Cebr welcomes the announcement of a provisional deal between the UK and the EU to regulate the post Brexit partnership. Obviously this deal remains unratified but we would expect it to be ratified, not necessarily without glitches. We will be examining the details in the coming days and will comment accordingly.
As we said in our Forecasting Eye on 30 November, a deal will certainly better for the UK economy than no deal. And equally for the EU economy, although being 6 times larger, any proportionate effect would always be smaller.
This deal looks to be about as good as could possibly be expected from both sides’ points of view.
The markets have largely factored it in, although with very thin trading around the Christmas period there is a still a chance of some further sharp movements in both the equity markets and the Forex market.
We would also expect business investment in the UK, which has been very subdued since the 2016 referendum, to recover in 2021.
Some had predicted that no deal would have had a seriously negative economic impact. We were always sceptical about the more extreme forecasts. More important would have been the impact of no deal on the political atmosphere surrounding the relationship. A no deal might have proved acrimonious, leading to deteriorating relationships for example in the fishing grounds. As things now stand, there is the prospect of continued cooperation on a wide range of areas of common interest as mentioned by Commission President Van der Leyen such as transport, energy, defence, terrorism and climate change.
More important than the deal itself will be the steps that both the UK and the EU take to improve their competitiveness. Cebr’s 2021 World Economic League Table to be published on Boxing day shows how the region ‘Western Europe and Scandinavia’ (which includes both the UK and most of the EU) is gradually becoming a smaller part of the world economy. In 2005 the region was 30.1% of the world economy. In 2020 it is 20.4% and in 2035 it is forecast to be only 15.7%, roughly half the relative importance of 30 years earlier.
Europe has a unique social model where the quality of life for many is preserved at the expense of reduced direct focus on competitiveness. Yet if the region fails economically, ultimately its current level of social support will become unaffordable. The challenge for both the UK and the EU is to find solutions supporting the economies that boost competitiveness without undermining social cohesion.
The deal should be not be seen as an end in itself but as a beginning of a drive to test new policies that could work to the benefit of both sides in promoting prosperity while ensuring that the gains from prosperity are fairly shared out.