The big fear with Theresa May’s Brexit speech was that the pound would tank and that the markets would respond as negatively as they had to most of her previous utterances. The opposite happened, and it rose to $1.24, up almost 3% on the day, after it had already risen on Tuesday morning on news that inflation had reached a two-year high (it fell back a cent today).
The news that the markets welcomed so warmly was that both houses of parliament would get a vote on the final deal and that May will not seek partial or associate membership of the European Union. That will prevent a bad deal, forced through by the Brexit-at-any-price Eurosceptics, which might have been on the cards without such a vote.
The markets have so far kept May in check, and represent a welcome constraint on her behaviour, but she still seems to think you can have your cake and eat it. She can’t. That is why businesses have put their investment and hiring plans on hold, and will continue to do so. This speech, which was basically a wishlist, doesn’t alter that uncertainty.
May went on to proclaim “We are leaving the EU but we are not leaving Europe,” without any further clarity on what those empty words meant. I am not sure anyone had expected that Britain was going to float off into the Atlantic. The government seems to think it is holding all the cards in the Brexit negotiation, when it is hard to see it is holding many. If you don’t accept the four crucial freedoms – of capital, goods, people and services – the EU is unlikely to want to play ball.
A big problem for May is to work out how you get from here to there and how long it is going to take. It is clear now that transition arrangements are going to have to be negotiated, and that may take a very long time – as Sir Ivan Rogers, the UK’s ambassador to the EU, suggested before he was effectively pushed out.
Despite what David Davis says, parliament may well vote down any arrangements, especially if the cost of a Brexit deal starts to rise and public support wanes. A poll from YouGov and Which? in December suggested that the British public will not accept a Brexit deal that leaves them worse off financially. Half of those who voted to leave the EU in June, including 62% of Labour voters and 59% of those in the north, would not be willing to lose any money at all as a consequence of Britain’s withdrawal.
The polls are showing that support among the public is still on a knife-edge if and when the costs of withdrawal rise. Already this week the consumer prices index jumped unexpectedly and will rise further as a consequence of the collapse of the pound. Apple this week announced a 25% rise in the price of the products in its App store.
On customs union, May wants Britain to leave the common external tariff but reach some sort of fresh customs agreement. Sensibly, the prime minister made it clear that this country will have to make “appropriate contributions”, the downside of which is that the UK will have no say over Brussels policy – in contrast with Norway, which pays to play. Those contributions may have to be high. Why would the rest of the union let the UK get all or even any of the benefits of access on the cheap?
It is going to be difficult to strike such an agreement. Using residency rights as a bargaining chip hasn’t gone down well. The Swedish minister for European affairs, Ann Linde, was in the UK this week, expressing her concerns about the xenophobic abuse that Swedes had been experiencing. When Swedes have anxieties about their future we are probably in big trouble. We are going to need friends in the negotiations, but we don’t seem to have many. The rest of the EU has every incentive to make this very hard for us, in order to scare others off from going down the same path.
A great deal of this is about controlling immigration – yet common travel between Ireland and the UK will apparently remain just that. It’s hard to see how you then restrict entry to the rest of the country for EU nationals. In any case, just about all of the economic analysis shows immigration, especially from the EU, has major benefits here. East Europeans have high employment rates – about 8% higher than those who are UK-born. Pressure on schools and the NHS arises m ostly because the government takes their money and doesn’t use it to provide the services they have paid for.
Support for Brexit is likely to fall if the economy slows and the negative impact on living standards becomes more apparent. People are hurting mostly, in my view, because of the reckless and unnecessary austerity imposed by George Osborne – and that has little or nothing to do with immigration and the EU. This remains the slowest recovery ever. Any deal May can strike over Brexit will probably make that worse.
