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Britain’s economy successes may push it towards Brexit — Simon Tilford

15:23 | 21.11.2014 | Analytic

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21 November 2014. PenzaNews. Growth of British economy may push the country towards leaving the European Union if the eurosceptics will come into power, writes Simon Tilford, deputy director of the Centre for European Reform, in his article “Does a eurozone slump make Brexit more likely?” published in the foreign media.

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According to him, the United Kingdom was among the European countries that were hit the hardest by the 2008 crisis.

“The crisis led to a large contraction in financial and business services, a major industry in the UK: Britain faced one of the biggest banking sector crises of any EU country, with the government having to provide unprecedented support to crippled financial institutions,” the author recalls.

However, in his opinion, at the present the tables in the eurozone have turned, and nobody has the grounds to accuse the UK of “beggaring” the EU.

“The eurozone economy has stagnated, leading to a big gap in growth rates. Indeed, the UK has now performed better since the first quarter of 2008 than Germany, the eurozone’s supposed ‘star performer’, let alone the eurozone as a whole,” Simon Tilford explains.

From his point of view, the successes of London authorities have been achieved mostly due to the country’s macroeconomic policies.

“First, Britain has imposed less austerity than other hard-hit members of the euro. Second, the Bank of England has pursued a much more expansionary monetary policy than the ECB. It cut interest rates faster and more aggressively than the eurozone’s central bank and has held them at record low levels first in the face of higher than target inflation and more recently against the backdrop of a recovering economy. The Bank of England also launched quantitative easing in 2009, which succeeded in stimulating the economy,” states the analyst.

Moreover, in his opinion, the situation was influenced by a wide-scale banking sector cleanup. According to Simon Tilford, this action allowed British financial institutions to better respond to increased demand for credit and thus speed up the recovery process. Another beneficial point was relatively low unemployment rate in the region, even though production dropped considerably.

“Firms were loath to let go hard to replace skilled workers, businesses slashed labor-replacing capital investment; and a large number of workers moved from full to part-time work. This helped prevent the huge increases in unemployment and hence collapse in consumer demand seen in parts of the eurozone,” the author explains.

From his point of view, preserving consumer demand helped increase overall internal demand of the country and surpass that of other European countries. At the same time, the national currency of the UK strengthened against euro.

“Sterling fell from €1.50 in January 2007 to a low of €1.09 in January 2009, before recovering steadily to €1.27 in October 2014. At such, it is not undervalued relative to its long-term trend,” Simon Tilford notes.

He also thinks that the future of the British economy will be positive with slow but steady growth: however, overall negative forecast for EU as a whole poses a certain threat to London’s well-being.

“The UK’s sizeable current account deficit (of around 4% of GDP) is entirely accounted for by trade with the eurozone. If, as appears all but certain, eurozone growth remains depressed for years, the UK’s deficit with it will continue to rise. And when the ECB finally launches quantitative easing, the euro is likely to weaken against sterling, exacerbating the trade imbalance. Despite the size of the UK’s external deficit, there is a risk of sterling strengthening too much, undermining the gradual recovery in investment in the tradable sector,” the analyst surmises.

From his point of view, this trend will last for a long time.

“Even the European Commission, which is notoriously bullish on the eurozone, expects the difference between eurozone and UK growth rates to be around 1 per cent in both 2015 and 2016. Most other forecasters expect a bigger gap,” the author writes.

In conclusion, Simon Tilford notes that the differences listed above may lead to two possible scenarios. In the most positive of them, the relationship between EU and Britain will improve, since growing economy may give London more freedom in cooperation and boost its image.

“After all, Britain grew more rapidly than the eurozone in the decade running up to the crisis, and this coincided with a period of almost unprecedentedly good EU-UK relations,” he recalls.

However, the analyst stresses the fact there are other, less optimistic visions of the next few years. According to him, slow, though steady, growth trend may escalate several issues, such as European immigration, while demands to contribute to the EU may grow. According to Simon Tilford, this may give to eurosceptics, already a considerable part of the Conservative party, a chance to exploit the country’s economic successes to push it towards Brexit if they manage to expand their influence.

“May’s general election [to the House of Commons in 2015] will have a large bearing on which of these two scenarios is closest to reality. If the Labour Party wins or is able to form a coalition with the Liberal Democrats, there is a good chance it could be closer to the first. A Conservative administration, especially one with a small majority or even governing as a minority, will struggle to avoid the latter scenario,” sums up the deputy director of the Centre for European Reform.

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