Article 50: Six ways Britain leaving the EU will affect you

John Rentoul
EU Council President Donald Tusk holds the official letter from Theresa May, beginning the withdrawal process from the EU: EPA

Theresa May has signed, sealed and delivered her letter to Donald Tusk, the President of the European Council, giving notice of the United Kingdom's intention to withdraw from the European Union.

In her statement to the House of Commons this afternoon, she struck an upbeat tone about the nation's future outside the EU. She promised to “look forward with optimism and hope – and to believe in the enduring power of the British spirit”. This was designed to reassure the British people, while she adopted a constructive approach towards her fellow European leaders, designed to ease the start of her negotiations over the terms of Brexit.

The Great Reform Bill is paradoxically designed to keep things as they are when the UK leaves. However, Brexit has already started to affect us and there are more changes that will become clearer over the two-year negotiation period.

More expensive foreign holidays

The pound fell sharply on the morning of 24 June last year, and is now worth on average 10 per cent less against the euro than before the referendum. This makes imports more expensive, and means that holidays in the rest of the EU cost more. As Harold Wilson said after the 1967 devaluation, “That doesn't mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” Indeed, a moderate devaluation can have benign short- to medium-term effects, by stimulating exports.

In the long term, however, the fall in the pound reflects the judgement of the markets that leaving the EU will make the British economy worth less. The market forecast is that, although we will be better off that we are now, we will eventually be 10 per cent poorer than we would otherwise be as a result of Brexit.

No immediate change in immigration status

The Prime Minister has been clear from the start that she wants EU citizens already in the UK to be allowed to stay, but that she wants other EU countries to guarantee the status of British nationals in their countries before giving a firm commitment. Angela Merkel, the German chancellor, insisted that no negotiations can take place until the Article 50 procedure has been invoked, so that will now be one of the first questions to be discussed.

As Jonathan Portes, the former Treasury economist, wrote at the time of the referendum, “given we have no population register, and that EU nationals are not required to have visas, we won’t actually know who is here on 23 June”. Since then, the position has not become any clearer, and no one knows what the status will be of EU workers who come to the UK over the next two years.

There is some evidence that net immigration has started to fall as a result of the referendum vote, and it is likely to fall further when we leave, but David Davis, the Brexit Secretary, this week was honest enough to say that some kinds of immigration might rise if there are labour shortages in future.

Higher inflation

A lower pound means that imports are more expensive, which is one reason why the rate of inflation has risen by a notch or two recently. Prices are now rising at an annual rate of 2.3 per cent – a phenomenon with which many of us are unfamiliar because inflation has been so low for so long. However, 2.3 per cent is not a problem: the target is 2 per cent, and many economists think it is better to miss it on the high side than the low.

A small dose of inflation may be a good thing, because it stimulates economic activity and prevents a slowdown in the economy turning into a slump or a Japanese-style long-term stagnation.

At first price rises are likely to be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum.

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates.

This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output.

Mark Carney, the Governor of the Bank of England, and his Monetary Policy Committee may face a dilemma. If the effect of Brexit is simultaneously pushing up prices and threatening to tip the economy into recession, interest rates may need to go up and down at the same time.

Did somebody say recession?

Carney, the Treasury and a range of international economists warned about this before the referendum. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. And the referendum itself has less of a negative effect on the economy than Remainers feared.

The problem is that this has led more bull-headed Brexiteers to claim that the Remainers were crying wolf. But the effects of Britain actually leaving the EU are different and more real than the confidence effect of the vote. Whatever trade deal is agreed, it is bound to be a little harder to buy from and sell to the EU 27 than it is now. And as midnight on 29 March 2019 approaches, companies and investors are likely to start to move money out of Britain, or to scale back plans for expansion.

And we wouldn’t even get our money back

All that extra money that the Leave campaign claimed would flow into the NHS and cheaper energy bills will not be available for two years. We have to continue paying our net contribution to EU funds – it’s about half what the Leave campaign said, but it is still half of one per cent of our national income – until we cease to be EU members. And a deal that is done, if any, is bound to include a substantial fee to settle our account.

Almost all economists agree that the costs to the economy of leaving the EU will outweigh the benefit of getting our net contributions back.

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