No deal or blind deal – the economic consequences

Speech delivered at Glasgow City Council’s Brexit summit on 2nd October 2018 by Professor Sir Anton Muscatelli, Principal of the University of Glasgow.


Lord Provost, Cllr Aitken – thank you for the invitation to speak to you here today and indeed for bringing together this important summit.


As many of you will know, I am Principal of the University of Glasgow and Chair of the First Minister’s Standing Council on Europe, but I am speaking today very much in a personal capacity.


Our impending departure from the EU will impact every part of our City’s public life and it is reassuring that the City Government is seeking to prepare, as far as possible, for the coming shock. The report which Professor Graeme Roy will present later I think gives an indication of just how damaging that shock could be to Glasgow.


I could talk to you all day about the havoc Brexit will wreak upon every facet of Scottish society, but unfortunately my time is constrained – although as you’ll have seen in the press last week, rationing looks like it will soon be the order of the day, so perhaps we’d better get used to it.


Instead, I’ll focus my remarks today on the economy – and I will apologise in advance to any of you who came here today hoping for an optimistic outlook.


I’ve been clear since the referendum was called that Brexit would be nothing less than disastrous for our economy – and since then, everything that has transpired has only hardened that view.


Indeed, Scotland may well find itself hit hardest by Brexit.


The Scottish Government document Scotland’s Place in Europe: People, Jobs and Investment sets out these figures in rather stark terms.


Under the least worst-option – that is leaving the EU but remaining in the single market – we would see Scottish GDP fall by 2.7 per cent.


Under a preferential UK-EU free trade agreement – the Canada model – we could expect a hit to GDP of 6.1 per cent, equating to £9bn in cash terms or £1,610 for every man, woman and child in the country.


That this would be the outcome of the preferred option of most Brexiteers should give us serious pause for thought.


Under a WTO terms – i.e. a No Deal scenario – the Scottish Government estimates that we would see GDP fall by a staggering 8.5 per cent – resulting in a loss of economic output up to £12.7bn terms.


Now that level of economic chaos might seem scarcely believable. Indeed, it was decried by many on the pro-Brexit side as scaremongering in January of this year…


That is until February of this year when leaked UK Government analysis suggested that the hit to Scotland would not be 8.5 per cent, but would be 9 per cent!


But regardless of which stats we accept – there is absolutely no hiding from the fact that a Hard Brexit would be devastating for the Scottish economy.


In Scotland, we also have a specific demographic problem which Brexit can only exacerbate.

For generations, our inability to maintain and sufficiently expand our population base has troubled policymakers and politicians alike. The desire to increase our numbers has never been seen as an end in itself, but rather as a means to stimulate economic growth, entrepreneurship and the delivery of sustained social benefits for all.

In recent years, progress has been made with an all-time record population. But here’s the rub. Much of the increase is down to inward migration from other parts of the EU. Talented individuals who have sought to make Scotland their home, on either a temporary or increasingly a permanent basis.

More than 180,000 EU nationals were resident in Scotland in 2015 –3.4% of the total population, yet accounting for 4.9% of the total workforce – significantly higher than their population share. These individuals, and their families, contribute massively to the skills base.


They pay taxes which help sustain and deliver vital public services in health, education and transport. This is clearly even more important now that Holyrood now that the Scottish Parliament is wielding its tax powers.


Unless there is a serious shift in rhetoric and policy, and within that a willingness to consider a differentiated deal on immigration for Scotland, we face the real possibility that the important progress on population growth will be reversed.


The impact of that on our economy, our tax take and our ambitions for society could be catastrophic for Scotland and take generations to overcome.


As a specific example of how important EU migration is for the City, let me take as an example m own institution, the University of Glasgow.


Over 950 of our staff are non-UK EU nationals – representing 13.2 per cent of our total workforce, and 21% of our academic research staff. We also have over 3,000 EU students studying in Glasgow.


These are people who – as well as enriching our campus and the culture of our City – contribute massively to the ground-breaking research which not only improves society but which is a major plank of the Scottish economy.


From our world-leading work on Precision Medicine to our groundbreaking efforts in Quantum Technology and nanofabrication – EU nationals have played central roles in this fields in which Scotland can genuinely lead the world, and which could massively boost our economy and create thousands of jobs.


In short, we rely on EU nationals for our University, our society and our economy to reach its full potential.


Any barrier to our ability to recruit and work with the best minds from across Europe would have a huge impact on future economic growth and productivity in Scotland – and stand in the way of Glasgow and Scotland playing our part in the huge social and scientific advances promised in the 21st Century.


We simply cannot allow it to happen.


Until now when I’ve warned of economic pain, many on the Leave side have sought to downplay what I and others have said as simply the sour grapes of those who argued passionately for Remain.


But recent announcements of the relocations of the European Medicines Agency and the European Banking Authority from the UK along with the tens of billions of Euros that the UK is almost certainly going to commit to paying on exit, suggests Project Fear has been shown to be considerably closer to Project Fact.


Indeed, the warnings made were – if anything – conservative. And of course, none of us could have foreseen the rank incompetence with which the U.K. side would have taken forward the negotiations.


So the question now is just how painful will Brexit be under the likely scenarios now facing us.


