Britain will be among the fastest-growing economies in the industrialized world this year, according to the International Monetary Fund. With the UK set to expand by 2pc in 2017, outstripping Germany, France, Japan and second only to the United States, the IMF last week became the latest in a long line of official forecasters to ditch predictions of British economic woe after last summer’s Brexit vote.
It wasn’t the IMF, though, that caused the pound to rally last week – even if its UK growth forecast was sharply increased from 1.5pc, with Britain getting the biggest upgrade of any major economy. Sterling surged by 4pc against the dollar last Tuesday, hitting a six-and-half month high, because of a snap election.
The pound leapt on shock news the Prime Minister had called a general election on Thursday 8th June, rising from $1.25 to $1.28. Sterling surged largely because, given the Tories’ 20-plus point opinion poll lead, it looks certain May will significantly increase her slender 17-seat majority in the House of Commons. With Labour sporting an unelectable leader, squeezed by Ukip in its northern heartlands and the Liberal Democrats in slightly more affluent urban constituencies, May could possibly win a triple-digit Commons majority, something no Tory leader has achieved since Margaret Thatcher.
Financial markets generally react positively to Conservative gains, on the assumption (not always warranted) that Tory ministers will borrow less than their Labour counterparts, be more business-friendly and aren’t as likely to ruin the economy. It’s not surprising, then, that with May attempting to convert her huge poll lead into more MPs and a tighter grasp on power, the pound rose.
Above and beyond that, though, a narrative emerged last week that sterling gained because, with more Conservative MPs, May would be less reliant on a rump of Eurosceptic Tory backbenchers pushing for a “Hard Brexit”. The Prime Minister, the story goes, would then be more likely to implement “the Soft Brexit she wants”, with the UK possibly even staying in the EU’s single market. I don’t buy that for a second.
I’ve never liked the term “Hard Brexit”. It’s a label used by those who want to make leaving the EU sound unreasonable and extreme, particularly those actively trying to reverse last June’s referendum result. Single market membership requires multi-billion pound annual payments to Brussels, makes UK law subordination to the European Court of Justice and almost certainly requires continued adherence to the EU’s freedom of movement rules. Leaving the single market isn’t “Hard Brexit”. It is Brexit.
Leaving the EU’s customs union isn’t “Hard Brexit” either. Inside the customs union, the UK is unable to cut suitable free trade agreements with the 85pc of the world economy outside the EU. The trade deals the EU has cut on our behalf cover countries accounting for less than 10pc of the global GDP and do few favours for a services-oriented economy like the UK.
Stating now that Britain will leave both the single market and the customs union, shouldn’t be dubbed “Hard Brexit” but “Clean Brexit” – as this column has often argued. That’s because this position acknowledges the UK won’t try to “cherry-pick” by seeking single market “membership” alongside an exception from freedom of movement. Doing so would guarantee an extremely acrimonious negotiation – as the UK’s newly-reclaimed sovereignty directly conflicts with EU principles which, if seriously breached, could tear the bloc apart.
The reality is that May doesn’t want “Soft Brexit” – not least as she understands it is unattainable. If the EU agreed it, the entire edifice would collapse, as other members demanded the same. Anyone who doubts this should read the Prime Minister’s mid-January Lancaster House speech. The UK is leaving the single market – which makes total sense. We can continue to trade extensively with the EU from outside, as do many other major economies. Given that the single market in services barely exists, the economic benefits to Britain are anyway far from clear.
May is also rightly determined the UK is finally able to strike trade deals with leading economies where this country already has huge commercial and cultural links, not least the US, India and China. In this, the EU has abysmally failed, not only because it is cumbersome and bureaucratic but because the agendas of its 28 members so often conflict. Unless we are granted some kind of associate deal, then, the UK is leaving the customs union too.
A bigger Tory majority won’t make “Soft Brexit” more likely. It will, in contrast, empower a Prime Minister who, having voted Remain because she thought Remain would win, now understands that, given that the country has voted to leave the EU, it makes economic, political and diplomatic sense to actually leave. The last two new intakes of Tory MPs in 2010 and 2015 both made the Parliamentary party, on balance, more skeptical of EU membership. The 2017 intake will do the same. After all, the UK voted for Brexit. And, since then, support for managed immigration and just “getting on with leaving” has risen further, even among Remain voters.
Across Europe, elections in French, possibly German and then Italy over the coming months, could well unseat incumbent governments. The Conservatives, in contrast, will have been re-elected, on a Brexit platform, with May will be at the height of her powers.
Back in early January, this column ventured the pound would strengthen once Article 50 came into play – as the world realized the UK has a much stronger bargaining position with the EU than is widely understood. That is now happening. And once May has a bigger Parliamentary majority, and a personal mandate to implement Brexit, that position will be stronger still.
Follow Liam on Twitter @liamhalligan