Merlin Weekly Macro: The myth and reality of Brexit

Brexit! Nearly a full decade on from the Referendum and only a couple of months shy of half that since we formally left the EU, it remains the cause of all our woes. Rachel Reeves insists so. She alleges that Brexit has done more damage than forecasters had predicted; commenting on Reeves’s allegation, Lord Rose, former doyen of Marks & Spencer and ASDA, wholeheartedly agreed on Radio 4’s Today programme, relieved that ministers had finally woken up to “smell the coffee” about the consequences of Brexit; as a statement, he said there is “no doubt the UK economy has shrunk since we left the EU”.

Let’s just stop there and begin unpicking some of this; given it was aired on an influential national radio programme, it is important. 

Reeves and the gremlin of Reform

Lord Rose might be wide of the mark interpreting Reeves’s remarks as blaming “the previous lot” for Brexit. Labour is in a hole. According to Politico, the polling organisation, this week Labour trails Reform by ten percentage points in the national polling of voting intentions. Reform is led by Nigel Farage who, as leader of UKIP, was the catalyst for the Referendum and significantly influential in the success of the Leave campaign. Economists had forecast that the UK economy would underachieve its potential “by 4%” were the UK to leave the EU.  The UK economy is sluggish and failing to deliver against Rachel Reeves’s growth targets. Ahead of a tricky budget, Labour and Reeves need both a scapegoat and a deflection. Simple solution! Blame Brexit! The unsaid extension of which is that Nigel Farage, Labour’s potential nemesis at the 2029 election, is directly responsible. The Conservatives are irrelevant. The political computation is as simple and cynical as that.

Sometimes the facts get in the way of a good story 

Where Lord Rose needs challenge is his statement that the UK economy has “shrunk since we left the EU”. That is factually incorrect. For the 5.4 million Today Programme listeners left under a misapprehension, the facts provided by the Office for National Statistics are these, measured by an index based at 100 for 2023:  June 2016, the time of the Referendum, 91.1; 31 December 2020, our legal departure from the EU, 89.0; at the end of 2024 reflected in the World Bank’s estimate of the value of UK GDP at £2.85 trillion, the ONS index stood at 101.9; to complete the series, the latest ONS data to the 31^st August records an index of 102.7. What is certain is that the two point drop in the index between the Referendum and our departure date from the EU was dominated far more by the 10% drop in economic activity in 2020 due to Covid than any anxieties due to Brexit. The economy might be sluggish, but it definitely has not shrunk since Brexit.

Where Rose would have had a valid point would have been to say that UK GDP per capita is no higher today than it was in 2019. But how much of that can be levelled at Brexit is impossible to say. The productivity drag is like a deadweight on the economy. The reasons for it are complex and diverse: the rapid rise of the “missing millions”, the 9.4m people of working age who are now economically inactive; the additional one million who have been signed off work and on to benefits in the last year for mental health reasons and who have no obligation to seek work; for those in employment, the change in work/life balances as a result of the Covid experience, particularly the partial work-from-home culture; the increasing reliance on the public sector for marginal employment gains when the public sector is no substitute for a match-fit, competitive private sector economy to generate national growth and prosperity.

Frictions, frustrations and footballs

It is true that Brexit has created administrative frictions, logistical inefficiencies, and direct costs in the form of imposed tariffs and regulation with the UK outside the Customs Union. The automotive, pharmaceutical and defence sectors would be cases in point where a protectionist EU has put up barriers against an independent United Kingdom. It is undeniable that the post-Brexit environment is a major inconvenience for travellers to and from the Continent; it has upended agricultural economics, posed serious constitutional problems for Northern Ireland and allowed fisheries, energy and Gibraltar to be used as political footballs. But in the main, business adapts, adjusts and moves on. The overall trade data proves the point.

