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Crunch talks between Britain and the EU are being held in London this week, but serious differences on fishing rights and the so-called level playing field remain. As there is no sign of a breakthrough, Brussels is facing mounting frustration from member states over its reluctance to swiftly present emergency measures that could mitigate chaos in case of a no deal Brexit. On Monday, the European Commission refused to say when it will present temporary contingency measures, such as short-term rights for EU-UK flights to continue and for hauliers to transport goods across the English Channel.
In a sign of rising tensions, one EU diplomat warned that national governments “will coordinate and come up with their own set of measures” if the Commission continues to refuse to act.
Meanwhile, Downing Street continues to insist that Britain is ready to leave the bloc without a deal, despite several business leaders warning of a “dual impact” from both the coronavirus pandemic and a no deal Brexit.
Last week, the governor of the Bank of England, Andrew Bailey, claimed that the economic cost of a no deal Brexit could be bigger in the long term than the damage caused by Covid-19.
In a recent report, though, senior economist Harry Western rubbished Mr Bailey’s claims, explaining why officials and others should stop treating it as a ‘fact’.
He wrote: “As we noted two years ago, these kinds of claims rely heavily on an assumed link between trade ‘openness’ and productivity. Typically, negative effects of Brexit on productivity account for between a half and two-thirds of the total estimated effect on long term GDP.
“You might think such massive estimated productivity effects must have a solid empirical foundation. But far from the trade-productivity link being well established in the economic literature, the evidence for its existence is at best inconclusive and at worst non-existent.”
The first problem is that, even if a trade-productivity link can be shown, Mr Western wrote, it is not obvious which way the causation runs: does higher trade lead to higher productivity or does higher productivity drive higher trade?
Looking just at the UK, there seems to be no historical association of trade openness and productivity since the Sixties.
Productivity growth dropped in the years immediately after the UK joined the EEC – the precursor to the EU – in 1973, although trade openness rose modestly.
More striking still, the senior economist noted, the decade or so after the inception of the EU single market in 1992 saw UK productivity growth flat despite a clear rise in the export to GDP ratio.
And since 2007, UK productivity growth has slumped even as the export/GDP ratio has trended higher still.
He added: “A firm-level study by the ONS from 2018 also doesn’t support the notion that Brexit will lead to large negative effects on UK productivity. It shows that exporters to non-EU countries are about 20 percent more productive than non-exporting firms – but for exporters to the EU, the ‘productivity premium’ over non-exporting firms is minimal.”
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Mr Western concluded in his piece for Briefings for Britain that given the above, it should be clear that the strong trade to productivity link assumed in many Brexit studies is based on extremely “shaky foundations”.
He said: “Indeed, given the nature of the evidence it is hard not to sympathise with Harvard economist Dani Rodrik who has dismissed productivity effects of this kind as ‘bells and whistles used to produce exaggerated benefits from trade agreements’.
“As such, it is very disappointing to see the UK economic establishment lazily continuing to assert the existence of this trade-productivity link. Indeed, given how crucial this supposed link is to generating big negative effects on UK GDP from Brexit, asserting its existence in the face of strong evidence that it may not exist is worse than lazy – it is downright misleading.”
The Bank of England and other British officials have a long record of being wrong on Brexit.
In 2016, former Chancellor of the Exchequer George Osborne claimed the UK would have been “permanently poorer” if it voted to leave the bloc.
The then Chancellor sensationally claimed the country would have been left with a £36billion financial black hole by 2030 due to the economic hit from pulling out of the EU.
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Mr Osborne heralded the analysis from April 2016 as a welcome dose of “facts” in the Brexit debate, which he insisted was “economically illiterate”.
However, just one in ten key Government forecasts about the frightful impact of the European divorce has come true, according to a study published by think tank Change Britain.
Mr Osborne also forecast a rise in unemployment, with a further 500,000 out of work, claiming uncertainty would reduce demand.
He said “it would be the poorest” who would be ravaged by an EU exit, citing people whose jobs “depend” on the car plants and steel-making factories.
However, in 2017, former Labour MP Gisela Stuart and Change Britain chairman said: “The Remain campaign fed the public stories of doom and gloom but this analysis shows why voters were right to see through their scaremongering.
“Growth continues to be upgraded, employment is at a record high and a number of multinational businesses have made major investment announcements into the UK.
“The British people had the confidence to reject Project Fear and back Project Hope.
“Outside the EU we can begin a process of national renewal and look forward to a strong and flexible economy which benefits everyone across the UK.”
According to Change Britain, just two out of 19 predictions made by Government peers in the run-up to the referendum can be shown to be true.
Former Governor of the Bank of England Mark Carney was also accused of contributing to “Project Fear” during the referendum, particularly after he warned that a vote to leave the bloc could have pushed the economy into recession.
Not only did a recession never materialise, the Bank of England’s prediction that the economy would stagnate in the second half of 2016 was incorrect, as it grew 0.6 percent in the third quarter.
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