OMFIF: Brexit: a dreadful experiment

14 June 2017

Perhaps the UK’s main error in its plans for leaving the European Union is the belief that the EU has to grant it a ‘fair deal’ which satisfies at least half of British demands.

Foreign investors are losing patience with a weak and wobbly government that has no clear line on Brexit. Foreign direct investment is soon likely to take an even bigger hit than consumption. FDI matters more to the UK than to almost any other developed country.

UK tax revenues will be lower than foreseen in the spring Budget. The deficit, already one of the highest in the EU, will grow again. If the prime minister attempts to trim it with austerity, she will drive more voters into the arms of Jeremy Corbyn, leader of the opposition Labour party. If she opts for benign neglect, the pound will be hammered.

Yesterday the European Commission adopted a draft regulation that is likely to lead to the repatriation of euro clearing from the City to the continent. The British right-wing press may call this a declaration of war, but the move has long been a risk. LCH, the clearing house controlled by the London Stock Exchange Group, already offers to clear euro futures in Paris and will be ready to do the same for swaps shortly. So much for the new opportunities for a City finally freed from EU shackles.

Worse, thousands of consultants are busy advising large industrial clients on the reorganisation of their supply chains on one side of the Channel. No prizes for guessing which side most are opting for.

Brexit is becoming what it was always going to be: a dreadful experiment for Britain and a useful lesson for others.

The most interesting news of the weekend was not the landslide of President Emmanuel Macron in the French National Assembly elections. It was that in Italy the Five Star Movement suffered an unexpected setback in local elections. The average Italian voter appears no longer to believe the Five Star fairy tales that leaving the EU and the euro are the magic recipe for fixing the country’s woes. [...]

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