presence of the state by cutting public spending, sharply increase productivity, return to economic and political decentralization, limit the corporate tax rate to 25%, never increase income tax, contributions and VAT, but also create a sovereign wealth fund to increase private investment and support industrial expansion.

The greatest challenge, however, remains that of controlling the public debt, whose record level hides so many issues, requiring the country to make sacrifices in spending and revenue, in the absence of sufficient growth. In this respect, Keir Starmer's plans remain very vague. Yet, as Prime Minister of a monetarily sovereign nation, he can make debt reduction the central pillar of his mandate, through a far-reaching reform of monetary policy, and thus do his bit for future generations. This battle will determine not only whether he remains in power, but above all the future of the United Kingdom.