The most fervent advocate of a continued Customs partnership between the UK and the European Union in the British cabinet, Philip Hammond, has converted to the hardline view of a clean break.
The conversion of Philip Hammond
Addressing business leaders on Wednesday morning, he told the UK’s biggest industrial lobby (CBI) that the UK is leaving the Customs Union. While Hammond admitted that the post-Brexit customs relation between the UK and the EU is still a “work in progress,” he sought to appease his audience by suggesting that an appropriate solution would be in place on time.
The British Chancellor was known as one of the most fervent advocates of retaining Customs Union membership or partnership.
The UK is leaving the EU in March 2019 with most members of government taking for granted that a transition phase will preserve the status quo until the end of 2020.
The majority of Theresa May’s cabinet advocate for a solution that will retain border checks for all goods and people but minimize the hurdle by investing in appropriate technology. The plan referred to as “Maxfac” relies on the assumption that the EU will not only endorse the plan but also member states will match British investment in border facilitation procedures.
The outgoing President of the CBI, Paul Drechsler, warned that the lack of clarity on customs arrangement inhibited investment and constituted a “hand-break” on growth. He urged staying in the Customs Union. Mr Hammond answered that delivering minimum friction and burden on the border, including in Ireland, did not necessitate customs union membership.
A Reuters poll published on Wednesday finds that 20% of economists in the UK project a disorderly Brexit. Most economists view the management of the negotiating process as shambles, lacking in direction and drive. The same poll had predicted Brexit as the most likely outcome in June 2016.
The two most likely scenario according to the poll is an EU-UK free trade agreement; the UK government is seeking to match Canada’s CETA agreement, while London seeks additional benefits such as access to the market for services. Some economists believe it may yet be possible to continue with European Economic Area membership, which means membership of the Customs Union and the Single Market. A small minority believes that a disorderly Brexit will be followed by trade on WTO rules.
The current political deadlock that threatens to derail negotiations is essentially domestic; the majority of the British cabinet wants to leave the customs union while the majority of the British parliament wants continued membership. Market stakeholders, including the CBI, lean towards continued membership of the European Economic Area, which provides for both customs union and Single Market membership.
The UK is currently facing multiple macroeconomic challenges, as inflation is surging due to the rise in energy prices and the devaluation of the pound, while growth has come to a standstill. The UK’s economy grew merely by 0,1% in the first quarter of 2018.
According to the poll, it is now uncertain whether the Bank of England will be able to deliver on its promise to raise interest rates in August and much will depend on growth figures. On the positive side of the ledger, the UK has conditions of near full employment and wage growth appears to be outpacing inflation.