Global Economy / Britain-EU divorce could be acrimonious

Image result for Global Economy / Britain-EU divorce could be acrimonious

Britain has one year left before it secedes from the European Union. With the conclusion of the EU summit meeting held in Brussels on March 22-23, the country will begin full-fledged negotiations with the EU to determine their post-Brexit relationship. However, both sides remain deeply divided, with no compromise in sight.

Seeking high-level FTA

“I want the broadest and deepest possible partnership — covering more sectors and co-operating more fully than any free trade agreement anywhere in the world today … it is in the EU’s interests as well as ours.”

British Prime Minister Theresa May made this comment on post-Brexit relations with the EU in a speech on March 2.

May ruled out a “soft landing” departure from the EU, in which Britain would participate in the European Economic Area (see below). Such an arrangement would allow it to maintain tax-free trade with EU countries under certain conditions while remaining outside the EU, much like Norway and Iceland. Instead, May clarified her plan to completely leave the EU and then sign a high-level FTA.

However, it is unclear to what extent Britain will achieve trade liberalization in its negotiations with the EU. There is no doubt that economic exchanges will become more difficult compared to the status quo, in which Britain trades goods and services with the 500-million-person EU market without regard for national borders.

European Council President Donald Tusk clarified that his position differs from May’s stance (see chart 1), saying on March 7: “In fact, this will be the first FTA in history that loosens economic ties, instead of strengthening them … It will make it more complicated and costly than today, for all of us. This is the essence of Brexit.”

The EU is Britain’s top market for exports. According to British government statistics, EU countries accounted for seven of its top 10 export destinations in 2017, the exceptions being the United States in first place, China in sixth and Hong Kong in 10th (see chart 2).

British Secretary of State for International Trade Liam Fox has noted in a speech and other occasions: “The pattern of our trade is changing. Fifty-seven percent of Britain’s exports are now to outside the EU compared with only 46 percent in 2006 … By 2020 China’s middle class is expected to number 600 million.” However, a deterioration in relations with the geographically proximate EU would inevitably damage the British economy.

Sign of change

The British economy remains firm, and has recorded gross domestic product growth for 20 consecutive quarters since the first quarter of 2013. Kenichiro Yoshida of Mizuho Research Institute said, “The firmness of the global economy has been a tailwind for Britain.”

However, negative consequences for the British economy have gradually surfaced. Around autumn 2016, right after the referendum was held, retail sales recorded about 5 percent growth compared to the same month the previous year. After autumn 2017, however, sales growth dropped to about 1 percent due to a rapid rise in prices.

According to Britain’s Office for National Statistics, consumer prices rose 3.1 percent in November 2017 compared to the same month the previous year, up from the 0.5 percent rate recorded at the time of the referendum in June 2016 (see chart 3).

The increase was driven by a decrease in the value of the pound, which was around ¥160 before the referendum but briefly fell to around ¥125, causing the price of imported goods to rise. (£1 is currently worth about ¥150.)

In contrast, the rate of increase for wages including bonuses has stagnated at around 2 percent. As this falls below the rate of price increases, Britons’ purchasing power has diminished.

The International Monetary Fund forecasts that Britain’s economic growth rate, which was 1.9 percent in 2016, will drop to 1.5 percent in 2019.

Paul Hollingsworth, senior U.K. economist at British research company Capital Economics, said that if Britain’s negotiations with the EU proceed smoothly, its economy probably will not worsen much.

However, the British economy faces major risks if talks do not go well, he warned.

Opinion divided over Brexit

In the referendum, supporters of Brexit outnumbered those who favored staying in the EU by a narrow 52-48 margin.

With concern mounting over the future of Britain’s economy, the number of Britons who regret their support for Brexit seems to be increasing slightly.

However, the composition of those who favor and oppose Britain remaining in the EU has not changed much.

According to a poll conducted in March by public opinion pollster YouGov, public opinion remains equally divided with 43 percent in favor of leaving the EU and 45 percent opposed (see chart 4).

When YouGov conducted another survey in February on expectations for the post-Brexit economy, 41 percent of respondents said it will “become worse,” while 26 percent said it will “become better.” Many Britons favor Brexit even though they know it may negatively affect their daily lives.

May stressed in a speech on March 2: “The agreement we reach with the EU must respect the referendum. It was a vote to take control of our borders, laws and money.”

Europe has steadily moved toward economic unification since the European Coal and Steel Community, a predecessor of the EU, was established in 1952. As Britain will be the first country to turn its back on this trend, the outlook for negotiations cannot be predicted.

Impact on world economy

Under the terms of the Lisbon Treaty (see below), which is the EU’s basic treaty, Brexit is set to be implemented on March 29, 2019. Little time remains.

Britain and the EU plan to begin intensive negotiations on the nature of their post-Brexit trade relationship. However, the question of how to deal with Northern Ireland, which borders EU member Ireland, is a thorny one. Discussions are sure to encounter rough waters.

The European economy accounts for more than 20 percent of the world economy.

If negotiations do not go well and the European economy stagnates, the global economy could suffer.

The administration of U.S. President Donald Trump is ever more inclined toward protectionism, and turmoil in global trade could deepen if British-European negotiations stagnate.

The result of the negotiations will also affect many companies with operational bases in Britain, including Japanese firms.

Britain and the EU should reveal their post-Brexit plans as soon as possible while paying attention to the potential consequences for the global economy.

■ European Economic Area

An economic zone composed of all 28 EU countries and non-EU countries Norway, Iceland and Liechtenstein. “Free movement of people, goods, money and services” is guaranteed within the area. However, non-EU member states must abide by EU laws.