For most people Brexit is the least of their worries this week. As the death toll associated with the virus escalates rapidly and the counter-measures assume a severity not seen since WW2, most are struggling to come to terms with a world that has changed at astonishing speed. The impact on Brexit has understandably been submerged beneath a torrent of virus-related news but there are important considerations.
The difficulty in carrying on with face to face trade negotiations is not the main issue. Teleconferencing is an adequate even if not completely satisfactory substitute. Much more important is the possibility that the transition period may be extended beyond the end of this year. The argument (not surprisingly encouraged by Remainers) is that the battle against the Covid-19 virus will occupy all of our administrative resources leaving no scope in government for implementing complex new trade and customs arrangements.
This is particularly relevant to the additional complexities of a ‘no deal’ (WTO or Australian scenario) option. If the preparations for no deal look impossible to achieve this year, then the threat of ‘no trade deal’ loses credibility and helps the EU to stall the negotiations. Ending the Transition period within a year is enshrined in UK law. A Johnson Government would be most reluctant to repeal the legislation and extend the Transition but could do so if the public felt that tackling the virus was the overwhelmingly more important issue.
However, the virus has already been beaten, at least for now, in China where no new domestic cases have been reported in recent days. If the same happened in the UK by June the normal life could be resumed including on negotiations over Brexit. The important questions for the UK are firstly whether the virus outbreak can be controlled in the ways that several far-eastern countries have demonstrated. Secondly, will the counter-measures adopted in the UK cause so much economic damage that dealing with the economy leads to delaying the preparations for leaving the transition?
Although it has been distressingly slow, the Government has at last moved to guarantee the wages of employees in affected sectors who might otherwise be laid off. In addition to existing measures to defer VAT and council tax and compensate firms paying sickness benefits, the Government has plugged several of the potentially largest holes in the economic dam. Unemployment may still rise but not now by catastrophic amounts.
Nor will the consequences for public finances be a huge problem and certainly not of the scale to present a danger to Brexit. The large cost of all of the direct remedial measures (perhaps £50 billion not counting the larger loan guarantees) is likely to at least double public borrowing this year, but the cost to the Government in interest payments will be small. This is due to Bank of England actions. Despite denials from the new Governor of the Bank of England, arrangements have been made to indirectly fund the measures through printing money rather than via interest-bearing debt. This repeats what was done in the wake of the 2008 banking crisis.
After several weeks of damaging hesitancy, No. 10, the Treasury and the Bank of England have now probably done enough to get the virus under control and to limit the economic damage. We can have some hope that the second half of 2020 will see something like a resumption of normality. In these circumstances the end of the Transition period might proceed on course.
On the website this week
Will the Virus Blow Brexit Off Course? By Graham Gudgin
Rumours that the Brexit trade negotiations will stall and ending the Transition may be delayed have accompanied escalation in the virus crisis. This article reviews the evidence on the progression of the virus and its economic consequences and concludes with hope that a return to normality in the second half of the year will allow Brexit negotiations to proceed on-course.
“It is difficult to assess the future path of the virus because the UK data on the epidemic is so unreliable.”
To help lighten the gloom, Rob Lee offers a few humorous investment anecdotes from a collection started after the 1987 stock market ‘crash’, which occurred three weeks after he became a fund manager. The overall lesson is that the current crisis, as serious as it is, is a major long-term stock market buying opportunity.
“My experience of 1987 and subsequent crises tells me that the wise investor should now be a buyer and not a seller. These exceptionally low prices and high yields will not last.”
How to deal with the North-South Divide, by John Mills
Leading Brexit campaigner John Mills argues that the best way of rebalancing the regions across the UK in a post-Brexit world would be to engineer a more competitive value of the pound sterling. Since he wrote this article the pound has fallen against the dollar and is nearer to the competitive level he advocates.
“Keeping the pound at about $1.30 may suit service-dependent London and the City which generally operate in relatively non-price sensitive markets where we also have major advantages we lack in industry, but it is lethal for manufacturing which needs a parity of about £1.00 = $1.00.”
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How you can help
There is much about Brexit still to be decided. Our MPs listen to their constituents. Do continue to send them links to our articles, especially on matters relevant to your constituency – for example, in rural areas, articles on the threat to British agriculture. Alternatively, make an appointment to see them at their next surgery. Let them know what you want post-Brexit Britain to look like.
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An Oxbridge PhD Student
Dr Graham Gudgin
Economist, Centre for Business Research, Judge Business School University of Cambridge
Professor Robert Tombs
Emeritus Professor of French History, University of Cambridge