Opinion - Europe Politics

The UK and the EU now need to move promptly on their separate agendas

Key Points
  • London needs a quick deal with the EU to lift trade uncertainties, strengthen business confidence and improve investment outlook.
  • Investments are key to expanding and upgrading the stock of human and physical capital that will drive Britain’s balanced and sustainable economic growth.
  • The EU is in a political disarray, but it is likely to cooperate because it wants to keep the U.K. as a strategic partner.
Pro-Brexit and pro-Remain protests have dominated Westminster since 2016.
Mike Kemp

By leaving the EU, the British have the possibility to establish a relationship they apparently always wanted with continental Europe in some kind of a free trading area.

With a strong mandate to negotiate such an arrangement by the end of this year, Britain's governing Conservative Party can proceed with dispatch to stop the economic slowdown and lift the country's weak growth rate closer to the potential trend line.

Moving with dispatch means a swift breakout from a vicious cycle of political turmoil, trade uncertainties depressing business investments and economic growth, while an aggressive import penetration keeps edging out domestic product supplies in a highly open economy.

Nearly four years of Brexit negotiations have largely cleared up the scope for a trade deal with the EU Commission. London has everything to gain by working around the EU's red lines to get an early agreement. The EU, for its part, will probably have a political mandate to keep things on reasonably amicable terms because Britain will remain an important strategic partner.

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Such a constructive negotiating environment would help London to improve business confidence and the investment climate. That would also strengthen the financial market support for tax cuts and the public spending Britain will need to step up economic growth and get moving toward the promised post-Brexit "golden age."

All that, however, would be the easy part.

It will be much more difficult to solve structural problems that are currently reflected in Britain's high external deficits. Those trade losses have reduced the U.K.'s economic growth over the last two years by a total of 1.4 percentage points.

A sustained investment revival is key to Britain's future growth strategy. And that's why clearing up trade uncertainties to spur business capital outlays is of paramount importance.

Brexit disputes with the EU have taken a heavy toll. Britain's private sector investments collapsed during the last two years, taking down the country's productive capital stock and the ability to supply products and services from domestic sources.

That means that a large part of any growth stimulus would quickly leak out to the rest of the world. A calculation based on the most recent data shows, for example, that a 1% increase in Britain's GDP growth triggers a whopping 2.7% increase in import demand.

Investments are, therefore, needed to expand and modernize Britain's (physical) capital stock, and to increase the stock and quality of human capital. That would raise productivity growth, lower unit labor costs, increase the competitive standing and cut down excessive trade deficits culminating last year at nearly 6% of an essentially stagnating GDP growth.

There are no quick fixes and shortcuts in such long-overdue structural adjustments. It will all be hard work requiring focus, patience and constructive trade arrangements with the EU.

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But here is a possible silver lining: London can count on a strong support from Germany. In the course of 2018, German firms took a 45 billion euro surplus on their U.K. goods trade, only a shade below their net export income from the U.S.

Germany will fight to salvage its lucrative U.K. trade that accounts for nearly one-third of its EU trade surpluses. That will be part of a perfectly coherent economic policy, as Berlin continues to live off its trade partners while refusing to use its overflowing government coffers to support its stagnating economy and help growth and employment in the rest of Europe.

That's the EU's fraternal solidarity the British are leaving behind.

Germany's dysfunctional coalition government is emblematic of the EU's disarray. To cover up their confusion, the EU leaders now want to run a large citizen consultation next May to find out what their voters and taxpayers want.

It's just another evasive and empty German-style talkfest about climate change and green economies, instead of providing jobs and incomes for EU's 15.5 million of unemployed, of which 3.2 million are young people in search of work and a meaningful future.

And what do those EU leaders know about the 113 million of EU people – 22.4% of the total – who are facing poverty and social exclusion?

The U.K. should forge ahead on its own agenda, instead of wasting time with people who have yet to find an agenda, because they have completely lost direction on the way to the epochal project of the European economic and political union.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.