With 2022 almost in the rear-view mirror, it is time for 2023 predictions. One thing is becoming clear: Brexit does not work. Therefore, this could be the year of a thawing of the UK-EU relations.
So many voices are saying that Brexit was a mistake that now, two years after Britain actually left the European Union, support for the move is at a record low: 56% of people in a YouGov poll carried out in November said it was wrong to leave, versus just 32% saying it was the right decision.
Moreover, almost 60% of more than 6000 people surveyed at the end of November said Brexit had gone “fairly badly” or “very badly” since the UK left the EU on 31 December 2020.
They have a point. The UK economy has taken a serious blow since the country left the EU. “The latest evidence suggests that Brexit has had a significant adverse impact on UK trade, via reducing both overall trade volumes and the number of trading relationships between UK and EU firms,” the independent Office for Budget Responsibility (OBR) said in its Economic and Fiscal Outlook, released in November.
The OBR’s assumption is that the UK’s trade intensity – the degree of integration with the world economy – will be 15% lower in the long run than if the UK had stayed in the EU. This can be a good thing when the world is in crisis, but a bad thing when economic recoveries take place.
Market pressure
Still, none of this would matter to the radical Brexiteers that are still calling the shots in the Conservative Party. They would not even look at the option of a rapprochement to the EU – as proven by the howls of indignation when the media mentioned the possibility of a Swiss-like agreement.
The only force that can – and probably will – make them change their mind and be more sensible about the type of Brexit they are prepared to support will be the market. The market has already shown that it can make a prime minister go when it forced Liz Truss’s government out.
It could easily do the same with Brexit: The Bank of England, which already owns more than £800 billion in UK government bonds (this is 40% of the total £2.0 trillion gilt market) has started to try to sell some of it in order to unwind the extraordinary support it has given to the government during the Covid crisis, and to try to fight inflation.
But the government is set for a rapid increase in its debt, as can be seen in the chart below, courtesy of the Debt Management Office:
With debt increasing both in absolute terms and as a percentage of gross domestic product, the last thing the UK needs is a smaller economy. But this seems to be exactly the effect that Brexit has had.
The Centre for European Reform, a think-tank with offices in London, Brussels and Berlin, estimates that the UK economy is 5.5% smaller than it would have been had the country stayed in the EU. And while this can be dismissed by Brexit fans as biased – since the CER is pro-EU – it is becoming obvious to ordinary people living in the UK that the choice and quality of products available in shops has reduced, while prices have increased more than in the EU.
Investors in the markets will look at these reports with increasing unease. The UK will be competing for their attention with other big issuers of sovereign debt, such as Germany and France. Any sign that political stubbornness is hurting the economy will drive the investors away from buying British debt.
It is likely that Prime Minister Rishi Sunak will have to fight against the hard-line Brexiteers in his party and warm up towards the EU, if he wants to sell UK debt to pay for the various investments the country needs. For the first time since the 2016 Brexit referendum, pragmatism could return to British politics.