“The long-term effects (of leaving Europe’s single market without a trade deal)…would be larger than the long-term effects of COVID,” Bank of England governor Andrew Bailey admitted on Monday, in replies to questions from the House of Commons’ Treasury Select Committee.
- Bailey seemed at odds with Chancellor of the Exchequer Rishi Sunak, who said in a Sunday Times interview two days ago that “the major impact on the economy is coronavirus” and that it would be better for the U.K. to walk away than to sign a trade deal “at any price.”
- The U.K. formally left the European Union on Jan. 31 but remained part of the EU legal system during an 11-month “transition period” that expires on Dec. 31. In the months since, the two sides have failed to strike an agreement on their future trade relationship.
- Teams of negotiators are meeting again this week to come to a compromise in time for parliaments to ratify the treaty.
- A recent London School of Economics study estimated that even a free-trade agreement between the U.K. and the EU would have more damaging consequences on the U.K. economy than COVID, compared with the scenario of staying within the EU.
- According to the study (released before the second wave of the disease), the COVID-19 pandemic would shrink gross domestic product by 2.1% over time, versus a 5.7% loss in the case of no deal, and 3.7% if a trade agreement is struck.
The outlook: Bailey’s statement will be used by those within the U.K. government who are pushing for a deal — who include, ironically, Sunak, who must know, even as he toes the party line on the matter, that the country could do without another major economic shock.
There is no serious debate among economists that the U.K. would be severely punished by the absence of a trade deal with the EU, which accounts for almost half of the country’s foreign trade (whereas trade with the U.K., on the other hand, is only about 15%-to18% of the EU-27’s global trade with non EU countries).
And if there is no doubt that the COVID recession is hard and unprecedented, it is only temporary, and not caused by structural shocks in the economy such as Brexit. So in the short term, Sunak has a point. But in the longer term, Bailey is right.