Chris Johns: Brexit deal is a choice between a rock and a hard place

Thatcherite market reforms in 1986 resulted in an explosion in finance activity and jobs. Is that revolution about to go into reverse?

EU chief negotiator Michel Barnier arriving at Brussels Midi station on December 5th,  after the last round of Brexit talks in London

EU chief negotiator Michel Barnier arriving at Brussels Midi station on December 5th, after the last round of Brexit talks in London

 

Deal or no-deal, Brexit isn’t going away any time soon. The only thing to be decided in the coming days is the difference between a very hard or hard Brexit.

For the UK that means trade disruption, higher costs and more bureaucracy for exporters and importers, less jobs, less taxes for the chancellor of the exchequer and much else besides. Not much use to Ireland, although a deal would be welcome.

All that, of course, is familiar stuff, along with the notion that the economics of Brexit didn’t matter much during the referendum and don’t matter at all today.

Like an incurable tumour, Brexit has grown and metastasised. The ruling Conservative party is but one casualty: it’s transformation into a fundamentalist version of the Brexit Party is almost complete. All that is missing is Nigel Farage as PM.

The political pundit Robert Peston this week posted a chart showing Covid-19 incidence during lockdown correlating with UKIP votes in the 2015 general election.

I think it was a joke about correlation versus causation. If you are an anti-vaxxer we can probably predict which side of the Brexit divide you lie. Brexit defines almost everything.

To repeat: this has got nothing to do with the economy. There are economic consequences of Brexit but these are not relevant to the debate; their impact on people’s lives are another matter.

The row about fishing and the mysterious absence of financial services are the best examples of this.

There are roughly 12,000 people directly employed in the business of catching fish, around 20 per cent of whom are part-time. A further 20,000 are employed in fish processing, a business with a turnover of £3.1 billion (€3.4bn). Over 60 per cent of the employees in processing are immigrants.

Fishing (and aquaculture) accounts for around 0.02 per cent of the UK economy, as measured by gross value added, or £466 million. (Almost every media report on the the Brexit negotiations says the number is 0.1 per cent. I’ve no idea why. Either way, we are not talking about a large sector of the UK economy).

Most of the fish caught by UK boats is exported – the wrong kind of fish for British tastes apparently. Most of the fish eaten in the UK is imported.

Trade tariffs, particularly of the no-deal kind, would devastate those exports and imports. There are not enough boats or processing facilities in the UK to deal with all the fish caught in British waters.

Indifference

Britain wants to keep more of the fish caught around its coastline. Hence the prominence of fish during Brexit negotiations. The total absence of financial services from the talks reveals, one presumes, British indifference to the implications for banking and insurance.

Financial services employ around 1.1 million people. That’s about 34 times those employed in fishing, broadly defined. Finance amounts to 7 per cent of the economy, approaching a contribution of £140 billion.

On this measure finance is 300 times bigger than fishing. The massively bigger economic value multiple – compared to the employment multiple – is evidence of the relative productivity of financial services.

Value added per person in finance is orders of magnitude greater than in fishing. It’s not much in these days of Covid-19 budget deficits but financial services also contributes around £30 billion annually in taxes.

Estimates vary, but Brexit is reckoned to have already shifted 7,500 jobs out of the UK banking sector to the EU. There will be more. We won’t know for a long time ,but we could well end up with more finance jobs being lost than currently exist in the fishing industry.

Accompanying those jobs is an exodus of real business. A lot of activities that rarely make the headlines are shifting, in no small part due to the hardline stance of the EU towards business in London.

We may not know much about swaps and OTC derivatives clearing but lot of money is moving, as well those jobs.

Not for nothing are some people wondering whether the start of next month will witness a sort of anti-big bang for the City of London.

The original big bang was inspired by Thatcherite market reforms in 1986 that resulted in an explosion in finance activity and jobs. Is that revolution now about to go into reverse?

It’s weird that the great Thatcher-inspired innovations – like the single market – are being buried by her Tory descendants.

Negotiations

Anyone who thinks that economics should matter for the Brexit negotiations will wonder how all of this came to pass. Anyone who realises the unimportance of economics will understand.

It’s possible to be emotional about fishing. It’s hard to get a warm fuzzy feeling about bankers.

Maybe this, finally, is punishment for the sins of the financial crisis. It doesn’t help that the bulk of financial services firms are in Remain-voting London, a place the Tory government seems to despise.

Official estimates of the cost of no-deal run at 2 per cent of GDP next year and 1.75 per cent in 2025. That’s a £40 billion hit in 2021.

Whether they do a deal or not, the fact that they were willing to run these risks for fishing speaks volumes about today’s politics.

Economics matters, but only in terms of the politics. Will the consequences ever feed back into the politics? Only when the cancer can be cured. No vaccine for that one.

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