speri.comment: the political economy blog

Industrial strategy failures increase the likelihood of soft Brexit

As Theresa May knows, Britain is too weak economically to prosper outside the single market under the current economic policy paradigm – this inconvenient truth will soon tear apart the pro-Brexit coalition

Craig Berry, Deputy Director at SPERI

Craig BerryIn many ways, 2016 was a fairly typical year in post-crisis Britain. The economy continued to stumble along, but the government continued to pretend otherwise, declaring austerity to have prefaced a new age of prosperity, making Britain the envy of the developed world.

But sluggish wage growth and increasing precariousness within the labour market tell the real story. Productivity is stagnant, living standards are declining, inequality is intensifying, and the Exchequer is unable to raise enough tax revenue to maintain much-needed investment in our public services.

Great economies do not decline overnight. Britain remains a stronger economy than most, but it has been in relative decline for at least a century. While there was no economic news in 2016 to suggest this historical process might be about to go into reverse, the heightened pace of decline evident since the 2008 financial crisis probably did slow a little, or more precisely, continued the decelerated pace of decline evident since around 2013.

We now know that this deceleration was far too little and far too late, because 2016 was also the year when Britain’s economic pathologies, even as they arguably began to abate, manifest in enormous political upheaval. 23 June 2016 will surely prove to be a decisive historical milestone, and like all such cleavages, was both largely unpredictable yet entirely explicable. Most of us may not have seen it coming, but imagining now a world where Leave didn’t win is impossible.

But as far as 2017 is concerned, the Brexit vote was an inconclusive one. There were essentially two very different, almost contradictory, Brexit votes. The one which has been most chewed over was an anti-establishment vote, which quite nebulously associated the EU and its free movement of labour dictates with Britain’s indifferent ruling elite and the failing neoliberal order.

The second was a vote which quite vividly saw the EU instead as a constraint on neoliberalism, and indeed a form of protectionism which actually inhibits Britain’s natural inclination towards economic openness.

At the moment, Theresa May is trying to satisfy both constituencies, but she will realise at some point in 2017, if she hasn’t already, that they are largely incompatible.

The only sustainable solution to Britain’s economic malaise must begin with a comprehensive industrial strategy. The simplistic notion of ‘picking winners’ (and getting it wrong) seems to haunt Britain’s elite, but most nations see industrial strategy as a normal, legitimate and necessary part of economic statecraft.

Industrial strategy means working out which of the goods and services that the world needs most our economy might be able to produce most effectively, and adopting policies which support the industries that produce them. Industrial strategy is the ultimate public good, one of the hallmarks of a functioning democracy – only unworldly market zealots, of which these isles have far too many, think otherwise.

But doing industrial strategy seriously (for any industry other than finance) would require May to partially repudiate Britain’s pre-crisis development model. Eight years on and counting, the British elite just isn’t there yet.

The mysterious deal agreed between the government and Japanese car manufacturer Nissan exemplifies the dilemmas facing May. The details of the deal remain a secret precisely because the government fears that it will set a precedent for industrial strategy, yet this is not a precedent the government can afford to set, because the deal probably looks a lot more like a crude ‘picking winners’ policy than a long-term industrial strategy worthy of the term.

Unfortunately, Brexit Britain does not have time for the long-term. The Nissan deal will save jobs and increase investment in the short-term. But the next desperate deal May makes will probably look a lot less like good news, and quite a lot more like finally allowing Rupert Murdoch to take full control of Sky.

For all of these reasons, 2017 will start to see the Brexit coalition unravelling, and the path to a very soft Brexit starting to take shape. Britain is quite simply too weak economically to insist on anything else (it will be impossible under the current economic policy paradigm, for instance, for the British economy to cope with restrictions on importing migrant labour from, or exporting financial services to, the EU).

The Labour opposition’s penchant for trading in abstraction and economic policy banalities isn’t helping matters. Brexit renders largely irrelevant the debates taking place inside Labour’s echo chamber. As such, on both left and right, Britain’s political elite finds itself embarrassingly devoid of ideas on how the country might prosper outside the single market.

This ideational vacuum will not persist indefinitely. We can expect that powerful economic interests will soon begin to push their own version of Brexit. Maintaining single market membership in practice while further delegitimising the idea of economic regulation in principle would be the ideal outcome for those who benefit from Britain’s current economic order – and soft Brexit fits the bill perfectly.

Crucially, the coming economic downturn will lead to a significant reduction in immigration, laying the foundations for a climb-down on the apparent free movement ‘red line’. This will not silence the populist anti-immigrant mood engulfing Britain at the moment, but it will diminish it just enough for May (or her successor; May’s survival as prime minister is far from assured) to push soft Brexit through. The right-wing media in Britain, which has done so much to create anti-immigrant sentiment, will co-operate with the deception, once the government signals that it will pursue their real agenda.

The general argument being articulated in the left-leaning commentariat at the moment is that, while May ultimately favours soft Brexit (or no Brexit) on economic grounds, her positions on border control and legal autonomy mean Britain is heading for hard Brexit by default (see here, here and here). The widely-trailed contents of May’s speech later today have accordingly been interpreted as confirmation that the government would be comfortable with a hard version of Brexit if it does not get its way on free movement and the European Court of Justice.

In my view, many commentators are currently paying far too much attention to the day-to-day machinations of Conservative Party politics, and not nearly enough to the deeply embedded norms of British economic statecraft. These norms are not impervious to change, but it is probably going to take a much bigger heave than a single referendum on an issue of relatively limited salience to do so.

As should be rather obvious, May is negotiating. The transitional deal is all that matters to her at the moment. May is hinting at a hard Brexit in the hope of scaring the rest of the EU into offering the UK favourable transition terms, while she manoeuvres herself into a position domestically (probably after the next election) whereby she can hold off hard Brexit. May knows that the EU will not under any circumstances offer preferential access to the single market – which most Brexiters are still taking for granted – if the UK is outside the customs union (our situation is analogous to Turkey in this regard), but also that it is going to take a little more time before the delusional but instinctively appealing ‘global Britain’ imagery is dismantled on the Tory right.

There are many unknowables at play, but soft Brexit therefore remains the most likely withdrawal scenario. The remain camp may well sigh with relief. But with the possible exception of former chancellor George Osborne, remain supporters tend to be correlated with supporters of a more active industrial strategy. Yet it is precisely because post-crisis Britain has so far proved itself incapable of delivering the latter that Brexit-lite will emerge as the only plausible way forward in 2017.

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