As the prospect comes closer of leaving the European Union without the UK having agreements for a transition period (mistakenly called a “deal”) we are likely to hear more prophecies of economic catastrophe and scares about what might go wrong.
One reason that uncertainty about Brexit has been allowed to build up must be the false sense of how important the EU has been to the relative success of the UK economy. Last week the latest figures for GDP growth in EU member states were released and they underlined how distressed in particular the Eurozone is. They also helped to demonstrate how the UK’s economic future lies outside the EU and why we should be confident of economic success after our departure.
The year-on-year comparison for Quarter 4 of 2018 against 2017 showed France at 0.9 per cent; Germany at 0.6 per cent; Italy at 0.1 per cent – and the UK at 1.3 per cent. For 2019 Germany’s Q3 performance was negative growth of -0.2 per cent followed by 0.0 per cent for Q4, only just missing a technical recession. In contrast the UK – outside the Eurozone – has not had even a single quarter of negative growth since 2012.
The French performance must only get worse as their statistics refer to the period prior to the “Gilet Jaunes” protests that have caused significant disruption, while Italy’s economy is smaller now than 14 years ago and still has a significant banking debt problem to overcome. It too is staring recession in the face.
To understand what is happening we need to look back to the period before the euro was launched in 1999. In 1994 the economies of the US and the future Eurozone were of broadly similar size worth 24.9 per cent and 24.5 per cent of global GDP respectively. Today the US economy is 30 per cent larger than the Eurozone. Simply put, EU economic performance has been the global laggard over the short and long term.
Since the financial crisis the UK economy has outperformed all the major EU economies. Overall it has grown 19 per cent over that period compared with a 13 per cent rise in the Eurozone. That 6 per cent differential is worth £120bn to our economy – or to put it in perspective, just short of the entire NHS budget.
The UK has also materially outperformed the EU in both job creation and levels of unemployment. UK unemployment is at its lowest level since 1974. French unemployment is 2.5 times the UK level, Spain is four times and Greece five times higher. Other EU economic readings are worsening too, be they employment levels, migration trends, fiscal strength, competitiveness and Target2 liabilities (balances due by countries to each other).
The big myth that the single market is central to UK prosperity remains prevalent. It is not. The evidence is clear, the UK trades with a modest surplus with the world (excluding the EU) but has a £96bn deficit with the EU. Over the last 20 years UK trade has grown 12 times with China, over three times with the rest of the world (ex-EU), 2.6 times with the US – but only two times with the EU.
The EU is meant to give us an advantage from being inside the single market and customs union but as the UK is mainly a service economy the main advantage has been in opening up our goods market to EU countries, while we have gained no comparable opportunities in their financial services markets that was promised.
Our politicians regularly discount small faraway countries as if they are unimportant while small countries in the EU are given greater importance. Yet while the UK exported £6.3bn of goods and services to Denmark less than 800 miles away we managed to export £8.6bn to Singapore – some 36 per cent more – even though it is over 6,700 miles away and outside the EU’s single market. Does it not strike readers as odd that UK trade not only is growing faster and in surplus where it trades generally under WTO rules than within the EU single market where we shoulder a £96bn deficit?
The underperformance of the Eurozone can be laid firmly at the EU’s door. Fundamentally, the Eurozone is not an optimal currency area; it lacks fiscal transfers and is weakly controlled with no central Treasury. These are structural issues that will not be easily rectified leading to continuing divergent performance, socially damaging unemployment levels in the south and a loss of competitiveness. The problem is the euro’s construction and there is no easy fix. Underperformance is baked in.
Without the ability to price themselves into markets by devaluing their own currencies, countries such as Italy, Portugal and Greece have either to increase productivity hugely or lower labour costs by shedding jobs. Another alternative is to effect greater fiscal transfers from wealthier Eurozone countries by making the EU a federal state.
This is the lesson of the UK’s own union where fiscal transfers from the wealthier parts of the economy are made to the poorer parts. Currently from London and the south East to the north of England, Wales, Scotland and Northern Ireland. Indeed, recent ONS figures suggest England is now in surplus transferring subsidies to the rest of the UK. The continuing UK deficit that adds to the national debt comes from the rest of the UK – but that is how fiscal unions work, and where the EU and the Eurozone fails.
Few nations in the EU have any appetite for “closer union” despite all the idealistic words of their politicians, for there is no demos and no common language to build one. Indeed the reverse is now evident with populist parties (of both left and right) riding patriotic waves of discontent with every election inside the EU.
None of this is to say trading with Europe is not important; it is and will remain so – and should therefore be given significant attention. However, to achieve the economic growth that people from all classes, communities and parties wish to see we must recognise the most important opportunities lie in the rest of the world where there is larger and faster growth we can take advantage of.
As our politicians seek to ensure as soft a Brexit as possible they should take solace in the fact that as we leave the EU we regain the ability to introduce policies that can help those business sectors that might find difficulty – while gaining the freedom to open up new markets for the benefit of everyone.
l Brian Monteith is a director of Global Britain