UK government’s unambitious EU “reset” plan won’t undo Brexit damage and needs rethink, bank says | Brexit Carnage

By Brexit Carnage editorial staff

The government’s plan to “reset” the UK’s relationship with the EU lacks ambition and is unlikely to undo the economic damage caused by Brexit without re-joining the bloc’s single market and customs union, Germany’s oldest bank Berenberg says.

Estimates suggest the UK economy has faced a loss of about 4% of GDP due to leaving the EU and its single market, Berenberg says in a research note.

The UK’s EU exit has contributed to stagnating business investment after the pandemic and goods exports to the EU falling as a share of GDP despite the 2016 depreciation of the pound and strong growth in goods trade within the EU, the bank says.

“The government’s plan to “reset” relations with the EU lacks ambition,” Berenberg’s senior UK economist Andrew Wishart says. 

“The only substantive improvement the UK government is attempting is an agriculture and food deal which would undo little of the damage to trade from Brexit.

“However, YouGov polling finds a majority of 55% of the population now think leaving the EU was wrong compared to 30% who think it was right.

“The government’s pragmatism could lead it to realise that, if it’s not going to diverge on regulation, it should reap the benefits of alignment by rejoining the single market and customs union. Therefore, we would not bet against the government watering down its red lines over time.”

The UK and EU’s “Trade and Cooperation Agreement” stipulates zero tariffs, but doesn’t prevent checks on goods entering the single market. The main benefit of this is that the UK can alter its regulatory standards, but so far it has not, Berenberg says. 

Indeed, divergence from the EU could create frictions at the Irish border and would require companies to adhere to two different sets of standards. That helps to explain why the UK is negotiating a “narrow” trade deal with the US, focused on AI and tech, rather than one that would require changes to UK standards, the bank says.

Meanwhile, the potential 0.5% direct hit from US tariffs on the UK economy is far smaller than the 3.6% loss Berenberg estimates that the country faced due to leaving the EU – reflecting the fact that the EU still accounts for most UK goods trade, the bank says.