Brexit’s lasting damage is looking inescapable

British stocks and bonds are worth less compared with EU alternatives since Brexit.

Leaving the European Union was unlike any event in modern British history. Institutional investors couldn't imagine a majority of Britons voting against their own interest. When they did, the shock was immediate. The pound plummeted a record 8.05 percent in minutes to a 31-year-low against the dollar. The toll of the June 23, 2016, referendum was more than double any of the eight worst days since 1981, and the almost 13 percent depreciation in less than a week remains unequaled as a UK foreign-exchange debacle.

Sterling's sudden collapse and failure to recover proved to be the signal that Britain's best days are fleeting. For most of this century, the UK was the biggest beneficiary among the 27 countries in the EU. Measured by gross domestic product, GDP per capita growth, unemployment and superior debt, equity and currency valuations, Britain was the perennial leader. All of these superlatives ended with “Brexit” almost eight years ago. The EU since then outperforms the UK, whose listless economy is now little more than an also-ran.

The EU, which soon gets the chance to re-elect Ursula von der Leyen to five more years as president of the European Commission, is at its highest valuation relative to the UK since she began her initial term as its leader in 2019 based on publicly-traded equities, according to data compiled by Bloomberg. The average premium investors pay for the future profits generated by the stocks in the 20 countries sharing the euro currency, known as the euro zone, is 25 percent as measured by 197 companies in the Bloomberg Eurozone Index and 71 members in the Bloomberg UK Index. Between 2006 and 2019, the average premium was zero, showing that investors perceived no difference between the corporate euro zone and corporate UK. It was only in 2020, during the Covid-19 global pandemic, when the EU's favourable relative value suddenly surged to 19 percent and continued to climb after Russia invaded Ukraine.

The market, which is another way of saying the people with the most at stake financially, got it right. More than 50 percent of the British electorate belatedly acknowledged sterling's June 2016 omen when they told polling firm YouGov in July they would vote to join the EU again. The public's repudiation of Brexit should have been the wake-up call to the major parties -- Labour and Conservative -- contesting a national election this year. British politicians instead show no hesitation offering prescriptions for the plight of Gaza 3,000 miles away and yet can't be bothered to discuss remedies for the failure to protect vital UK industries such as finance and data while the public increasingly blames rising shop prices, reduced health care and broken public services on the vote to leave the EU.

Far from being the bloated, inefficient bureaucracy derided by Euroskeptics -- led by former UK Prime Minister Boris Johnson when he was the fabulist journalist for the London Telegraph -- who coloured the prevailing Brexit media narrative, the EU economy is growing 2.3 percentage points faster than the UK’s on an annual basis, with GDP advancing 24 percent since 2016, compared with the 6 percent for the UK. During the 10 years before the Brexit referendum, EU GDP lagged behind the UK annually by 12 basis points, since 2000 by 9 basis points and the two decades preceding Brexit, by 149 basis points, according to data compiled by Bloomberg.

The dichotomy is similar for GDP per individual among the 20 countries sharing the euro. The bloc’s per capita GDP increased 19 percent, or 2.19 percentage points more than the UK on annual basis since 2016, an overwhelming reversal of the decade prior to Brexit. During the 10 years preceding Brexit, annualized euro zone growth was barely eight basis points better than the UK, and between 2000 and 2016 the euro zone trailed the UK by six basis points.

Contrary to the overwhelming perception, Britain had everything to gain from its EU inclusion and little to lose as the bloc expanded with the fall of the Soviet Union's Berlin Wall and rapid integration of Eastern European countries. Between 2011 and 2015, the EU's jobless rate expanded from 1.3 percentage points higher than the UK to 4.6 percentage points above. Only after the Brexit vote did the situation reverse, with the EU's additional joblessness rate narrowing to 2.9 percentage points as its citizens secured employment at a faster rate than their UK counterparts.

Greece remains the most vivid example of EU beneficence. Unlike Brexit, voters in the Hellenic Republic refused to leave the shared currency and common market as they were widely predicted to do in the 2015 referendum that was supposed to be “Grexit.” Anyone who bothered to look at the bond market back then would have realized the nation wasn't about to return to drachmas that would have accompanied an exit from the EU because the yield on its debt was well below the peak reached in 2012 during the worst of its fiscal crisis. To be sure, Greek GDP shrank 45 percent during its depression between 2009 and 2015. But Greece was rational and since then, its economy expanded 11 percent, representing a 1.53 percent annual rate, easily exceeding the UK's anemic 0.7 percent annual growth.

Greece has plenty of company among EU nations in the shadow of the bloc’s original major economies, France and Germany. At least 10 of these countries enjoyed superior growth since 2016 and beat the world average of 35 percent: Ireland, 82 percent; Bulgaria, 78 percent; Lithuania, 71 percent; Estonia, 66 percent; Czech Republic, 55 percent; Latvia, 50 percent; Cyprus, 47 percent; Poland, 44 percent; Hungary, 42 percent; Croatia, 41 percent, according to data compiled by Bloomberg.

As for the pound, it's persistent relative weakness since 2016 can be measured by its anticipated price fluctuations, known as implied volatility. Between 2000 and Brexit, the average of the euro's expected price swings was 1.2 percentage points greater than the pound. The spread turned negative in 2017, with sterling on average becoming 1.8 percentage points more volatile than the euro, a consequence of the diminishing confidence in the UK. British GDP is forecast to increase 0.4 percent this year and 1.2 percent in 2025, inferior rates of growth compared with 24 of the 27 EU countries, according to 61 economists surveyed by Bloomberg.

British stocks and bonds are similarly worth less compared with EU alternatives since Brexit. The UK in 2023 paid 2 percentage points more in interest to borrow than euro zone governments, the widest spread of the century. Companies in the Bloomberg Eurozone Index surged 86 percent on average since 2016 while UK shares gained 46 percent. That's a total return (income plus appreciation) advantage amounting to 3.1 percentage points of greater annual appreciation.

During the first hour after the polls closed on the second-to-last Thursday in June eight years ago, the pound rallied to $1.50 from $1.48 on speculation that the British people would agree with the consensus of domestic and international prime ministers, presidents, finance ministers, business leaders and economists and vote to remain in the EU because it was perceived to be best for Britain.

That didn't happen, of course, and UK productivity and global trade have been in a funk ever since. No one doubts now that Brexit hindered rather than helped the ailing British economy. Unlike the EU, Britain showed no confidence in the motto of the US that became the inspiration for the EU: E Pluribus Unum.

Matthew A. Winkler is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.

Credit: Bloomberg