Brexit means Brexit, probably – but what does Brexit mean?

Will Britain actually leave the EU? And will that be a great disaster for the country – or a great opportunity? Will the economy hold up? John Stepek chairs our Roundtable discussion.


Will Britain actually leave the EU? And will that be a great disaster for the country or a great opportunity? Will the economy hold up? John Stepek chairs our Roundtable discussion.

John Stepek: The pound has been the most obvious casualty of Brexit so far. Is this a bad thing, and is sterling likely to fall much further?

Roger Bootle: I don't think it's a bad thing at all. I just published a pamphlet with John Mills called The Real Sterling Crisis, arguing that a major problem of British economic policy over the last 25 years has been ignoring the exchange rate the most important price in the economy. This has severely unbalanced our economy. So Brexit marking it down is a heaven-sent opportunity. My big worry is that it will go up again. I'd like to see the government and the Bank of England take steps to prevent that.

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Peter Warburton: The foreign-exchange market is a bird with a small brain it thinks about only one thing at a time. As long as it's obsessed with sterling, it could weaken further. But that sterling obsession will be overtaken pretty soon perhaps by the US election. So the slide is unlikely to last, particularly if the Conservative Party conference marked peak "hard" Brexit, and we progressively give up ground from that position.

Andrew Lilico: And UK assets are probably cheap here, even in the more pessimistic Brexit scenarios. Once people stop worrying about the pound falling further, you'll get an inflow of money.

John: But if a weak pound is key to rebalancing, might the government try to keep it down?

Roger: It would take a revolution in thinking in the Treasury and the Bank of England. But I'd like to see Chancellor Philip Hammond at least give some prominence in the Autumn Statement to reducing the current-account deficit. Ultimately, I'd like to see the exchange rate mentioned as an objective by the authorities: "We want the economyto get back to balance; we think having the pound in the range of X to Y would achieve that". That would at least make international capital holders wary of a response when the pound was on the edge of that range.

Danae Kyriakopoulou: I'm interested in this idea of there being no hard or "soft" Brexit just Brexit. We've talked about weaker sterling and a potential export renaissance without mentioning membership of the single market. Tariffs on exports would affect prices much more than changes in the exchange rate.

Our Roundtable panel

Roger BootleChairman, Capital Economics

Danae KyriakopoulouHead of research, OMFIF

Andrew LilicoChairman, Europe Economics

Gerard LyonsChief economic strategist, Netwealth Investments

Charlie MorrisFund manager, Newscape; editor, The Fleet Street Letter

Peter WarburtonDirector, Economic Perspectives

Andrew: But the EU's average external tariff is very low. Sterling's recent moves more than offset that. Maybe you're saying that we'd see big non-tariff barriers, but as things stand those barriers can't be like the ones other countries face. If I'm an American and I export a car to Europe, I face 10% tariffs and 25% in non-tariff barriers. But that extra tariff must be because I've capitalised the value of setting up a separate system to be compliant with EU regulations, rather than US ones. Whereas if I'm in the UK, my EU system will be the same as my UK system, at least to begin with.

Danae: With eurosceptic movements on the rise, Europe doesn't want Brexit to be a success, so measures could be put in place to make exporting more difficult.

Roger: "Europe thinks this", "Europe thinks that" what is this "Europe" that thinks? I don't see much sign of it. You've got the European Commission, and European heads of government. You've got European firms and voters. All of them may think different things from one another. Sweden apparently wants to go easy on Britain, as do parts of the German establishment, and continental industrial groups and consumers have an economic self-interest in being easy on us. So I don't buy this idea that they're bound to be hard on us because Britain is supposedly a danger to the EU.

Certainly, that will be the negotiating stance, and we're not going to be done any favours. But to return to Peter's point on foreign-exchange markets flitting from one thing to another one of those things could quite easily come out of the continent.

On 4 December there's an Italian referendum, which could unleash political chaos. You've got the French and German general elections next year. And the Italian banking crisis is morphing into a Europe-wide banking crisis. So this notion that lots of capital and many people will leave the City for Frankfurt is the biggest load of nonsense I've heard since the last time it was mooted, which was when Britain didn't join the euro.

Yes, some people and activities will leave, and perhaps some banks (although I doubt that, given the risks of depending on operations on the continent). But they'll just do the bare minimum to comply with the regulations.

Andrew: I think the EU is too fragile to make an example of the UK. The OECD think tank expects the UK to lose 3% of GDP growth by 2020, assuming no deal with Europe. Less widely noted is that it also expects a 1% loss for the EU. And I think the EU is less able to tolerate that 1% loss than the UK can tolerate 3%, because the EU's populist movements are largely a reflection of economic failure.

If I'm a Spanish car worker and someone says: "You could've kept your job, but we decided you had to lose it because we wanted to punish the UK", I'm not going to think: "I'd better not vote for Podemos because they'd be nasty to Spain". I'm going to think: "These characters don't care about me I'll vote populist". If Europe's leaders don't understand that delivering for their populations economically is more important than punishing the UK, they run the risk of it all collapsing.

