“The long-term effects (of leaving the European single market without a trade deal) … would be greater than the long-term effects of COVID,” Bank of England Governor Andrew Bailey admitted on Monday in response to questions of the House of Commons. “Special Treasury Committee.
Bailey seemed to disagree with Chancellor of the Exchequer Rishi Sunak, who said in a Sunday Times interview two days ago that “the major impact on the economy is the coronavirus” and that it would be better than the UK is moving away from it rather than signing an exchange deal “at all costs”.
The UK officially left the European Union on January 31, but remained a member of the EU legal system for an 11-month “transition period” that expires on December 31. In the months that followed, the two sides failed to come to an agreement on their future business relationship.
Teams of negotiators are meeting again this week to reach a compromise in time for parliaments to ratify the treaty.
A recent study by the London School of Economics estimated that even a free trade agreement between the UK and the EU would have more damaging consequences for the UK economy than COVID, compared to the scenario of staying in the EU.
According to the study (published before the second wave of the disease), the COVID-19 pandemic would reduce gross domestic product by 2.1% over time, compared to a loss of 5.7% in the absence of agreement, and 3.7% if trade agreement is struck.
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There is no serious debate among economists that the UK would be severely punished for the lack of a trade deal with the EU, which accounts for almost half of the country’s foreign trade (while trade with the United Kingdom, on the other hand, only concerns 15% to 18% of the EU-27’s world trade with third countries).
And while there is no doubt that the COVID recession is harsh and unprecedented, it is only temporary and not caused by structural shocks in the economy like Brexit. So in the short term, Sunak is right. But in the longer term, Bailey is right.
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