The European political and economic landscape has changed dramatically in the 12 months since the UK’s referendum decision to exit the European Union. This time last year average economic growth in the EU was anaemic and people were worried about the possibility of a Greek exit from the union and the ramifications of Italian Prime Minister Matteo Renzi’s constitutional referendum. The threat of political populism was rising in the Netherlands, Italy and France. Nice, Brussels and Munich became victims of terror attacks. Meanwhile the UK was one the fastest growing G7 economies with growth of around 2% and falling unemployment.
One year on, the picture has turned around completely. Growth is strengthening in the euro area and in non-euro EU countries. The European political landscape is more stable following the failure of populist parties in the Netherlands and France, where the victory of Emmanuel Macron in the presidential elections has marked a revival of strong Franco-German co-operation. Greece once again managed to avoid default and even Italy is repairing its banking sector.
Conversely, the UK experienced a tumultuous general election, growth is slowing, and the Bank of England is considering raising interest rates because of inflationary pressures. Businesses are preparing for Brexit – some by leaving the UK altogether – and EU nationals who might have previously considered coming to Britain for work or study are not. The number of applications from EU nationals to study in British universities has fallen 7.4%. Terrorist attacks in London and Manchester and the Grenfell Tower fire have further darkened the collective mood.
Most worrying of all, the UK seems to be renouncing its comparative advantage as ‘Global Britain’. Sometimes referred to as ‘the Wimbledon effect’ (named after the famous tennis championships which begin today), this relates to the benefits the UK draws from its regulatory framework, a strong rule of law, and a reputation for openness that attracts players from around the world. British businesses are finding it increasingly difficult to promote their services and build global partnerships on the back of the UK’s narrative.
Even interest from Asia may be weakening. The void left in the government after the departure of former Chancellor George Osborne, who expended a lot of energy in his pursuit of a ‘golden era’ of China-UK relations, has not gone unnoticed by Beijing. Foreign direct investment from China into the UK is weakening. The relationship between China and the UK has undergone a ‘pause’ – even though this may now be coming to an end.
Many believe Prime Minister Theresa May’s choice of prioritising meetings with Donald Trump, Turkish President Recep Erdoğan and the Saudi royal family contradicts the values underpinning the UK’s soft power. German Chancellor Angela Merkel has declared ‘the EU can no longer completely rely on the US and Britain’.
The unity the EU has displayed in the Brexit negotiations so far has been extraordinary, especially in the light of persistent discord on other issues like Greek debt relief and Italy’s bank bail-outs. Meanwhile dissension among leaders in England, Scotland, Wales and Northern Ireland threatens to turn the UK into a ‘Divided Kingdom’.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.