The starting point for any such discussion has to be that Chequers is dead. It is an ex-plan.


Before we even get to apparent concerns of the Rees Moggs of this world, the EU’s chief negotiator Michel Barnier has been explicit about the serious problems the EU27 have with the Chequers Deal.


To some extent this was not a surprise. The EU27 have always been consistent about wanting to maintain the integrity of the EU Single Market. To the EU a single market in goods only does not work in a world in which increasingly the specification of traded goods includes an element of service trade.


So for the EU a Chequers Deal which proposes a partial integration of the UK in the Single Market, segmenting goods from services, and not allowing an EEA-style dynamic alignment of UK and EU regulations with an EFTA-style Court and a surveillance authority simply will not fly.


The EU27 would rather negotiate a Canada style Free Trade Agreement with the UK.


The EU had been cautious, hoping to use elements of the ‘Chequers plan’ as a basis for negotiation. But the strong opposition to ‘Chequers’ from those in the Conservative ranks who want a ‘hard Brexit’ has convinced Brussels that it’s best to be clearer about its position.


So where are we heading? A No-Deal Brexit remains a real possibility. And it is a scary prospect. If people like me have in the past been accused of running Project Fear, I say that there’s every reason to be deeply afraid of a No Deal.


The estimates of the economic cost of have been around for some time. Independent economic analysts have put the long-run costs at between 8-10% of GDP by 2030 relative to remaining in the EU, depending on the precise assumptions.

But the short run is completely uncharted, as the WTO’s Secretary General Roberto Azevedo has pointed out.


Very few economies operate as stand-alone WTO members and there has been no comparable experience of a member of a regional trade association or free-trade area crashing out of that area without agreement.


So the UK crashing out of the EU would be a first. The consequences would be dire in terms of disruption not only to trade in manufactured goods, but in the short run to food supply in the UK, air travel, enforcement of existing contracts in other EU countries. The list goes on.


I still think the chances of a ‘no deal’, while uncomfortable high, are only around 15-20%.


It would be highly disruptive, not only to the UK but to some of the EU27.


But with Chequers dead, the central scenario is one in which the UK and the EU agree on completing the 20% which is still missing from reaching a Withdrawal agreement.


This would include an Irish backstop which is sufficiently strong to satisfy Ireland and the EU27 and which will condition the future trade negotiations between the UK and the EU during the transition/implementation phase.


The political communique which will accompany the Withdrawal Agreement would say very little about the shape of the future framework of the UK-EU relationship. It will include lots of warm words but no substance.


Of course that means that we are most likely heading towards a Blind Brexit, and we will leave the EU without knowing where we are heading.


This is of course utterly undesirable. But from the EU’s negotiating perspective it’s a logical negotiating position to hold. Knowing that there is no UK Parliamentary majority for any single Brexit plan what are they supposed to do?


It would be tempting to try and take some comfort in the possibilities afforded by a Blind Brexit – to kick it into the long grass and tell ourselves that sanity will prevail and a softer Brexit deal will emerge in time.


But a Blind Brexit is no cause for blind optimism.


To me, that is the equivalent of a child covering their eyes when watching a horror movie. The horrors of a hard Brexit are still going to be there when we open our eyes – unless we do something about it.


In my view, a hard Brexit would represent the most unhinged example of national self-sabotage in living memory – and everyone in public life has a duty, a moral obligation, to do what we can to prevent it.


This obligation falls most heavily on those in the political arena. To put country ahead of party can oftentimes be difficult – but when we are faced with the economic calamity bearing down upon us now, failure to do so would have gravest economic consequences for millions of people.


As an economist, I may judge these politicians harshly – but I can assure them that the judgment of historians will be significantly harsher.


So what needs to be done? Is there hope to mitigate the damage which could be wrought by our impending departure?


Beyond any efforts to keep the U.K. in the EU as a full member – and reverse the Brexit decision – which is clearly an issue for politicians and Parliamentarians – from an economic standpoint, our clear goal should be to secure the softest of Brexits if it does proceed.


From the outset I and a number of other commentators have been clear what our goal should be: continued membership of the EEA and a customs union as the only ‘second best’ to full EU membership which will minimise economic damage to the UK and Scotland.


Indeed, sensible and credible proposals to keep Scotland in the single market have already been put forward by the Scottish Government through Scotland’s Place in Europe


At U.K. level, I am under no illusions of the political difficulties inherent in getting any such deal through the House of Commons.


But given the scale of the economic and social disaster about to unfold on ordinary people across this city and across the country, we have the right to expect an effort to be made – the right, in short, to expect leadership.


The type of leadership which avoids personal political interest in favour of the national interest, which puts country before party and which stands up against the fevered ideological goals of many of one’s own supporters, at least making the effort to chart the path which is so clearly the right one.


In admittedly rather different circumstances in 1960, then Senator John F Kennedy implored the Democratic Party to meet precisely this standard of leadership which the public have the right to expect, saying “we cannot fail that trust. We cannot fail to try.”


Any politician refusing to try – who won’t even attempt to soften the pain of Brexit by making the case for single market membership which all logic tells them is the right thing to do – is guilty of a serious dereliction of duty.


And if their failure of leadership sets our economy and our society back for generations, history will judge them very harshly indeed.