Our prime minister is quietly filling in the blank pages of the UK’s post-EU playbook
Source - Daily Telegraph 25/04/23
Britain was conspicuously absent when a group of close neighbours issued the Esbjerg Declaration a year ago, unveiling plans to turn the North Sea into a massive green power plant for half of Europe.
The exclusion made no economic sense since Britain is the world leader in offshore wind. Surplus electricity from giant wind parks on the Dogger Bank will be a lynchpin of European clean power by the early 2030s. It will be an integral part of Europe’s post-Putin energy security.
That frosty and petulant stand-off already seems like another world. The UK reached an accord with the EU’s North Seas Energy Cooperation (NSEC) last December on a basis of sovereign parity. This week British ministers are taking part in the North Sea Summit in Ostend as full equals.
What has happened in the meantime is the invasion of Ukraine and a complete change in the political weather on both sides of the Channel.
The UK’s import terminals for liquefied natural gas are the unsung heroes of Europe’s energy war. They have been a conduit for large volumes of LNG from the US and Qatar, either through the UK’s gas pipelines to the Continent or in the form of electricity via interconnectors.
This additional supply has quietly covered a critical shortfall. It is a key reason why the EU survived the winter without blackouts, and was able to refill its gas storage sites. The UK is today shipping more gas to the EU than Russia. The British and Dutch governments this week announced a joint plan to build the LionLink cable, the world’s most powerful and advanced electricity interconnector.
It is perhaps a minor detail in the blossoming rapprochement between London and EU capitals, but such detail is more illuminating than the stale invective over Brexit in the Westminster media. The larger story is that Britain is no longer being treated – or behaving – as a secessionist apostate. The logic of mutual interest is reasserting itself.
The Windsor Framework has been the clincher, draining poison from relations with Brussels and Washington alike. This has turbo-charged a ‘rerating’ of UK Inc in the minds of global investors and economists that has already been underway for several months – even if the International Monetary Fund has yet to smell the coffee.
Standard & Poor’s upgraded the UK’s sovereign debt rating on Friday from negative watch to stable AA, citing both the Windsor accord and Rishi Sunak’s fiscal cleansing. It is becoming clearer that last year’s catastrophism was greatly overblown.
The agency said the budget deficit will average 3.7pc of GDP over 2023-2025 rather than the earlier forecast of 5.5pc. The debt ratio will start falling from a peak of 97.7pc as soon as this year. It will not keep rising relentlessly through the 2020s as the IMF suggests. S&P said the energy price cap would cost nothing beyond mid-2023.
The Office for National Statistics said this week that government borrowing was £13.2bn lower than originally thought for the 2022-2023 financial year.
Revised ONS data also show that economic output is above pre-pandemic levels, though one continues to hear the uncorrected claim that the UK is the only G7 country still trailing this miserable milestone. The picture is poor but not so different from the sluggish performance of Germany and Japan. Overall, the UK’s economic growth since the referendum has been roughly the same as German growth.
Nor is investment as bad as we thought. Charts are still circulating that purport to show business investment a long way below 2016 levels. Again, revised ONS figures show that is not the case. Gross fixed capital formation (GFCF) is significantly higher than in 2016. Furthermore, it is running at 18.7pc of GDP, above its 25-year average.
The pound has been the star of G10 currencies this year, albeit rising from a low base. This should not be overinterpreted. It is mostly a dollar story and some of the latest strength reflects higher gilt yields due to stubborn inflation. What is of interest, however, is IMF data on foreign exchange reserves held by central banks.
Sterling’s share of reserves has risen over the last year to 4.95pc. The percentage has held up slightly better than the dollar or the euro since mid-2016, even adjusting for exchange rate distortions. Clearly, the world’s omnipotent reserve managers have not lost confidence in this country.
Nor has the Truss mini-Budget done lasting damage to British economic credibility as many feared. What it told the world is that the institutional system can act with speed and ruthless efficiency in dealing with a wayward government.
The Bank of England won plaudits from global peers for putting out a dangerous brush-fire, while at the same time refusing to accommodate fiscal adventurism. The Treasury and the Office for Budget Responsibility emerged stronger.
This cathartic episode may have been an establishment coup, but it was not an anti-Brexit coup. Rishi Sunak has closed off any serious possibility of the UK rejoining the EU single market and the customs union by instead joining the Pacific free trade pact (CPTPP).
The fast-expanding CPTPP demolishes the fallacy that the world is split into three hegemonic trade blocs – US, EU, and China – and that any country left outside this structure is a powerless supplicant.
The pact will probably be the world’s biggest trade bloc by a wide margin before the end of this decade. It does not require political union, or swallowing an acquis, or accepting the jurisdiction of a supranational court. It is a club of equals based on the principles of equivalence and mutual recognition. It chiefly wants to trade.
It may over time outflank the EU’s trade directorate with a more open regime for digital commerce and services. It sits at the heart of the world’s fastest growing economic region. Membership raises the UK’s implicit bargaining power with Europe by several notches.
Mr Sunak is quietly filling in the blank pages of Britain’s post-EU playbook. Personally, I owe him an apology. Last year I thought his fiscal policy was too contractionary for an economy heading into five quarters of deep recession, or so the Bank of England told us. Yet the economy has refused to buckle.
I feared that his six-point rise in corporation tax would choke inward investment. But a “full-expensing” allowance of 100pc in the Budget may neutralise the effect, and possibly in a way that is ultimately shrewder.
I have yet to see an overarching economic and industrial strategy, and have yet to be convinced that Mr Sunak fully recognises the potency of Britain’s green-tech as an economic accelerator. But this is to quibble. Never underestimate the value of sheer managerial competence.
This country may yet clatter into a bad recession. But if it does so, it will be in good company, brought down by monetary over-tightening in the US and Europe. Some IMF staffer may think that Britain will be a particular sink of pauperisation in 2023 – worse even than Russia – but sophisticated global opinion has already moved on.
The UK has underperformed the eurozone slightly over the last seven years. It may outperform slightly over the next seven. For the first time in what seems like an eternity, I am starting to feel the first flush of optimism.
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