Why Brexit Won’t Cure Britain’s Broken Economic Model

Simon Deakin

Simon Deakin explains in this audio podcast that Britain’s low-wage, low productivity economy is the result of 40 years of neoliberal economic policies.  While some on the Left think that Brexit will allow a reset of British economic policy, this view is implausible. Even a benign or ‘soft’ Brexit will cause a shock to Britain’s trading relations that will have long-lasting consequences. If there is a hard, no-deal Brexit, the effect will be akin to ‘shock therapy’ of the kind inflicted by neoliberal policy makers on the former Soviet Union in the early 1990s.

The likelihood is that there will be a deal before next March, so avoiding the worst-case scenario.  But, at that point, the UK will enter into a ‘transitional period’ which could last several years, since there is very little prospect of a quick resolution to negotiations on a UK-EU trade deal.

He explains: “I think it is extremely unlikely that we will have arrived at a free trade deal with the EU by the end of December 2020 because it isn’t enough time to resolve some very complex matters and the EU won’t just roll over, that is now obvious, to whatever the UK is proposing. The EU is going to drive a very hard bargain and this is especially the case if the EU believes that the goal of the Brexiters is to undercut the rules and regulations of the single market. The purpose of Brexit for many of its adherents is, it is obvious, an undercutting of labour and environmental standards.  And the EU is not going to give us a generous Canada-plus-plus free trade agreement, if it believes the whole point of this is for us to undercut them.”

Trading places

Deakin continues by elaborating on the link between regulation and trade.  “The critical thing with Brexit is to think about trade and regulation as being two sides of the same coin. When we talk about international trade we are really asking, which regulatory regime do we want to sign up to? Inside the single market there is high degree of harmonisation and convergence of rules, or what is sometimes called alignment. Regulatory alignment is the condition of frictionless trade in the European single market. It is a uniquely deep international trading arrangement because of the high degree of regulatory compliance that goes with EU membership. We can’t achieve regulatory autonomy post-Brexit without giving up frictionless trade. So UK policy makers have to think about the consequences of moving away from the single market. The first impact will be felt in those industries which rely upon regulatory alignment in order to function. For the car industry, and large manufacturers like Airbus, European supply chains will be very negatively affected by regulatory divergence.  That is why it is not surprising to hear that the car companies are going to put their production on hold if there is a prospect of a hard Brexit. They have said that they will pause their production lines for a while to see how their new supply chain arrangements can work. That will have a very serious impact on jobs.”

The EU will be unwilling to sign a “deep and enduring” free trade deal with the UK: “We will get a minimal free trade deal with the EU if we say we are aiming for regulatory autonomy.  Although the government has said it is going to maintain labour and environmental laws post Brexit, these are political declarations not binding legal rules. At the moment we can’t undercut single market standards but the whole point of Brexit is to change this. Political words in this context matter less than hard legal reality.”

Deakin says during the transition the UK can begin negotiations with third countries but these potential deals will be clouded by continuing uncertainty over the UK’s relationship with the EU trading bloc and so are unlikely to make much progress.  Because the effect of leaving the EU will be to terminate trade deals which the UK currently has with over 50 third countries, Brexit will disrupt the UK’s trading relationships well beyond Europe.

No jobs bonanza

He predicts that restrictions on migration from the EU after the transition period ends will not result in more jobs for British workers. The British government is likely to extend bespoke arrangements to allow firms in sectors such as agriculture, hospitality and construction to employ foreign workers outside the scope of British labour laws.  In some sectors, employers faced with rising wage costs are likely to respond by investing in labour-saving technologies, but that while this will improve productivity, it will not lead to net job creation.

“The idea that after Brexit jobs that would previously have been taken by mainland European citizens will suddenly become available to British workers doesn’t follow as they will probably be lost to labour-saving technology and bespoke migrant labour arrangements.”

Deakin also argues that if the UK decides to become a low regulation, low tax regime, undercutting the EU after Brexit, the chance to realign its economic model will be lost.

He says: “This is the debate that needs to come out into the open because it is the issue that is really driving Brexit. The Brexiters argue from a libertarian, deregulatory position.  They want a small state and the removal of social protections. We need to think about what are the pros and cons of shifting our regulatory model away from the mainland European model to something that would be very, very, different; a world in which our current food standards, our health and safety standards and our standards on workers’ rights simply do not apply anymore and we are constantly using our new found so-called freedom to undercut our European neighbours.”

He adds: “I do not see a future for this country which is a good future in undercutting social and environmental standards. We can more productively use our natural and human resources through better, not less, regulation. High environmental and social standards are conducive to efficient use of capital and labour and are needed for innovation.”

Deakin says that the deregulation that Brexit would bring about would leave the country “poorer and more exposed to risk”.

Project Fear no more

He also explains why economic forecasts of the negative effects of Brexit, far from being part of ‘Project Fear’, have underestimated the full shock it will inflict.

“There are so many things in an economy that critically matter but which can’t be easily measured and regulation is one of them. There are so many moving parts, labour, capital and product markets interact, it is very difficult to model these convincingly.  Models tell us something, but their predictive value is limited.  It may be more meaningful to look to history to understand the impact of Brexit in terms of the disorganisation of the economy which it will bring about.  We need to think about historical precedents for a complete dis-embedding of a country’s institutional framework.  A hard Brexit could be something like shock therapy in the former socialist countries; hopefully not as bad as that but dis-embedding our trading relationships with the EU and third countries at the same time as removing many of the rules governing the economy would still be catastrophic. This would be the effect of a hard Brexit.”

The right response to the Brexit debate, he suggests, is to use the opportunity it presents not just to reset British economic policy but to take the argument for a fairer and more sustainable economy to European and global levels.

He argues: “We need to make the case for a different EU. If we think that the EU has become too neo-liberal and too deregulatory, that is correct: this is the irony of the Brexit debate. If we think that the economy needs to change, we should be making the case for this in Brussels and not just in Westminster. Whatever we decide over Brexit will inevitably be affected by the European and global context.  We need to make the case for change not just in Britain and the EU but in the WTO”.

“I would turn the argument of the Brexiters on its head. Brexit is the goal of those who support further deregulation. They are losing the argument on its merits so for them, Brexit is the last chance. If we want a new model, we should reject Brexit, but that will not be enough.  We need to make the case for a new regulatory settlement which will address the true causes of the malaise affecting Britain: inequality and the erosion of our productive economy.  And at a global level we need to make the argument for policies aimed at achieving social and environmental sustainability.’

On 16 November 2018 the SRI and the CBR, the Centre for Business Research, University of Cambridge, are holding a conference in Cambridge on Brexit with the aim of encouraging interdisciplinary discussion amongst academics and further research on the implications of the UK leaving the EU for public policy.

This is the third of a series of podcasts which the Public Policy SRI has commissioned with key speakers involved in the Cambridge event. Professor Simon Deakin was in discussion with CBR Policy Associate Boni Sones OBE.