Theresa May’s Brexit makes offshore UK a reality

The UK's prime minister, Theresa May, has said that the country will leave the European single market and the customs union. Her finance minister Philip Hammond has threatened that the UK will become more aggressive on tax and regulation to remain competitive if the EU denies it market access.

But the logic of Brexit and Trumponomics (apart from the protectionist sentiments, which may only be rhetoric) are for both the UK and the US to head off in this direction anyway. 

We are at one of those big departure points in global economics where a clash of ideas is leading to starkly different strategies – the free-market, deregulated, low-tax, small-state view of Adam Smith followers versus the big government, interventionist, high-tax ideas more closely associated with John Maynard Keynes, to put it very crudely. 

The last time this happened was during the Reagan/Thatcher supply-side revolution of the 1980s and it proved very painful in the short run and highly productive in the medium to long term. It allows growth to come from the bottom up through the entrepreneurial energies of individuals who are set free from intrusive regulations and punitive taxes – that is why many hedge funds and small businesses are pro-Brexit.

But for big banks and companies – which are not very innovative – success is much more about market access and economies of scale, so being cut out of the single market is a strong negative. However well equivalence works, life will not be as easy as it was under EU membership. 

But there will be upsides if banks can make themselves more entrepreneurial. They can expect a more sympathetic hearing on regulatory matters and there will be new markets to explore. Both big and small companies will need a good supply of skilled labour to succeed. 

The interesting thing is what happens to the remaining EU countries set along the top-down path, which works very well for releasing the potential of countries that have fallen behind (think Portugal and Poland before EU membership), but fails to deliver supply-side reforms at a more advanced stage. 

Currently analysts are divided between the more-of-the-same camp in Europe, or its break-up as a populist parties gain power in France, Italy or the Netherlands. But there is another outcome. If so-called Thatcherite Francois Fillon becomes the next president of France, some of the huge differences in economic thinking between France and Germany may be bridged. We may see Europe start to move in a direction that in economic substance looks more Adam Smith than John Maynard Keynes (not that the Keynesians were ever happy with EU economic policies) albeit with a European rather than an Anglo-American flavour.  

Brian Caplen is the editor of The Banker. Follow Brian Caplen on Twitter @BrianCaplen