EU ‘tough stance’ will remain
Perhaps the UK’s main error in its plans for leaving the European Union is the belief that the EU has to grant it a ‘fair deal’ which satisfies at least half of British demands.
Both sides in Britain – Leave and Remain – may see the negotiating stance of the other 27 EU members as excessively tough, but the EU does not have the slightest reason to change it after the UK prime minister Theresa May lost the Conservative party’s majority in last week’s general election.
Recovery is in full swing on the continent. We have heard arguments before that German car makers are desperate to keep the ‘giant’ UK market and that the EU would be as damaged as the UK if both had to rely on World Trade Organisation terms. Such arguments rang hollow before the election. They do so even more today.
This is true, too, for the view that the EU is attempting to ‘punish’ the UK for daring to leave. The opinion on the continent is that the UK is punishing itself. Domestic consumption dropped in May and commentators predict that GDP growth probably won’t exceed 0.2% in Q2. According to the International Monetary Fund, Britain is swiftly moving from fastest to slowest-growing G7 economy. It is hard to lay the blame on Brexit negotiations that have not even started.
The worst may be yet to come.
Foreign investors are losing patience with a weak and wobbly government that has no clear line on Brexit. Foreign direct investment is soon likely to take an even bigger hit than consumption. FDI matters more to the UK than to almost any other developed country.
UK tax revenues will be lower than foreseen in the spring Budget. The deficit, already one of the highest in the EU, will grow again. If the prime minister attempts to trim it with austerity, she will drive more voters into the arms of Jeremy Corbyn, leader of the opposition Labour party. If she opts for benign neglect, the pound will be hammered.
Yesterday the European Commission adopted a draft regulation that is likely to lead to the repatriation of euro clearing from the City to the continent. The British right-wing press may call this a declaration of war, but the move has long been a risk. LCH, the clearing house controlled by the London Stock Exchange Group, already offers to clear euro futures in Paris and will be ready to do the same for swaps shortly. So much for the new opportunities for a City finally freed from EU shackles.
Worse, thousands of consultants are busy advising large industrial clients on the reorganisation of their supply chains on one side of the Channel. No prizes for guessing which side most are opting for.
Brexit is becoming what it was always going to be: a dreadful experiment for Britain and a useful lesson for others.
The most interesting news of the weekend was not the landslide of President Emmanuel Macron in the French National Assembly elections. It was that in Italy the Five Star Movement suffered an unexpected setback in local elections. The average Italian voter appears no longer to believe the Five Star fairy tales that leaving the EU and the euro are the magic recipe for fixing the country’s woes.
The British are admired for their humour and patience. But sooner or later they will get angry – with the Brexit liars and their promise of ‘£350m a week for the NHS’. At that point, expect yet more stormy UK politics.
Like most continentals, I would much prefer that Britain be in Europe. But as the Brexit experiment has started, it needs to run its course. If, for whatever reason, it was interrupted prematurely, it would not take long for eurosceptics to accuse Brussels of having plotted against the will of the people.
Jacques Lafitte is founder of Avisa Partners in Brussels, and formerly oversaw the euro dossier in the Cabinet of Yves-Thibault de Silguy, Economic and Monetary Affairs Commissioner, 1995 to 1999.