This is already a big week for Brexit. Ministers from the 27 other EU member countries have set the terms for a transitional deal until the end of 2020: that everything will remain the same except for the loss of a British vote, and voice. The only quarrel I would have is that the transition is likely to last longer. But to take phase one of Brexit as a template, it seems very likely that the government will accept the EU’s transition terms.
We also had the leak, to the website BuzzFeed, of the document EU Exit Analysis – Cross Whitehall Briefing. This showed that the economy would suffer over the coming 15 years under three scenarios: Norway-style European Economic Area membership (2 per cent lower gross domestic product than otherwise); a comprehensive free trade agreement (5 per cent lower); and no trade deal (8 per cent lower). Every region would be adversely affected, with the biggest hits in the northeast, West Midlands and Northern Ireland, and pretty well every sector of the economy.
It was a great scoop for BuzzFeed, though no surprise to economists. Overwhelmingly, credible analysis shows a similar picture. It also produced the usual nonsense, of the kind that says that if you cannot forecast next year how can you forecast for 15 years? This, of course, is not standard economic forecasting but conditional analysis, which looks at the relative difference compared with the baseline when you introduce frictions into trade with your largest trading partner, reduce your attractiveness for foreign direct investment and cut the supply of EU migrant workers. It sets that against modest gains, only over a very long period, from non-EU trade deals.
As for forecasts, although Britain has been helped by a strong world economy a standard forecast was that the economy would be 3 per cent smaller in 2020 than in the absence of a Brexit vote. That remains on track. Mark Carney says that the economy will be 2 per cent smaller by the end of this year, and that effect will build. The squeeze on real wages has returned, as predicted. That poorer and more unstable future some of us warned of is reality.
As for the government’s response, that its proposed bespoke EU deal is not modelled, it is easy to see where that would fit in, somewhere between the 2 per cent negative effect of an EEA deal (Norway) and the 5 per cent of a trade agreement (Canada).
Advertisement
Anyway, I shall leave people to fight that out, because it is time to come to the defence of our beleaguered chancellor. Some Tories, when they are not gunning for Theresa May, want Philip Hammond to be sacked. His latest offence was to go to Davos and apparently propose such a softly-softly approach to Brexit that it might as well not happen at all.
Any reasonable person reading the chancellor’s speech to British business people in Davos last week — and I suspect that his critics have not read it — would find little to get excited about. It was a clear exposition of the government’s approach, stressing that Britain is leaving the EU, including the customs union and single market. It emphasised, as many Brexiteers do, that Britain and the EU start from a unique position of convergence which should make a bespoke agreement easier to negotiate.
That was the context of Mr Hammond’s red-rag-to-the-Brexiteers’-bull phrase that Britain and the EU would be moving only “very modestly” apart. You would have to be very thick, or very obtuse, not to see what the chancellor was doing. He was reassuring businesses that there would not be a sudden leap into the unknown, over the cliff edge.
“Instead of doing what we’re normally doing in a trade negotiations — taking two divergent economies with low levels of trade and trying to bring them closer together to enhance that trade — we are taking two completely interconnected and aligned economies with high levels of trade between them, and selectively, moving them, hopefully very modestly, apart,” he said. “And so we should be confident of reaching something much more ambitious than any free trade agreement has ever achieved.”
It is a sign of the bonkers approach of some in the Tory party that those words produced calls for him to be sacked. It is not, however, a great surprise. Brexiteers were criticised before the referendum for not having a blueprint for Brexit. More than 19 months on that blueprint is still on the drawing board. Apart from vague talk about flouncing out of the negotiations and trading on World Trade Organisation terms, there is nothing. Tory hard Brexiteers snipe, and in doing so inhibit the prime minister from setting out her Brexit plan. They offer nothing constructive.
Advertisement
Those involved in the process, such as the international trade secretary Liam Fox, know that there is hard work to be done, notably the urgent task of rolling over by March 2019 the roughly 40 trade agreements that the EU has with more than 40 countries, to which Britain is a party.
The chancellor will get on with trying to keep the economy on an even keel while pushing hard for the inclusion of financial services in the eventual deal, to the benefit of both sides. Mr Hammond could never be accused of being a flashy politician. Faced with one of those quickfire interview quizzes, I suspect that he would choose Inspector Morse over McMafia and The Crown over Game of Thrones. The chances of him on Strictly Come Dancing, cavorting gangnam-style like the former shadow chancellor Ed Balls, are about as likely as those of me doing so, no chance at all.
But as chancellor, he clearly has the country’s best interests at heart, and is working hard to ensure that they are protected in Brexit. I am not sure that that can be said of many of those calling for his head.
David Smith is Economics Editor of The Sunday Times