As Brexit talks begin, Europe sees economic upswing over UK

Investors are getting more confident about the eurozone economy’s prospects

By Pan Pylas
Associated Press

LONDON (AP) — When Britain voted to leave the European Union a year ago, proponents argued Britain’s economy was being held back by the slow-growing, dysfunctional bloc.

A year on, and with the Brexit divorce talks finally starting, the situation is radically different.

Britain’s economy is growing more slowly than Greece’s, its households are getting poorer as inflation rises and the government is struggling to stay in power. The remaining 27 members of the EU, meanwhile, appear to have pushed into a higher gear and found renewed vigor from the election of pro-EU governments like that of France.

“The tables have turned somewhat,” said James Nixon, chief European economist at Oxford Economics. “The European economy is now enjoying a solid upswing and sentiment, especially towards the EU, is improving.”

The situation could embolden the EU negotiators in the Brexit talks and weaken the British side, though it is still far from certain how the talks, which are due to last two years, will play out.

For Britain, it’s a role reversal, having been buoyed by strong growth in recent times — even after the momentous vote on June 23, 2016 to leave the EU.

Rather than fall into recession in the wake of the Brexit vote, as many economists had predicted, Britain last year was one of the fastest-growing economies among the Group of Seven industrial nations. That was largely due to the sharp fall in the value of the pound in the wake of the Brexit vote, which made British exports cheaper in international markets.

The EU, and the 19-country eurozone in particular, was still reeling from a debt crisis that raised questions over the future of its euro currency and was struggling to cope with a flow of refugees seeking sanctuary from the war in Syria. The Brexit vote had raised questions about the future of the EU and its detractors, including many political parties, were looking to deliver it blows in key elections in France and elsewhere.

For Britain, things have clearly gotten worse this year.

Britain’s Prime Minister Theresa May failed spectacularly to achieve a majority for her Conservative Party in the general election she called for earlier this month, undermining confidence in her ability to remain in the top job. And the economy started showing clear signs of worsening.

A 15 percent drop in the pound against the dollar has pushed up inflation as it makes imports more expensive, causing living standards to fall as wage increases fail to keep up pace. The consequence of that is households are spending less — retail sales are growing at their slowest rate in four years.

Uncertainty surrounding the outcome of the Brexit talks — such as the possibility that Britain crashes out of the EU with no deal — is also likely to make consumers cautious. As will the prospect of higher interest rates from the Bank of England. Last week’s policy meeting showed that three of eight rate-setters surprisingly backed the first increase in nearly a decade.

The pound’s fall has helped exporters by making their goods cheaper around the world. But the impact of the depreciation doesn’t last long and credit ratings agency DBRS says that whatever the shape of the Brexit deal, uncertainty “is likely to adversely impact the economy and the fiscal accounts.”

The upshot is that Britain is now at the bottom of the G-7 growth table. Even Greece, which is just coming out of an economic depression and is operating under an international bailout, is doing better, with quarterly growth of 0.4 percent, double Britain’s.

Philip Hammond, reappointed as Chancellor of the Exchequer by May after the election, is increasingly arguing for the need for business to be front and center in the Brexit discussions, over and above any other consideration, such as reclaiming sovereignty or clamping down on immigration.

“When the British people voted last June, they did not vote to become poorer, or less secure,” Hammond said Tuesday. “They did vote to leave the EU. And we will leave the EU. But it must be done in a way that works for Britain. In a way that prioritizes British jobs, and underpins Britain’s prosperity.”

While the situation in Britain has clearly worsened, it has gotten brighter in the rest of the EU.

Populist, Euroskeptic politicians in Austria, the Netherlands and France failed to make the headway they may have anticipated in recent elections, while German Chancellor Angela Merkel is widely expected to win again in elections this autumn. Meanwhile, the region’s debt crisis doesn’t look like it’s going to flare up again anytime soon as Greece got the money it needed to meet a big summer repayment hump.

“The second half of the year now looks far less threatening,” said Simon Derrick, chief markets strategist at BNY Mellon.

Perhaps the most important development for the economy has been the election of Macron as France’s new president, and his party’s big success in legislative elections on Sunday.

Macron was elected on a mandate to deeply reform France’s economy, such as making it easier to hire and fire workers. The French economy is performing better than at any time in years, which could make it more palatable for people to accept the changes.

All the signs are that the French economy, for years a laggard in Europe, has pushed into a higher gear. The same can be said for the wider eurozone economy, which grew by 0.6 percent in the first three months of the year.

Investors are getting more confident about its prospects, with some funds, including Blackrock and Morgan Stanley, recommending clients to go “overweight” on European stocks.

It’s still unclear how this divergence in performance between the two sides of the Brexit negotiating table will play out. The worry for Britain is that the EU will be able to tough it out a bit more than it could have done a year ago.