Revisiting Brexit: The Economic Imperative Staring Britain in the Face

The United Kingdom’s economy stands at a pivotal juncture. Plagued by sluggish growth, persistent inflation, and a cost-of-living crisis, policymakers are grappling with a complex puzzle that seems to have no easy solution. Yet, a provocative and increasingly discussed idea, once confined to the fringes of political debate, is gaining traction as a potential answer. This concept, highlighted in a letter to the Financial Times, suggests that the most direct solution to the UK’s economic malaise might be the one that is most politically daunting: a “Brexit rerun,” or at the very least, a fundamental re-evaluation of the UK’s relationship with its largest trading partner.

While the political wounds of the 2016 referendum are far from healed, the economic data since the UK’s departure from the European Union paints a stark picture. For investors, finance professionals, and business leaders, ignoring this data is no longer an option. This article delves into the economic and financial arguments for reconsidering Brexit, analyzing its impact on the UK economy, the stock market, and the future of its world-leading financial services sector.

The Economic Scars: A Sobering Look at the Post-Brexit Data

The debate surrounding Brexit’s economic impact is often mired in partisan politics, but the numbers provide a clearer, more objective narrative. The UK’s Office for Budget Responsibility (OBR), an independent public body, has consistently maintained a sobering forecast. In a landmark report, the OBR projected that the UK’s departure from the EU will reduce the country’s long-run productivity by 4% and that both exports and imports will be 15% lower than if the UK had remained in the EU. This isn’t a future prediction; it’s an ongoing reality that is shaping the country’s economic trajectory.

The primary mechanism for this economic drag is increased trade friction. The end of frictionless trade with the EU introduced a labyrinth of customs checks, regulatory hurdles, and paperwork, which act as a non-tariff barrier. This has disproportionately affected small and medium-sized enterprises (SMEs), which lack the resources of larger corporations to navigate this new, complex trading landscape. A study by the Centre for Economic Performance found that Brexit led to a “steep drop” in UK trade with the EU, with a significant negative impact on smaller firms (source). This has stifled growth, reduced competitiveness, and contributed to the UK’s inflationary pressures.

To contextualize the performance of the UK economy, consider the following key indicators before and after the full departure from the EU Single Market and Customs Union.

This data underscores a structural shift. The UK economy has become less open, less dynamic, and less attractive for business investment since putting up barriers with its closest neighbours. For those involved in finance and investing, this trend is a critical headwind impacting long-term returns on UK assets.

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Investor Sentiment, the Stock Market, and the “Brexit Premium”

Global financial markets are ruthless arbiters of economic policy, and their verdict on Brexit has been consistently clear. Since the 2016 referendum, UK assets have been saddled with a “political risk premium.” This means investors demand a higher potential return to compensate for the heightened uncertainty surrounding the UK’s political and economic future. This is most evident in two key areas: the Pound Sterling and the UK stock market.

The pound experienced a dramatic fall immediately after the referendum and has struggled to regain its former strength. This persistent weakness makes imports more expensive—fuelling inflation—and erodes the value of UK-based investments for international stakeholders. While a weaker currency can boost exports, the benefits have been muted by the new trade barriers, creating a worst-of-both-worlds scenario.

Furthermore, the UK’s flagship stock market index, the FTSE 100, has noticeably underperformed its global peers. While the S&P 500 in the US and Germany’s DAX have soared to new heights, driven by technology and growth stocks, the FTSE’s performance has been sluggish. This reflects a global investor base that sees more attractive growth opportunities elsewhere, deterred by the UK’s uncertain economic outlook and its political instability. Any discussion about a closer relationship with the EU, let alone a “rerun,” would inevitably cause short-term volatility in trading but could lead to a long-term re-rating of UK assets by removing this persistent risk premium.

The Future of UK Finance: Banking, Fintech, and the European Question

Nowhere are the stakes higher than in the UK’s financial services sector. London’s status as a global hub of finance was built on a foundation of deep integration with Europe. Brexit unilaterally dismantled a key pillar of this foundation: financial services “passporting.” This system allowed UK-based banks and financial institutions to operate seamlessly across the EU. Its loss has forced major players in banking and finance to move trillions of pounds in assets and thousands of jobs to EU cities like Paris, Frankfurt, and Dublin to continue serving their European clients (source).

The burgeoning financial technology (fintech) sector also faces a mixed picture. On one hand, the UK’s regulatory environment remains a global leader, fostering innovation in areas like open banking and blockchain applications. However, Brexit has created significant hurdles. Access to the vast EU market is now more complicated, and, critically, the flow of top tech talent from Europe has been restricted. For a sector reliant on attracting the world’s best and brightest, this is a major long-term risk. A new agreement with the EU that prioritized financial services and talent mobility could be a game-changer, potentially unleashing a new wave of growth in UK fintech and solidifying its competitive advantage in financial technology.

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The Path Forward: From Rerun to Realignment

If a full referendum is off the table, what are the alternatives? The policy debate is slowly moving towards exploring established models for non-EU members’ relationships with the bloc. These include:

• The Norway Model: Membership of the European Economic Area (EEA), which grants full access to the EU’s Single Market. This would eliminate most trade barriers but would require accepting freedom of movement and following EU regulations without having a say in making them.
• The Swiss Model: A series of complex bilateral agreements governing access to specific sectors of the Single Market. This offers more sovereignty but is administratively burdensome and provides less comprehensive access.
• A Bespoke Customs Union: Similar to Turkey’s arrangement, this would eliminate tariffs and customs checks on goods but would not cover services, which constitute roughly 80% of the UK economy.

Each of these options involves significant trade-offs between economic benefit and political sovereignty. The core of the issue, however, remains unchanged: the greater the alignment with the EU’s economic structures, the greater the potential benefit for the UK economy, its investors, and its financial markets.

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The idea of a “Brexit rerun” may seem radical, but it stems from a pragmatic assessment of the economic consequences. The data on trade, investment, and growth points to a clear and sustained underperformance that is directly linked to new barriers with the UK’s largest trading partner. For the finance and investment community, the path to restoring international confidence and unlocking value in the UK stock market involves reducing the political and economic uncertainty that has defined the last decade. Whether through a seismic political shift or a gradual, pragmatic realignment, the solution to many of the UK’s economic challenges is, as the letter suggests, staring its leaders right in the face: it lies in forging a closer, more rational, and more prosperous relationship with Europe.