Rarely does a top politician have such a questionable record after just a few years as Boris Johnson. As early as 2016, the conservative with charisma helped British EU opponents gain a narrow majority in the referendum on leaving the EU. The fact that he led his popular Brexit campaign with rather dubious claims hardly bothered him. Because he has achieved his goal: He has forced his intra-party competitor David Cameron to resign from the office of Prime Minister.
The country had to pay dearly for the Brexit decision. By the end of 2019, British economic output was around three percent behind the trend in the years before the referendum. Insecure companies restricted their investments on the island after the Brexit referendum. Relative to the trend in previous years, this investment gap was around 15 percent by the end of 2019.
The UK had barely left the EU at the end of January this year when the next mistake followed. Instead of paying close attention to what was happening on the continent, Johnson – who has resided as Prime Minister at 10 Downing Street since July 2019 – has found his own way in dealing with the virus. Actually, the island had at least as good conditions as Germany to get the pandemic under control. The number of people returning from skiing holidays in northern Italy, which developed into the first corona hotspot in Europe, was limited.
But while the number of detected infections soared from an initially low level in March, Johnson hesitated for eight days before finally imposing a tough lockdown. At a time when the virus was spreading exponentially, those days made all the difference. Hardly any other country in Europe recorded such a high excess mortality rate from March to May as Great Britain.
Deep economic slump
After all, Johnson apparently learned that lesson. Since he was in intensive care with Covid-19 at the beginning of April, he has become more cautious in dealing with the virus. Since the pandemic spread widely in the United Kingdom, the country was only able to relax the corona restrictions much later and more slowly than was the case almost everywhere else in Europe. After all, Great Britain managed to significantly reduce the number of new infections. It is currently becoming apparent that London will not take a special route with the new increase in the number of cases, but will react cautiously, like other countries in Europe.
Johnson’s mistake in March left a deep mark on the economy. While Germany had been on the up again since the end of April, significant parts of the British economy remained largely shut down until the beginning of June. Accordingly, British economic output slumped by 20.4 percent in the second quarter. In Germany, the decline of 10.1 percent was only half as bad. Even the countries in the eurozone, such as Italy, Spain and France, were hit by the pandemic early on, got off lightly. For the euro zone as a whole, the decline was 12.1 percent.
Quarterly GDP (change on the previous quarter in%)
Unlike in federally constituted Germany, where many decisions between the federal and state governments are discussed for a long time and the competences are distributed over several state levels, Great Britain is governed centrally. London determines what applies across the country or – in some areas – at least across England. If the top makes a mistake, there is hardly any other authority that can counteract it.
Johnson may already be heading for a third mistake. In June he decided against extending the transition period during which his country is still a member of the EU internal market and its customs union. The end of 2020 is over. How to proceed after that is still in the stars. Despite some progress in detail, the positions of the EU and the UK in discussions about their future economic relations are still far apart. Time is running out. In order to be able to ratify an agreement, there should actually be a result in October at the latest.
If Great Britain actually leaves the domestic market at the end of the year without a comprehensive follow-up agreement, this could hit the British economy hard again. So far, the EU has been by far the most important trading partner of the British. The country earns around 13 percent of its economic output from exports to the large EU. Conversely, it is only around three percent. Even if the transition could be cushioned somewhat with a few transitional rules for particularly sensitive sectors, the loss of preferential access to the EU internal market could push British trend growth to 1.5 percent from around two percent before the Brexit referendum. In the short term, there is also the threat of significant traffic jams at the borders and great uncertainty about the exact bureaucratic procedures that would have to be followed in the future.
Johnson is by leaps and bounds. Last autumn, by changing course at the last minute, he ensured that there was still an agreement to leave the EU. Contrary to his previous assurances, he has agreed to de facto leave Northern Ireland in the EU internal market in order to avoid internal Irish border controls. This time, too, it is conceivable that Johnson will soften the British position at the last moment so that the economic Brexit can be carried out in an orderly manner and the country retains preferential access to the EU market in at least some areas. But you don’t want to bet properly on such last-minute insight.
Holger Schmieding is the chief economist at Berenberg Bank. He writes here regularly on macroeconomic topics. You can find more columns by Holger Schmieding here