Bank of England Governor Urges UK to Rebuild EU Relations Post-Brexit

Andrew Bailey, the Governor of the Bank of England, stated that the UK needs to “rebuild relations” with the European Union, “while respecting the decision of the British people” who voted to exit in 2016. During his Mansion House address to investors, Mr. Bailey delivered some of his most direct remarks concerning Brexit, noting that diminished trade has been one of its outcomes. Previously, he had refrained from discussing the subject due to the Bank’s political independence from Westminster. Mr. Bailey indicated that the altered relationship with the EU has “weighed” on the economy. He clarified, “As a public official, I take no position on Brexit per se,” adding, “But I do have to point out consequences.” He further elaborated, “The impact on trade seems to be more in goods than services… But it underlines why we must be alert to and welcome opportunities to rebuild relations while respecting that very important decision of the British people.” While the government maintains its opposition to rejoining the EU, Chancellor Rachel Reeves, in her own Mansion House speech, also suggested the possibility of a closer relationship. She stated, “Our biggest trading partner is the European Union. We will not be reversing Brexit, or re-entering the single market or customs union. But we must reset our relationship.” Mr. Bailey advised against focusing “just on the effects of Brexit,” cautioning instead about “geopolitical shocks and the broader fragmentation of the global economy.” He had expressed a similar sentiment the previous week when questioned about US President-elect Donald Trump and his proposed tariffs of up to 20% on imports. Vicky Pryce, the chief economic adviser for the Centre for Economics and Business Research, commented that should such tariffs be implemented, “it is actually quite questionable whether the UK could have a special relationship with the US when it still trades quite substantially with Europe.” Evaluating the economic repercussions of the UK’s departure from the EU has proven challenging due to numerous economic disruptions in recent years. The Office for Budget Responsibility, along with other independent analysts, projects that the economy will experience a 4% reduction over 15 years because of this. Goods trade, particularly in food and farm exports, has been significantly affected by the introduction of new trade barriers. Conversely, trade in services, including banking, has performed more favorably than anticipated. Certain politicians have suggested the potential for an improved relationship between the UK and the EU. Spain’s Finance Minister Carlos Cuerpo informed the BBC, “We need to be positive here and optimistic that a better deal can be actually closed on that front.” Concurrently, Sir John Gieve, a former deputy governor of the Bank of England, proposed that the UK might negotiate “some deals around the edges which reduce the barriers to trade.” While he also dismissed the idea of rejoining the single market or customs union, he told the BBC’s Today programme, “If we could, in due course, get close to joining the customs union I think that would be a major help.” He further explained that this would imply “people would invest in Britain… in the knowledge they could freely export into Europe, as they did before Brexit.” Reeves additionally reaffirmed her intentions to reform the UK pension system to foster growth. Her proposal involves merging council pension funds to enable larger investments and achieve greater returns, a strategy that some have deemed risky. She commented, “The UK has been regulating for risk, but not regulating for growth.” This annual event occurred amid criticism from businesses regarding the government’s impediment to growth via tax increases, which Reeves has asserted are essential to “properly fund” public services. In her address, Reeves stated that regulations implemented following the 2008 global financial crisis “resulted in a system which sought to eliminate risk-taking,” and that this has now “gone too far.” She described financial services in the UK as “the crown jewel in our economy” but cautioned that “we cannot take the UK’s status as a global financial centre for granted.” Reeves announced that the government plans to release a financial services strategy in the spring, concentrating on fintech, sustainable finance, asset management, insurance, and capital markets, thereby “laying the foundations for more private investment.” Mr. Bailey’s speech also touched upon the broader UK economy and its insufficient growth. He detailed how productivity has declined since the 2008 economic downturn and has not rebounded. He mentioned that the UK is not unique in facing this issue, which he noted also impacts other European regions, but observed that the US presents “a better story to tell.” Mr. Bailey also reiterated Reeves’ apprehension that the UK pension system is “fragmented” and necessitates “heavy lifting” for its rectification. Shadow chancellor Mel Stride stated that the Conservatives would “study the detail of these reforms, many of which follow on from those we were pursuing in government.” However, he added that reforms “aimed at increasing growth will be significantly undermined by Labour’s Budget, which sent precisely the wrong signal to investors and wealth creators.”