Could a return to the EU fix Britain’s broken economy?

Since leaving the European Union, the UK has been contending with slowed growth, reduced trade and a weakened pound, made worse by high energy costs
But whether rejoining the EU would fix these problems, and whether the bloc would take Britain back in the first place, is far from certain

David Brown

Published: 10:00pm, 19 Dec, 2022

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One of life’s golden rules is that you should never say never again. Britain’s departure from the European Union on January 31 in 2020 might have had a note of finality about it, but could the unthinkable really happen and might a future UK government consider rejoining the EU again?

Since the so-called Brexit, UK growth has suffered, Britain’s trade deficit has worsened, public sector finances are in a dire state and the economy is crying out for new regional investment which has dried up from the EU.

In hindsight, Brexit looks like it was a bad mistake for many Britons, with recent polls suggesting a majority of voters would think twice about jumping ship from Europe if offered the opportunity to vote again.

With the next general election less than two years away and the UK economy slipping down the global performance tables, Britain’s return to the EU’s ranks may become a burning issue for voters in the not-too-distant future.

For the current Eurosceptic Conservative government, a return to Europe would be out of the question. Labour, Britain’s main opposition party, currently leading the government by around 20 per cent in the opinion polls, might have ruled it out as a major policy plank at the next election, but that could change if it wins office, especially if the economy needs urgent help and voters are looking for salvation.

Right now, the outlook is bleak with the UK already likely to have fallen into recession in the second half of 2022, as the economy continues to struggle under the cost-of-living crisis, continued fallout from the Covid pandemic and the drag posed by Brexit over the last few years. The odds are that the recession will spill over into 2023 and last for an extended period. It could turn into Britain’s longest recession for a century.

Commuters in the City of London, London’s financial district, on December 8. Photo: Bloomberg

It’s very hard to see what will turn the UK economy around in the near term. Consumer demand is under severe strain from higher inflation and the impact of higher taxes as the government struggles to bring public sector finances under control.

Austerity cuts are hitting the economy hard through the government’s squeeze on public spending, while private-sector companies are shelving new investment plans while the economic outlook remains so uncertain.

The sharp rise in the UK trade deficit is also dragging on growth as exports into Europe continue to struggle. The Organisation for Economic Cooperation and Development (OECD) forecast that the UK economy could contract by 0.4 per cent next year, growing as low as 0.2 per cent in 2024. The chances are that the outcome will be worse.

Britain’s trade performance has been deteriorating for years but has got a lot worse since leaving Europe, the country’s main trading partner accounting for 42 per cent of all UK exports and 50 per cent of all imports in 2020. Since leaving the EU’s single market, trade barriers have risen for UK goods going into Europe, import duties have been imposed and the ease of access for UK companies exporting into Europe has been made a lot worse.

The fall in the sterling exchange rate over the last year and rise in the cost of energy imports haven’t helped either, raising the risk that the UK could be heading for a future balance of payments crisis and a collapse in confidence in the pound.

Brexit has meant a loss of key business opportunities in the past few years as some UK companies have opted to relocate into Europe to avoid trade restrictions and to enjoy easier freedom of movement in the single market.

UK turmoil shows how market stress can amplify policy errors

The exodus of British manufacturing abroad has aggravated the trade gap, while the loss of some euro-denominated financial trading for closer EU control means the City of London’s dominance in European markets, a major earner for the UK economy, is under serious threat.

Whether these areas of business could ever be recovered by a UK return to Europe is questionable. So too is the issue of whether Europe would ever want to see the UK back in the EU fold given the political ructions caused by Brexit in recent years. Out probably means out in Europe’s book.

Britain is left with making the best out of a bad job, enduring life left out in the cold. The quandary is whether Europe’s weak growth outlook could offer any hope of fixing Britain’s broken economy in future? The jury is out on that one.

David Brown is the chief executive of New View Economics