Britain's post-Brexit choices

[Celerity]

Assuming the UK does eventually leave the EU, its next government will need to negotiate new relationships with the rest of the world.

https://www.socialeurope.eu/britains-post-brexit-choices

by Ngaire Woods on 13th November 2019

Huge amounts of time, effort and frustration have gone into negotiating the terms of the United Kingdom’s exit from the European Union. And with the UK set to hold a crucial parliamentary election on December 12th, it still is not clear whether, when and how Brexit will happen. But assuming the UK does leave the EU, its next government will need to begin the long, difficult process of negotiating new relationships with the rest of the world. That will involve tough choices, one of the thorniest of which is whether the UK should align its regulations in key economic sectors with those of the EU or the United States. Where, then, is Britain headed?

The prime minister, Boris Johnson, wants the UK to reach a trade and investment agreement with the US after Brexit. After all, America is the UK’s largest single-country trade partner and its biggest source (and destination) of foreign direct investment. In seeking such a deal, however, the UK would have to decide how far it is willing to realign its regulatory regimes with those of the US (as American firms and investors want). Closer alignment with the US would create new barriers to trade with the EU, which is a much larger market for UK exports. Moreover, the prospect of adopting US standards—on drug pricing, the environment, food standards and animal welfare, for example—is already creating a public backlash in Britain.

As the UK prepares for life after Brexit, regulatory tensions with the US and EU could potentially flare up in two other important sectors.

Banking and finance

The first is banking and finance. In 2018, the UK’s financial services sector contributed £132 billion ($170 billion) to the economy, or 6.9 per cent of total output, provided 1.1 million jobs (3.1 per cent of the total) and paid some £29 billion in tax (in the 2017-18 UK tax year). The sector also generated £60 billion worth of exports in 2017 (against £15 billion in imports). But the financial services sector poses huge risks if it is not adequately regulated. The 2007-08 financial crisis reduced UK national output by 7 per cent, wiped out one million jobs, caused wages to fall by 5 per cent below 2007 levels and brought bank lending to a halt. All parts of the UK (and much of the rest of the world) felt the catastrophic impact.

After the crisis, an independent commission made a clear case for regulatory reform to protect the British public (and the public purse) from reckless bank lending. Policy-makers in the EU and the US also accepted the need for robust regulation. Today, however, America and Europe are pursuing sharply divergent approaches. EU regulators continue to strengthen prudential rules and capital requirements (especially for very large banks) and are widening the ambit of regulation to cover every asset and profession in the financial services industry.

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About Ngaire Woods

Ngaire Woods is dean of the Blavatnik School of Government at the University of Oxford.