LONDON — Olivia Galliano is a 23-year-old recent college graduate who’s working toward a law career. That should guarantee her a bright future. Nevertheless, she admits, she’s “terrified” that Britain’s looming exit from the European Union, or Brexit, will plunge the United Kingdom’s economy into a deep downturn around the same time she’ll be job-hunting, darkening her prospects.
It’s not an unrealistic fear, and it’s one that will likely haunt many others in Galliano’s age group, more than 70 percent of whom voted against Brexit last June.
Galliano, who graduated last year from the University of Nottingham and is studying to qualify as a solicitor, was among the nearly half of the electorate who voted to stay in the EU. A slim majority of 52 percent voted for a Brexit — a British exit — despite warnings that the economic consequences could be dire.
“I think it is a very dangerous route we are going down,” Galliano says.
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Over the summer, those warnings seemed overdone and there’s been a pervading sense — promoted by the Euro-skeptical press here — that Brexit wasn’t a calamity. Yes, the pound dropped in value — against the dollar it plunged about 13 percent to $1.30, but then stabilized around that level. Claims from some economists that the U.K. would suffer a short, sharp recession came to nothing. And, it was argued, the weaker pound helped British exports by making them cheaper.
The illusion of a soft landing fractured earlier this month, however, when Conservative Prime Minister Theresa May signaled that in coming negotiations with the EU, Britain would seek a so-called “hard Brexit” by prioritizing limiting immigration from Europe over maintaining full, tariff-free access to the EU’s $19 trillion, 500-million-person single market. Her rationale is that voters mainly opted for Brexit so Britain could gain more control over its borders by jettisoning one of the EU’s fundamental principles, the free movement of people.
Since May’s comments, the pound has dropped to less than $1.22 — its lowest level in more than 30 years — and the Bank of England is warning that a big jump in inflation will be the inevitable result. That will usher in a prolonged period of weak consumer spending and anemic growth, the international services firm said on Monday. Meanwhile, a leaked Treasury report claims that a hard Brexit could eventually cut economic growth and cost the county between $46 billion to $80 billion a year.
Chris Curtis, a research executive at pollster YouGov, says that whatever equanimity voters may have felt over Brexit this summer could easily be shattered by higher prices. “It will start shifting opinion if it starts to hit people’s pockets.” That shift may have begun. A new British Election Study poll found that 6 percent of “leave” voters now regret their vote. That’s not a huge amount, but they total more than the margin of victory.
Adding to the anxiety, Ernst & Young says the U.K. has now dropped out of the top five global locations for investment for the first time in seven years, according to a Bloomberg report.
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Given the closeness of the vote, Galliano says, May shouldn’t take an economically fraught route to Brexit that “so much of the country fundamentally disagrees with. Why not take into account the views of the large percentage of voters who voted to remain?”
May, however, has bowed to her mostly pro-Brexit ministers, who argue that Britain can restrict EU immigration and come out ahead economically because European businesses won’t want to lose tariff-free access to the British market and, meanwhile, the UK can hammer out new trade deals outside of Europe. Or, as Foreign Minister Boris Johnson said: “Our policy is having our cake and eating it.”
“That’s wholly unrealistic,” says L. Alan Winters, an economics professor at the University of Sussex. The EU principle of free movement of labor is part of a rock-solid set of rules designed to protect the union and the single market. Nullifying it to give a special deal to the U.K., he says, “would just lead to the thing unravelling.” And while 44 percent of U.K. exports head to Europe, only 8 percent of EU goods and services go to Britain. The U.K. would be “desperate” for a trade deal with Europe, Winters says, while for the EU, it would merely be something “nice to have.”
Additionally, Winters says, countries like the U.S. and China will not consider wrangling new trade deals with Britain until the U.K. has first reached a new trade relationship with Europe, because they’ll want to know whether the U.K. retains at least partial access to the single market.
Meanwhile, a long period of renewed tariffs between Britain and the EU may be unavoidable. Once the U.K. triggers Article 50 of the Treaty of Lisbon and formally notifies Europe that it’s leaving — and May says that will happen at the end of next March — they’ll have two years to negotiate a divorce settlement. At the end of that period, the U.K. will be out of the EU.
However, the two sides must then work out a new trade and security framework, and those negotiations could take 10 years. During that limbo period, trade between the two entities would revert to World Trade Organization (WTO) rules, which would slap tariffs of 20 percent on food and drink items and 10 percent on automobiles. “Trading under those rules would be very, very difficult,” says Carl Emmerson, deputy director of the Institute for Fiscal Studies.
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To sidestep tariffs, the EU and Britain could agree to extend the current free-trade arrangement during those long years of negotiations, Winters says. But other countries could argue that that would violate WTO rules and seek sanctions. “It would be a huge diplomatic challenge.”
There’s near unanimity among economists, Emmerson says, that “GDP will be smaller if we leave the single market.” That pending economic black hole concerns Antony Rix. He’s CEO of 8power, a Cambridge startup that’s developed new, cost-efficient sensor technologies for monitoring infrastructure and machinery — the kind of high-tech company that creates jobs and economic growth.
Although Rix says leaving the EU is a bad idea, he nevertheless concedes that “Brexit is something we can work around,” even if it causes investment and the U .K . market to dry up. He’ll simply move the company outside the U .K ., taking jobs with it.
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The U.K. Wrestles With Hard and Soft Brexit Choices originally appeared on usnews.com
