Brexit: Britain may be heading for an Italy-style decline

• The Resolution Foundation said that the UK economy could be heading for an Italy-style decline
• Britain slams EU for not fulfilling post-Brexit obligations 
• UK proposes new Irish sea border checks to the EU
• Cabinet ministers engage in a “ferocious row” over Northern Ireland protocol

According to a leading British think tank, the Resolution Foundation and the London School of Economics (LSE), the UK economy is facing an Italy-style decline over the next ten years due to the challenges of Brexit and the impact of the COVID-19 pandemic.

Although the Bank of England (BoE) upgraded UK growth forecasts for 2021, predicting an expansion of 7.25% versus earlier estimates of 5%, the Resolution Foundation has warned that Brexit will have a long-lasting impact on economic growth.

Both institutions also noted that UK Prime Minister Boris Johnson’s commitment to achieving net-zero emissions by 2030 and increasing automation is likely to have economic repercussions as both require significant funding.

In a report published on Tuesday, it wrote: “The UK is facing a decisive decade, with Brexit, COVID and the net-zero transition coming together with significant shifts in technology and demography. 

“If Britain fails to overcome the challenges presented by these factors, this could leave the country diminished and divided.”

The report noted that a decade of underperformance would not only cause living standards to deteriorate but risk Britain falling behind other European economies such as Germany and France.

The Resolution Foundation warned that if “relative decline” sets into the UK, then in terms of economic performance, Britain would be closer to Italy than the bloc’s leading economy, Germany.

While the think tank did not disregard recent growth predictions for 2021, the report suggested that relative decline tends to persist for a long time and that Brexit is likely to have a “longer-lasting and more significant impact on the economy than COVID-19.“

Britain’s departure from the EU already appears to have hurt trade, with exports in Q1 2021 14% lower than in the same period the previous year. 

The report also revealed that trade with non-EU countries had not substantially increased despite efforts to strike new trade deals with other nations.

The UK government hopes that the free trade pact with Australia – which is yet to be finalised – will springboard similar deals with other countries. Still, Britain’s departure from the EU has not been plain sailing as we have seen considerable shifts in trade and investment across the economy.

A leading economist has said that ministers must take a new approach to restore UK competitiveness as trade is undermined by an undervalued euro (EUR).

Is an undervalued euro undermining UK trade?

According to Professor David Blake, the UK government needs to implement a strategy that counters the structural undervaluation of the euro (EUR), which has damaged UK trade capabilities for the last two decades.

In his report for Briefings for Britain, Prof Blake concluded that the euro (EUR) is undervalued by as much as 20% against pound Sterling (GBP) under what economists describe as a purchasing power parity (PPP) basis.

There have been arguments that Germany disproportionately benefits from broader Eurozone weakness, which economists believe has enabled the euro (EUR) to trade at a lower value than other regional currencies such as the Swiss Franc (CHF) or Norwegian krone (NOK).

Germany benefits as an undervalued currency reduces the cost of its exports in overseas markets such as China and the US.

In 2017, an advisor to former US President Donald Trump, Peter Navarro, accused the bloc’s largest economy of using the euro (EUR) to exploit its European and US neighbours, but German Chancellor Angela Merkel shut down the allegations.

Nonetheless, with Northern Ireland facing a new period of turbulence and Britain yet to finalise a trade deal with a non-EU nation, it seems that chances of the UK becoming more competitive remain difficult.

David Frost criticises EU’s approach to Northern Ireland protocol

UK Minister of State Lord David Frost told a committee of MPs that discussions with the EU on Northern Ireland protocol had not been hugely productive as Brussels remains overly concerned with “superficialities.”

Lord Frost added that the EU continues to suggest a solution to the issue for the UK is to “operate the same rules as they do”, which he said would make it harder for Britain to sign new trade agreements with other countries and goes against the UK’s post-Brexit ideals.

However, the former chief Brexit negotiator said he was concerned about the lack of time left to resolve the problem and avoid fresh trouble.

The Irish sea border has already incited anger among pro-British unionists in Northern Ireland, many of whom argue that the Brexit deal has undermined the 1998 peace treaty by separating the country from the rest of the UK.

The UK Minister of State stopped short of announcing a formal deadline for talks with the EU but stressed that a “real-life timeline” was approaching ahead of the summer.

With COVID-19 restrictions concluding and the economy reopening, David Frost said, “late spring and summer can sometimes be turbulent and taking that into account, we must progress with the EU in talks on post-Brexit Northern Ireland trade.

He said that the “degree of unsettledness” in the country had been stronger than anticipated, and based on his assessment of the situation, he suspects that “Northern Ireland firms want to see a greater degree of flexibility in the way the arrangement is implemented.”

Lord Frost also condemned the EU for failing to fulfil Brexit obligations on Northern Ireland trade despite a provision in the Withdrawal Agreement stating that both sides have a duty to minimise any possible barriers in trade between the UK and NI.

Brussels officials responded, stating that they are prepared to discuss the issue with the UK and offer some flexibility on protocol within the limits of EU law.

The European Commission went a step further, insisting that talks had been “constructive” but that the UK needs to honour the deal it signed in October 2019 to allow both sides to find a resolution. 

“If we are to achieve our goals, then we need to implement our agreement. This is a shared responsibility, and we expect the UK to uphold its political commitment,” the EU Commission added.

While talks on NI protocol appear to have hit a roadblock, government officials confirmed that the UK had submitted a roadmap for the gradual phasing of border checks on agricultural food from October 2021.

News of the proposed new Irish border food checks comes alongside reports that Britain’s cabinet ministers have come to blows over the possible terms of a new UK-Australia deal.

Ministers in “ferocious row” over UK-Australia deal

According to a Financial Times report, Brexit minister Lord David Frost and International Trade Secretary Liz Truss are involved in a “ferocious row” with Environment Secretary George Eustice and Cabinet minister Michael Gove over a GBP 20BN trade deal with Australia.

Ms Truss and Lord Frost believe to be supporting terms to offer tariff-free access to Australian farmers, whereas Mr Gove and Mr Eustice say this could cause domestic political fallout and backlash from British farmers.

At the start of 2021, ministers said that Britain and Australia had reached a “consensus on the most elements” of a free trade agreement and that they had now entered a race to finalise any outstanding issues by June.

While Liz Truss is keen to get the deal signed off, Mr Eustice has encouraged the International Secretary to reconsider the terms, arguing that a “balance needs to be struck” to ensure domestic industries are also protected.

Minette Batters, president of the National Farmers Union (NFU) president, appears to share Mr Eustice’s view and warned that “eradicating tariffs would make life extremely difficult for small farming families, who must also uphold British laws governing standards.”

Much remains uncertain for the UK at this point, but if finalised, the trade deal with Australia would mark the first agreement UK negotiators have secured independently.