Charlie Morris: But there's a difference between what the corporations or the people think and what politicians think. Politicians are worried about losing the UK's contribution to their budget. There are 10,000 people in the EU who earn more than the British prime minister that's a lot of mouths to feed. They need the money. Firms will act in their own self-interest. Free trade is mutually beneficial, so they'll vote for that. But politicians ultimately will make other decisions.

Danae: And as we saw in Greece, politics always comes first in Europe.

John: Does anyone think Brexit might not happen? Could the article 50 court case disrupt it or result in a second vote?

Charlie: I think if you had the referendum again tomorrow, the mandate would be even more overwhelming. A lot of people thought: "I like the idea of leaving the EU, but I can't be bothered to have a recession, so I'll stick with Remain'". Now that the worst hasn't happened, I think most people would just vote out'.

Peter: I'm more cynical. My fear is that having delayed the decision to invoke article 50, we end up with a fudge or a partial reversal. Allowing time for more legal challenges to appear was a mistake.

Roger: I think May's got it about right, I have to say. The government and the civil service had done no preparation whatsoever they were forbidden from doing any. Meanwhile, you've got appeals for the Norway option, the Swiss option; people banging on about rules of origin, about reciprocity; you can't bake a cake from these ingredients the day after the vote, you really can't. So I don't think it's daft to have a period of debate. And she's said this phase has to end by March I think that's about right.

Andrew: Except the period has been squandered, partly due to the Remain side's attitude. With opposition parties calling for a second referendum, May felt she had to reassure the public that she really did plan to leave. That's how we've ended up with some very counterproductive policies such as not guaranteeing EU citizens the right to remain and that nonsense about naming and shaming workers. We need to get EU firms and voters on our side.

I understand that May, as a Remain voter, felt she had to signal her intent to the British people. But the attitude that went with it at a time when we should have been love-bombing European citizens was incredibly insulting.

John: On immigration, how open should our borders be?

Roger: I've already said that the government should have a policy for the pound. Well, I think it should also have a policy for the population, which needs to be integrated with policies on housing and transport. We've had the very opposite of joined-up government totally open borders, a messed-up policy on residential housing, and a rubbish transport policy. Disaster. We need to think about what sort of numbers we think are reasonable for Britain to accommodate.

We shouldn't stop immigration altogether, but equally the idea that there's no divergence between the private self-interest of an immigrant coming here and the social interest of the British people in admitting that immigrant is just ridiculous. So a population policy comes first, which then feeds into a policy on overall numbers. Then you have to work out how to administer that.

Charlie: It's normal for a large sovereign nation to control its borders. It's abnormal not to. But I don't think many people would want to see a city like London become less cosmopolitan or less diverse. As Roger says, it's a numbers game. And there were two sides to the Brexit vote. One was the sort of right-wing intellectual around this table, and the other was a worker in the north who saw his pay falling because the Polish plumber is better and cheaper.

Gerard Lyons: Yes, there's a domestic agenda and an international agenda, and both have different needs in terms of migration. For the domestic agenda, government policy has to be about limiting unskilled migration. That should push up unskilled pay and, in theory, firms should spend more on training staff. But there's also the international agenda, and the areas where you want to encourage skilled migration. One in eight City workers are EU staff from outside the UK, as well as a smaller proportion from the rest of the world. For that, you have to have a migration policy.

Andrew: I don't think it's that straightforward to draw a line between skilled and unskilled workers. In agriculture and construction, for example, access to high numbers of unskilled labourers has been very important.

Gerard: This was always addressed in the past by having seasonal permits.

Andrew: That may well be. But we've had pretty much free movement with Italy, Germany and France for 3,000 years or so. The British appetite for curtailing free movement with those countries must be very low indeed. Part of what's really behind immigration concerns is that when the eastern European countries joined the EU we had a huge spike in immigration because we let people from those nations in right away, rather than having the transitional arrangements adopted in other parts of Europe. Then there was the eurozone crisis. The eurozone is meant to offset economic shocks by allowing people to move from high unemployment areas to low unemployment areas but instead they left the eurozone entirely and headed for the UK.

Charlie: Well, if every country was rich, we could all have open borders. But of course it's not like that.

Andrew: My point isn't that we should have open borders. I just think there's scope for a form of control that says something like: "Skilled or unskilled, as long as they have a job, the first X' thousand citizens from the EU can get into the UK". Above that, you have to fill in a form. You do that for long enough to assert control, and thereafter maybe you make it non-binding. After all, right now, we don't really know what we mean by "control". Is it reducing the absolute numbers, or just having the ability to constrain spikes?

John: So assume we get Brexit. What do you hope to see ten or twenty years down the line?

Roger: There's a rational, narrow, mechanistic calculation of economic gains and losses, but that stuff is the small change. What really matters are questions of emotion, motivation, identity and institutions. Mancur Olson wrote that the secret to a successful country is having the elites and their presumptions and institutions turned over every so often, which we never have Britain coasted through much of the post-war period because, as it were, we'd "won".