Debunking the trade myth

It is often said that the “EU” is the UK’s most significant trading partner. The reality is that the bulk of the UK’s trade with the EU is derived from companies operating in Germany, France and the Netherlands; the “EU” is simply the customs and regulatory framework within which overarching terms of trade are set and regulated. £5 billion of Polish defence orders placed with UK contractors has everything to do with the quality of the products on offer and our both being members of NATO, and little or nothing to do with our having been EU members. The doomsayers were convinced that our UK-European trade would collapse in the post-Brexit environment. The government’s own data published in April 2025 suggests otherwise: of the UK’s total imports in 2020, 50.8% were from the EU in the last year before our departure; in 2024 that was 50.6%. As for exports, they have dipped from 42.0% to 41.2% over the same period, though it is only the value of UK exports of physical goods to the EU which has declined (imports of goods increased as did both sides of the trade in services).

Is it really feasible that the UK economy might have undershot its potential by four points simply because of Brexit? It seems unlikely. Germany has been in recession or flirting with it for the last three years and with the exception of the Covid bust and recovery years, has not achieved an annual growth rate of over 1% since 2018. France has been stronger but in the post-Covid era has struggled to get beyond 1.1% annual growth. If the “4%” Brexit penalty was a spurious suggestion when it was first made as part of Project Fear, today thanks to what has happened in the intervening period with Covid and Russia’s invasion of Ukraine, it is impossible to prove.

What all this talk of Brexit does do is to distract from the significant structural financial and economic problems confronting the government. Fooling nobody else, Rachel Reeves is deluding herself if she thinks Brexit is the problem; as Lord Rose very clearly identified, many of the economic travails experienced over the last year are directly the fault of or have been exacerbated by Reeves’s 2024 Budget.

The sequential “Rs”: re-joining requires re-admission requires re-applying

No doubt the cockles of “Remainer” hearts are warmed by the latest public opinion poll reaching 50% in favour of “rejoining” the EU. However, it is worth rehearsing yet again what would not happen: we would not simply be readmitted and allowed to carry on where we left off in 2016 or 2020. We would formally have to re-apply. Adoption of the euro would be a binding, non-reversible commitment. We would currently fail the financial admission criteria of a maximum debt/GDP ratio of 60% and a maximum annual deficit of 3%; we are struggling to contain both let alone nearly halve them.

Were we to be readmitted, we would immediately lose sovereignty over our currency and monetary policy to the European Central Bank, and over trade policy to the unelected European Commission. UK courts would be subsidiary to the European Court of Justice. The European Union remains a half-baked confection: 27 countries of which 20 (soon to be 21 with Bulgaria) share the euro; there is neither fiscal or debt union to complement monetary union; without direct democratic accountability and total governance reform, fiscal union is a non-runner without political union. Political union is as far away as it is possible to imagine.

Protectionist to its core, the EU is losing global competitiveness at an alarming rate. Adapting the old Army advice to new recruits (“if it moves salute it! If it doesn’t move, paint it!”), the EU mantra is “if it moves, regulate it! If it doesn’t move, it’s regulated already”.

In the national interest…..

We might be making a poor fist of the opportunities offered by Brexit, but that is neither the fault of Brexit as a principle about retaining sovereignty, nor those who voted to keep it. As we have argued before, the greatest deficiency of Brexit was the lack of political preparedness for what came after and the abject lack of leadership, vision and ambition to take advantage of all the opportunities Brexit afforded. Both can still be rectified. Rejoining the EU on the other hand would be an irreversible one-way ticket.

Fully reformed, being a member of the EU could have attractions. In its current state, it is dispassionately difficult to see what they are. What is equally clear is that Labour’s policy of “dynamic realignment”, the process by which Keir Starmer wishes to “reset relations with the EU” structurally favours the EU: the UK adopts the asymmetric position of having all the responsibilities for compliance in the areas to which we sign up, while having absolutely no say in the framing of new regulations or policy. A good way to look at “dynamic alignment” is this: the EU has its cake and eats it; the UK picks up a few dropped crumbs.

Brexit: it really is time to move on, in every sense.

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