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On Thursday, December 1, Martin Wolf joined Markus’ Academy for a lecture. Wolf is the associate editor and chief economics commentator at the Financial Times.

Watch the full presentation below. You can watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.


[0:00] Introductory remarks

[7:19] What’s the matter with Britain

[13:11] Long-run performance

[23:46] After the financial crisis

[27:01] What Brexit has done

[36:09] Current challenges

Executive Summary

  • [0:00] Introductory remarks. Britain’s recent events including Brexit, the “mini budget,” and an intended Asia focus has led to a bit of volatility. The country strategy could entail a few different things: focusing on lifesciences and IT, having a financial center focus combined with becoming a tax haven, or becoming a European “bridge to Asia.” All options have different geopolitical implications which must be considered. In a potentially fragmented world, Britain could be vulnerable, even if it has the advantage of language in terms of connection and trade. There is an ongoing current account deficit, which can be a challenge when compared to a country like the U.S. The Gilt Yield Spike in October led to a challenging situation, with a three-sided game of chicken between fiscal, monetary, and financial sectors. The UK needs to focus on resilience, but it will take pragmatism. 
  • [7:19] What’s the matter with Britain? Nothing is really wrong– Britain is just much less powerful than it was in the past. Perceptions lag behind reality. The country also suffers from nostalgia for past grandeur. The Brexit debate reflected these realities. Yet, despite this, Britain’s democracy is healthier than that of the US. Yes, it recently got a terrible prime minister. But she was removed peacefully in 44 days. 
  • [13:11] Long-run performance. The UK has not caught up with France or Germany in productivity over the past four decades. Moreover, productivity growth has slowed throughout the developed economies. Since the global financial crisis,, the UK has sufferedd a massive collapse in productivity growth. The last 15 years have shown stagnation in incomes across the British population, even with high economic inequality, though taxation is relatively progressive. The UK is a relatively low-tax country, which means overall redistribution is smaller than in many continental countries. 
  • [23:46] After the financial crisis. Britain was hard hit by the financial crisis. GDP per head in 2019 was about 21% lower than the pre-crisis trend. UK real disposable incomes have also fallen behind European peers.
  • [27:01] What Brexit has done. The growth in real GDP per head is relatively low, and following the Covid shock, the UK is the only G7 economy that is still below its pre-pandemic size. The pound depreciated substantially following the referendum in 2016. Trade has been slightly lower since the end of the transition period: exports to the EU have been affected more than imports, partly due to pound volatility. Real business investment peaked at the time of the Brexit referendum, also perhaps because of exchange rate uncertainty. There has also been a shift in migration, with a large decrease in EU immigration; on the other hand, non-EU immigration has increased hugely, raising the question whether net immigration is decreasing at all. The UK still has an important role to play in global affairs, in or out of the EU, but all its options have drawbacks. 
  • [36:09] Current challenges. The so-called “moron premium” was the increase in 10-year gilt spread after the mini-budget introduced by Kwasi Kwarteng and Liz Truss, but that has been removed by the new government. There has been falling participation in the UK labor force since Covid. This is unique to the UK among developed countries. The expected growth of household disposable income is decreasing. Inflation is also a key challenge, with a massive spike already underway, but (perhaps overly optimistic) projections by the Office for Budget Responsibility suggest that it will fall swiftly in the next couple of years. Public spending as a share of GDP is rising, while public debt has risen, but the overall public debt level is not exceptionally high compared to other countries. Polls show that the majority of residents would like to rejoin the EU. Productivity growth is the biggest  issue going forward.