Theresa May Brexit Speech: Economic experts react

Theresa May has said Britain will not remain a full member of the EU customs union after Brexit

Tuesday 17 January 2017 14:14
Theresa May: 'I want be clear, what I am proposing cannot mean access to the single market'

Economists from academia and the City of London respond to Theresa May’s landmark speech in which she confirmed that the UK will leave the single market and instead seek a free trade deal with the rest of the European Union.

Simon Wren-Lewis

Professor of Economic Policy, Blavatnik School of Government, Oxford University

“Why are we leaving a market that is so advantageous for the UK? Because May has chosen to interpret the Brexit vote as above all else a vote against freedom of movement. But polls have repeatedly shown that a great many people who voted Leave are not prepared to see any drop in their living standards as a price worth paying to control EU immigration. Theresa May will ignore this partly because she spent her political life before becoming PM trying to control immigration, and now she sees the possibility of actually achieving the reduction she has always promised. To do that she is prepared to put in place a degree of government interference in the labour market that would make even the most diehard socialist blush. Margaret Thatcher must be turning in her grave at the foolishness of all this, and the apparent willingness of MPs to vote for it.”

Jonathan Portes

Professor of Economics, King's College London & Senior Fellow, UK in a Changing Europe

“We've known since October that Theresa May would make ending free movement and the jurisdiction of the European Court of Justice her top priority - even though that means leaving the Single Market. In that sense, today's speech simply fleshes out what we already know. And behind the rhetoric, two contradictions remain. First, her rhetorical claim that we can build a truly 'global Britain' is incompatible with her top policy priority of reducing immigration from both inside and outside the EU, including of course skilled workers and students. Second, optimistic references to trade deals with third countries are all very well - but those are a long way off. Meanwhile, the civil servants in Whitehall actually doing the donkey work of Brexit are focused far more on the minutiae of the upcoming negotiations with the EU. And Mrs May's suggestion that we want an 'implementation phase' – that is, some sort of transitional arrangements to soften the blow of a 'hard Brexit' – will make that task even more complicated. More broadly, it is welcome that the Prime Minister has at last begun to flesh out her vision of what Brexit is actually for - to make the country 'stronger, fairer, more united, and more outward-looking than ever before.' Who could disagree? But she didn't explain how exactly Brexit – or her version of Brexit – will make us stronger and fairer. Will Brexit mean that wages start rising again at pre-crisis rates? Will it enable the Government to make up some of the massive funding gap currently facing the NHS? Will it improve opportunity and social mobility for young people in the UK? If so, how and when?”

Ashoka Mody

Visiting Professor in International Economic Policy, Princeton University

“The phrase 'hard Brexit' is part of the wishful thinking that somehow Brexit will be finessed and that there will really be no Brexit. But that was always a silly notion. Because a soft Brexit is the worst of all worlds for Britain: not in the European Union but bound by European laws and directives and under the jurisdiction of the ECJ. Surely, even those who want to remain must find that intolerable. So bottom line: the Prime Minister’s position has been consistent, if only people were willing to hear her. More importantly, there is no other option. Hence, the phrase 'soft Brexit' is really an oxymoron. There is only Brexit. I am really puzzled by those who say that higher tariffs will lead to lower exports to the EU but a depreciated exchange rate will have no effect. How can that be possible? Both are changing the relative prices in the same way. Indeed, the lower exchange rate produces a broader impetus to exports than the higher tariffs, which only reduce the exports to the EU, a reduction that moreover can be at least partially made up by selling elsewhere.”

Adam Posen

President of the Peterson Institute for International Economics

"There never was any uncertainty about Brexit being hard, if the Tories want border control at all costs. So now people will learn the real problem with Brexit is Brexit itself, not the lack of plan to get there. Several times, the PM said that since the UK economic data was better than expected for the last six months, she was persuaded she was wrong about the economic costs of Brexit being large. This is Wile E. Coyote logic – I ran off the cliff, but so far I haven’t hit anything and the view is nice, so the future will continue to be nice. Splat. It is false to claim that restricting immigration or pushing out foreign workers will raise UK real incomes. No matter how many times it is said, it is still false. The UK pensions, health care, retail, and agriculture all will be hurt if the UK cuts back on foreign workers. Unskilled UK citizens who live in regions without demand will not gain a thing. A ‘free trade agreement’ [FTA] with the EU after leaving the Customs Union and Single Market will mean less trade than UK has with EU now, and with many of the same rules in order to get access to their markets. The UK can pursue bilateral FTAs with the US and others. It cannot change the laws of gravity and geography. The share of non-EU trade in UK output will take decades to rise, at best, and will not make up for the losses for decades. As I predicted a year ago in Davos, the desperate strategy that will be open to the UK Government is to race to the bottom, trying to become an offshore tax and financial haven. Not a strategy with much to recommend it, especially since it will be Trumped and the EU can retaliate. Industrial policy on the Communist model of selecting winning industries or companies, and which of them get market access and skilled labour isn’t a strategy, it’s a nightmare."

