The fall of the pound and the 50 shades of Brexit
Dr Marek Martyniszyn looks at the fall in sterling since the EU referendum and analyses the options available to the UK in terms of trade relations with the EU post-Brexit.
In the weeks following the Brexit referendum, we have experienced an unprecedented fall in the value of sterling. This fact seems to be largely underappreciated or even disregarded in the Brexit debate, although it is one of the first appreciable effects the referendum has had on the British economy.
The consequence of the fall of sterling is already visible at petrol stations. However, it seems it has not yet translated into price rises at large. In the short run, firms may be willing to absorb this extra cost. Plus, it takes some time for such an effect on prices to trickle down, but it is unavoidable.
Typhoo, the tea producer, has already announced price hikes (noting that the cost of tea importation rose by 50%) as did Microsoft (announcing a price increase of 22%). The producer of popular Toblerone chocolate adopted a different strategy. Instead of increasing prices, it decided to reduce the weight of products sold in the UK to preserve the same pricing. Given the UK is not a net exporting nation, but an importing one – such a significant fall of currency will affect most people. It is not a huge exaggeration to say it is similar to the whole nation taking a voluntary pay cut.
In the largely misinformed Brexit debate, media tend to talk about ‘soft’ and ‘hard’ Brexit. These simplifications are used to refer to the key types of relationships between non-EU states with the EU, which are being used as points of reference in the discussion of how the UK’s relationship with the EU can look like post-Brexit.
Four types of relationships are used as benchmarks (EU-Norway, EU-Switzerland, EU-Turkey, and the CETA—the brand new EU-Canada deal). These are only the key models of closer ties the EU has with other countries. In general, the EU has relationships with a great many countries – from Norway to North Korea (to use professor Weatherill’s words) and they do differ greatly. Hence, Brexit will be neither ‘soft’, nor ‘hard’. It can easily have well over 50 shades. That metaphor may better reflect the complexity of the withdrawal process and what awaits both sides of the negotiation table during the Brexit talks.
Given the wish to do away with the free movement of persons in the future relationship with the EU (which is guaranteed in the EU relationships with Norway and Switzerland) and regaining the power to shape UK’s trade relations (which is not possible in the case of the Turkish model), the CETA model seems most appropriate. However, that agreement does not provide for free movement of all services. In particular, there would be no so-called ‘passporting’ for the UK financial sector.
That is why some commentators air the idea of negotiating a ‘Canada+’ solution – a form of CETA which would accommodate these needs – and yet another possible shade of Brexit. In this context, it is worth adding that it took over eight years to negotiate the CETA deal. Will the UK be able to secure an even more advanced agreement within the period of two years? That is highly unlikely, if not practically impossible, given that all other EU member states will need to agree.
Some Leave supporters argue that it is unnecessary to worry too much about the nature of future relationships with the EU and the rest of the world, since the UK can always default to trading with other countries on the basis of the World Trade Organisation’s rules. While the UK is one of the WTO founding members, it is unclear what rules will apply after Brexit.
WTO memberships are largely individually negotiated with other WTO member states (currently 164). Decisions are made by consensus, giving all members a veto right. It is overly optimistic to hope that the concessions obtained by the EU will be retained by the UK post-Brexit. There is no such precedent. It is unclear why other WTO members should be willing to grant the UK any concession without an appropriate quid pro quo.
Moreover, trading on the default WTO terms may not be beneficial to the UK. That is why leading trading powers invest so much effort into big bilateral or regional trade deals, in which they agree on more favourable terms. It is also worth noting that the WTO membership comes with the jurisdiction of the WTO dispute settlement system with the Appellate Body at the apex. The latter is effectively the world’s supreme trade court. So far the decisions of the Appellate Body did not receive much attention in Britain, mostly because it was the European Commission who had to bring and defend cases on behalf of the whole EU. In future this will change. Hopefully the WTO will not become the next organisation which the UK decides to leave in an effort to reassert its sovereignty.
Some Leave supporters might have thought that there will be a pot of gold at the end of the Brexit rainbow. However, leaving the EU will not be easy and there will be no windfall at the end of it. The fall of sterling is only an indication of what is still to come.
This will be no stroll in a park, but a challenging process of developing a new type of relationship – one of the many shades of grey. The darker it gets (that is, the weaker the future EU-UK ties), the gloomier the economic realities for post-Brexit Britain.