Look at Singapore. When it came out of the Malaysia Federation, it was up against it. So it made some tough decisions, which were extremely well followed through by Lee Kuan Yew. So I almost welcome complaints that we're in a really difficult position it might force us to do things we should have done anyway about corporate tax, infrastructure, etc. Similarly politically our institutions have been fraying, and parliament's been losing respect, justifiably.

We haven't had a real national debate about things like immigration or sovereignty. Underlying all that is the concept of citizenship. What does that actually mean? What are the obligations of every individual in the state? I think we're going to have that conversation now.

Gerard: We could learn a lot from Singapore. I remember Standard Chartered had an office in Battery Park and it wanted to build something, and the Singaporeans said: "No. There's going to be a railway line there in nine years' time". Nine years later, the line had been built. That level of longer-term thinking is amazing.

Charlie: Someone once said to me: "Does Britain have a plan?" I said: "Of course it doesn't. It's a democracy". Singapore has a plan because it's not a democracy.

John: We've just approved the Heathrow runway.

Roger: Heathrow is a prime example of how difficult it is to get things done in a democracy. It isn't over yet. It'll drag on through the courts.

Charlie: But monetary policy has come to the end of the road. So it's fiscal policy time. All these projects have been talked about for ten years, so all we've got to do now is sign on the dotted line and build them.

Danae: It's hard to see how fiscal expansion will be financed, given the UK's deficit and rising gilt yields.

Gerard: We do need to be more creative in terms of long-term savings and how we mobilise the City to start financing these things. Fiscal devolution has to be part of this, which goes hand in hand with shovel-ready projects.

John: Do you think this is our best chance of the "Northern Powerhouse" pulling ahead?

Gerard: Yes. In his Tory Party conference speech, Philip Hammond acknowledged regional imbalances he said that Britain had the biggest gap between its capital city and second, third and fourth cities in terms of productivity. Capitals are usually very productive Paris is far more productive than the rest of France, for example so we don't want to impede London. But in terms of income per head, London gets far more infrastructure investment. Now, I hope that doesn't mean Crossrail 2 is stopped. But while we need to meet London's needs, we need to be doing other stuff too.

Charlie: On rebalancing, we've got the Northern Irish, Welsh and Scottish assemblies. An English one would be nice too. Then we need a UK parliament. The House of Commons will cost a fortune to fix it should become a museum. The obvious place for the replacement is Liverpool. The centre of gravity of the population is near there, and it would revive the place. Land's very valuable in London why not move the government elsewhere? And from a military point of view, you don't want to have all your departments next door to each other anyway.

Gerard: It's a good idea. After all, it's not just about creating jobs you need to make other cities as attractive as London, which has a magnetic pull for young people. And it's not just London versus other cities, it's cities versus rural areas too. But sometimes it's just about creating the enabling environment. The idea that government should pull all the levers isn't necessarily the right one.

Andrew: Exactly. These big infrastructure deals are government vanity projects. Take High Speed 2 (HS2) if, in five or ten years, we're all driving around in driverless cars at 200 miles an hour, who'll want to go on HS2?

Charlie: I disagree that driverless cars will be that quick to materialise or to drive, but transport should be both frequent and cheap. HS2 will be neither.

Peter: I'd like to pick up a point about Ireland. Basically there was a European protocol a while back that sought to standardise corporate tax. It was vetoed because the UK and Ireland both opposed it. It's come back. But now it's only Ireland that's against it, and Ireland has just seen a crazy GDP figure of 28% growth year-on-year, having imported aircraft-leasing companies that employ about 1,000 staff, but have assets worth half of Irish GDP. So I think Ireland's business model is under severe threat. That's an opportunity for the UK. I think we can be the offshore tax haven of Europe.

Gerard: So if we can demonstrate in the near term that there's not been an economic meltdown, it would be helpful. But people haven't yet moved on from the Remainers versus Brexiteers debate.

Andrew: Voters reportedly feel more attached to those labels than they do to any political party.

Gerard: Like Roundheads and Cavaliers. This is going to be with us forever.

John: One last question: we've been broadly optimistic about Brexit. What is the one thing you are most worried about right now?

Peter: Complacency about inflation. The capacity to reprice financial assets is quite great.

Gerard: Yes, both markets and economies are vulnerable if interest rates start to rise, and the eurozone is still the big problem area for the global economy. The risk in the UK is that we underestimate how big a challenge and how huge an opportunity Brexit is. Instead of having three ministers assigned to Brexit, we should be on an almost war-like footing. I can understand why the government doesn't want to be seen as just a Brexit government, but that's what it'll be judged on.

Andrew: The big risk for me is the possibility that the EU might overplay its hand in the Brexit negotiations, leading to the collapse of the EU.

Roger: That's my main hope!

Andrew: I know, but I think the collapse of the EU won't be like the collapse of the ERM I think it will be more like the collapse of the Roman Empire.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.