Richard Baldwin

Professor of International Economics, The Graduate Institute Geneva

"This is a bad idea for the UK middle class. Leaving the Single Market will make it harder for UK-based producers to sell to the EU. This will not lead to a disaster – the market will adjust. But the adjustment will involve UK wages and salaries falling relative to those in alternative locations in the EU in order to restore competitiveness in the face of the worsening of market access. The idea that the UK can replace this with free trade agreements is Quixotic. First, the EU already has free trade agreements with over 50 nations and the UK will have to reproduce these to simply maintain current access. Second, for the big countries like the US, Japan and China that the EU does not have deals with, it will take the UK years to reach agreements. And that process can only start after they leave the EU customs union. Since the average deal that the US does takes 6 years, it won’t be till something like 2023 before the UK has new deals with big markets."

Stephanie Flanders

Chief Market Strategist for the UK and Europe, JPMorgan Asset Management

"The positive market reaction to the speech suggests that any concern about the content of the speech has been outweighed by relief that it was delivered at all. There is plenty about the Brexit process for UK businesses to worry about. The PM insisted that “no deal was better than a bad deal” and she admitted that a good deal was not a forgone conclusion. But we do now have more clarity on what the Government is hoping to achieve – and an official assurance that transitional arrangements will be made. That, along with the PM’s more conciliatory tone towards the rest of the EU, is likely to be positive for UK assets, at the margin. However, we retain our view that large-cap UK equities overall look less vulnerable to Brexit risks and are generally more favourably priced in the current environment than either small and mid-cap UK stocks or many other developed equity markets."

Kallum Pickering

UK economist, Berenberg Bank

“As anticipated May did not really provide any additional detail on her Brexit strategy beyond what we already knew. Critical details on the Government’s intended future rules for migration, or ambitions for the length and nature of a transitional agreement for Brexit, were missing. Such details are crucial if we are to come to grasps with the longer term implications of Brexit. May’s speech did not alter our base case by much, if at all. While there are profound uncertainties, we currently expect the UK and EU27 to agree a deal in which the UK maintains a good level of access to the EU’s goods markets and limited access to the less developed services markets. Crucially, we expect the UK to lose its EU financial services passport. This follows from the UK raising some modest barriers to migration from the EU. By lowering growth in trade, investment and migration with the UK’s biggest market we expect our Brexit base case to reduce UK potential growth to 1.8 per cent per year from its pre-referendum rate of 2.2 per cent. The accumulated costs of Brexit could add up badly over time.”

Azad Zangana

European economist, Schroders

“Very little new information for markets. The only key piece of information is that both houses of Parliament will vote on the eventual deal before it is accepted. We think that investors have assumed that either the deal will be softer than previously thought, or that parliament can stop Brexit. This could explain why the pound is sharply higher today. However, we doubt that either assumption is correct, and that a hard Brexit now looks more likely than not.”

Philip Shaw

Economist, Investec Bank

“Our view is that it was very well delivered and avoided a confrontational tone. It ran very much along the lines of reports contained in the press over the past few days. Partly because of this, there was little if anything that stood out in terms of policy initiatives. Significantly while the PM ruled out transferring ‘huge sums’ to the EU budget, she did concede that Britain might be prepared to maintain some contributions, for example, to specific projects. She also confirmed that there would be a vote in both the Commons and the Lords on the final deal struck by the negotiations with the European Council. The reality is that the Brexit negotiations are unlikely to be as straightforward as the substance of most of the PM’s speech seemed to imply. We recognise that the Brexit negotiations will at times be very difficult and highly politicised and that sterling is likely to undergo periods of significant volatility.”

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