Dr Gerard Lyons is a senior fellow at Policy Exchange and was chief economic advisor to Boris Johnson when he was Mayor of London.
It is not just leaving the EU but what we do when we leave that is key. From January 1, we will have left the EU and distanced ourselves from its inevitable march towards ever closer political union.
Naturally, it makes sense for us, the fifth-biggest economy in the world, to have a sensible future working relationship with the EU. Thus, the trade deal should be seen in a positive light.
The devil is not just in the detail but also in how it will be policed. There are reasons to be positive, but also many areas the UK needs to guard against. It sets a framework for the future. Crucially, it does not tie our hands (too much at least) on future domestic policy or on our independent trade policy.
To succeed, we need to reboot and rebalance the domestic economy and reposition ourselves in a changing and growing global economy, where the balance of economic power is shifting towards the Indo-Pacific and western Europe is the slow growth region. The fourth industrial revolution demands a willingness to embrace new technology that points to the need for the UK to be more innovative. Contrary to much that is often written, the domestic and global agenda that the UK needs are mutually reinforcing.
There are many things the UK needs to do domestically that it should have done while in the EU – but for whatever reason did not do. Yet, at the same time, there will now be a new sense of direction. The path we take will depend upon Parliament and the electorate. Crucially, we will be able to diverge where we see fit.
With the right pro-growth economic vision, there is every reason to be positive. In 2021, with the roll-out of a vaccine and with this deal, the UK economy could grow strongly from spring onwards, achieving growth above eight per cent and returning to its pre-crisis level by the first quarter of 2022. This deal removes immediate uncertainty and the misplaced worries about the downside of a no-deal exit. The financial markets have already given it the thumbs up.
Beyond the next year, or two, though, the UK needs to really seize the agenda, globally and at home. We need to become more competitive. Thus, in terms of the deal, how it is applied is important, as the rebalancing principle that both sides have accepted will look at how subsidies and regulations will impact future trade and investment and our competitiveness.
At Policy Exchange, earlier this year we identified the need for a ‘three-arrowed’, pro-growth strategy, built on sound and principled fiscal policy, monetary and financial stability, and a supply-side agenda of innovation, investment, and infrastructure, aimed at reducing inequality and getting the right incentives focused on tax and regulation.
Both sides have tried to position this deal in a different light: the EU suggesting the UK is losing access to EU programmes and that trade will no longer be frictionless; while in contrast the Prime Minster has highlighted a host of areas, including future trade without tariffs or quotas.
Overall, on the three areas of dispute, as one might have expected, it is a mixed outcome.
On fish, the UK did not achieve as much as it wanted. This was a disappointment and while we may be able in time to revisit future quotas, the UK should focus now on building up shoreside development, food processing, logistics, and maintenance, as part of a domestically-orientated agenda with strong regional benefits to many coastal areas.
Likewise, too, the creative industries, an important sector, will be disappointed with not being included on the list of workers not needing a visa to work, and so may need support in other ways. It highlights how the detail will impact different sectors. Despite this, no tariffs and a holiday on rules of origin were well received by the auto sector while road hauliers, another sector worried before the deal, seemed content.
However, in other areas there is some ambiguity as to whether we have accepted the EU’s precautionary principle.
In terms of the level playing field, this deal alleviated worries that Great Britain would be constrained significantly in future domestic policy. In the near-term we can follow through the levelling up agenda not tied down by the EU in boosting competitiveness via initiatives like free ports. Westminster also has scope to outline its own future independent subsidy regime. Meanwhile, there is nothing in the deal to suggest we will be held back by the EU in continuing with our high standards in labour, environmental and food areas.
Implementation of this deal and resolving future differences matters. Of course, there is no case law yet for areas of dispute. Businesses like certainty. Also, a dynamic UK must avoid the EU’s problem of protecting incumbents. The European Court of Justice will not have a future role. This deal will have its own 19 sub-committees and four working groups, as well as an intergovernmental partnership council. The UK’s focus should be on boosting competitiveness.
The big issue in coming months will be financial services. This trade deal did not cover these and outlined that a memorandum of understanding (MOU) is to be agreed by the spring. The City has lacked a cheerleader for some time and needs one now, although when Mayor, Boris Johnson was often its biggest advocate.
Since the referendum, firms have had to act based on their own business model. For some, this has meant boosting operations in other cities like Paris or Frankfurt. Given the uncertainty, that was understandable. Yet, London has continued to see employment gains in recent years. The combination of law, language, time zone, skills and infrastructure, plus London’s ability to position itself in financial technology and in new growth markets such as green finance, the offshore renminbi and Islamic finance, all auger well and suggest that it will dominate as Europe’s financial capital.
Financial centres thrive based on where clients want to do business and on the regulatory environment. In the years since the referendum there was a focus on mutual recognition, based on high level outcomes, and then on equivalence of each other’s regulatory regimes. While the EU has been stubborn, the UK has granted a temporary permissions regime to a phenomenal number of EEA-based firms, all keen to continue to do business in London. The main focus of this MOU should be on addressing this issue of equivalence and regulatory cooperation.
One important area for the City is the EU’s desire to see euro-denominated business carried out in the euro area. This would have happened regardless of Brexit. Lest we forget, when David Cameron reached his deal, the main area of concern was that the EU had made clear the euro was central to their project and thus non-euro members would no longer have a veto over future developments.
This push to have euro business in the euro area has continued. It will not succeed, leading initially to a fragmented and more costly market in the euro area, but it has the potential to be disruptive, as we are already seeing, with pressure placed on London-based firms to move business.
Finally, this trade deal can be reinterpreted in four years or so, after the next election. That is a worry if some, including the EU, try and bounce the Government into a much closer future relationship.
Instead, we should view this deal as an opportunity for the UK to focus on the need to boost growth, well-being and competitiveness, thus cooperating closely with the EU where it makes sense to do so and diverging where needed.