Brexit - have we been here before?

26 June 2017

Written by Dominic Wheatley

So exactly one year on the UK is heading for a hard Brexit: no customs union; no single market. Surely, as everyone else seems to want to tell us, the economic outcome of that will be dire for the UK economy and, by inference, bad for Guernsey.

Last Thursday [22 June] I spent the day at the excellent Guernsey STEP conference where Brexit and other international developments were very much the focus of attention. Setting the scene was key note speaker, Dr Savvas Savouri, Chief Economist for Toscafund Asset Management. Dr Savouri is an econometrician of significant reputation and experience. His is undoubtedly an informed and objective view.

We settled back to listen to the expected doom and gloom prognosis based on what we are used to from current media speculation and political posturing from various sources.

Or perhaps the gung-ho over-optimism of the UKIPers.

Well, maybe not.

Firstly, Dr Savouri described the environment. Disagreements with the EU. A major economic event with apparent downside risk that caused the departure of the Chancellor of the Exchequer. A weak Tory government with a lame duck prime minister lacking personal mandate and popularity even within their own party. An opposition with a new hard left leader. Big economic questions to answer and key international relationships to shore up and establish. A weak pound and a stuttering economy. Uncertainty and instability everywhere you look.

We all nodded sagely. We have read the papers.

However, it turned out that he was actually talking about 1992 and sterling’s ejection from the Economic and Monetary Union (EMU), John Major’s lame duck government surviving on a wafer-thin majority. John Smith heralded as the saviour of the Labour party. A new EU treaty to be negotiated. The pound in freefall following its release from the constraints of the EMU. The parallels are obvious and I am sure you do not need me to highlight each one. Suffice to say there should be something to learn from history where so much of the circumstances are so similar.

So, what followed on from 1992?

Well, we were told, what followed were 1992 to 1997 being the best five-year period of economic growth in post-war Britain. Not good years. Not okay years. The best years.

I can already hear all the ‘yeah but…’ calls from readers. However, look at the evidence objectively and you start to think he may have a point.

The UK has more economic links with other EU countries individually than any other Member State including Germany. Only Luxembourg would not suffer economically from a hard UK Brexit. Similarly, major EU corporations from across the other Members States have major stakes in the UK through their own businesses and markets. They will not stand idly by and watch their interests be unnecessarily devalued by a sub-optimal Brexit deal.

The pounds devaluation may have some temporary inflationary effects but is making UK companies more competitive internationally. It has also kept real interests down which encourages investment. It has also attracted external investment as sterling denominated assets are now cheaper to buy and inward investment from China, Japan and the USA are all up since the Brexit vote.

And some of the so-called insurmountable problems may not be as insoluble as is sometimes made out. The island of Cyprus has a border through it marking the boundary between EU Greece and non-EU Turkey. This has operated for many years without undermining the local economy.

There are even ready precedents for duty-free access to EU markets without the burden of other aspects of membership, blueprints if you like that could be applied readily albeit with some amendments.

And, as regards London, London has seen the coming and going of foreign banks before. Notably the Japanese banks that arrived in numbers in the 1980s, many of which have now left. The expert staff are still in London developing new businesses, innovating for the future and sustaining London’s status as a global finance centre.

What does all this mean to Guernsey?

Well our finance business is 70% London sourced. We are a significant niche part of the City of London in fund administration, private wealth management, captive insurance and insurance-linked securities, banking and investment management. Our substance and expertise is complementary to that of London. The UK itself is a key market for us also and many of the funds here invest into the UK economy, creating jobs and building infrastructure.

A successful City of London and a successful UK economy mean a successful Guernsey.

Is Dr Savouri right?

I have neither the economic expertise (my economics degree was 30-plus years ago and was only a Desmond anyway!) nor the prophetic powers (like most of you I called the last two UK general elections and the Brexit vote wrong!) to comment. However, it is a compelling and attractive alternative to some other analyses I have heard and if you get the chance to see him speak I recommend that you grab it.

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