Jean-Claude Juncker and Theresa May in Brussels on 21 November. As the UK is ushered out of the European Union, it has an opportunity to do things differently and tackle the structural problems that have plagued the economy for decades, argues Larry Elliott
The left needs to work on its own plan to rebuild our economy, and that will be easier after Brexit says Larry Elliott.
Theresa May’s mantra should fool no one. While the prime minister insists repeatedly that her Brexit blueprint will mean the UK controlling its borders, laws and money, the real aim of the government is to keep as close as possible to the status quo.
Whitehall, with the Treasury to the fore, was highly pessimistic about Britain’s economic prospects outside the EU and hasn’t changed its mind about the desirability of finessing the softest of all Brexits. Philip Hammond has been able to whistle up plenty of support from employers’ organisations which – unsurprisingly, perhaps – want as little disruption to business as usual as possible.
This pessimism is curious for two reasons. It suggests that the low-wage, low-skill, low-investment economy that existed on the day Britain voted in the June 2016 referendum is as good as it gets. What’s more, the pessimism about the UK is mirrored by an optimism about the health of the EU that is unwavering, despite a plethora of evidence to the contrary.
The unwarranted gloom about the UK and the exaggerated respect for the EU are not new. Many of those who now say that Britain must stay as closely aligned to the EU as possible predicted disaster when the pound left the exchange rate mechanism in 1992; prophesied a decade later that Britain would rue the day that Gordon Brown gave the single currency a wide berth; and said with the utmost confidence in 2016 that a vote for Brexit would lead to an immediate and deep recession and a massive increase in unemployment. None of these things happened.
On the other hand, the predictions made by those who thought the single currency was one of the daftest ideas of all time have come true. The euro, it was said, would lead to economic divergence not convergence between member states, be run along monetarist lines, entrench high levels of unemployment and leave Europe in the growth slow lane. The rise of populism across Europe, which is being documented by the Guardian this week, has everything to do with the failure of Europe’s flagship project.
Forces of disintegration
As the single currency struggled, its devotees took comfort in the prediction from Jean Monnet, one of the pioneers of the original common market, that Europe would be forged in crisis. The design flaws glaringly exposed by the bailouts required for Ireland, Greece, Portugal and Cyprus, together with the run on Italian and Spanish bonds would give the drive for integration fresh vigour. But as Bruno Le Maire, the French finance minister, noted recently, none of the things that would be required to make the euro work have happened. The banking union has not been completed, the capital markets union has not been completed, and there is not the remotest prospect of a common eurozone budget overseen by its own finance minister because Germany fears that would result in its taxpayers footing the bill for public spending in other countries (as it would). Europe is still, as Monnet said, being forged in crisis, but the forces of disintegration are currently much more powerful than the forces of integration.
A prolonged period of slow growth has highlighted another weakness: Europe’s lack of economic dynamism. There are strong, world-beating European companies but almost all of them were created many decades ago. There is no European Facebook or Google, no rival – as there is in China – to eBay. When it comes to artificial intelligence, Europe is lagging well behind the US and China. Europe’s position as the world’s biggest market is a legacy of its success in developing the products that were behind the economic boom in the first three decades after the second world war – cars and other consumer durables. In terms of the fourth industrial revolution, Europe is playing catch-up.
It is this slow-growing and politically riven Europe, not the confident rapidly expanding Europe that gave West Germany its Wirtschaftswunder and France its Trente Glorieuses from 1945-75 that Britain is planning to leave.
And while there would certainly be a short-term hit to the economy from a no-deal Brexit, this would be mitigated by policy easing. Interest rates would be cut by the Bank of England, while the Treasury would sound the death knell for austerity by announcing tax cuts and spending increases. Even at its gloomiest, the Treasury cannot come up with forecasts that suggest the impact of Brexit will be anything like as serious as the financial crisis of a decade ago.
There are those who say the answer is not for Britain to leave but to reform Europe from within, so that it is run along progressive rather than neoliberal lines. But Germany is never going to agree to a common budget and the European Commission wants to fine Italy because the government in Rome is seeking to stimulate growth by running a higher deficit than is allowed under the eurozone’s hardline budget rules, so that might take a while.
In the meantime, there is an opportunity to do things differently, to exploit the policy space that Brexit affords and tackle the structural problems that have plagued the economy for decades. The right has its plan: more liberalisation. It is time for the left to come up with its own vision that would deploy every available policy tool to modernise the economy, rebuild Britain’s industrial space and spread prosperity more widely.
Such a transformation is much more likely to happen outside the EU than inside. That’s because the two most significant UK imports from the rest of Europe – German industrial goods and cheap labour – have helped to bend the economy out of shape by holding back the manufacturing sector and encouraging the growth of low-wage service sector jobs. It is possible to do better than that.