Tribute bands are all the rage these days. So it should come as no surprise that the triggering of article 50 was marked by a homage to a band that toured the country in the summer of 2016: Project Fear.

Project Fear 2017 has been playing its own versions of Beatles hits: I (Don’t) Feel Fine, We (Can’t) Work it Out and, of course, that all-time classic, While My Economy Gently Weeps. It has been quite a trip down memory lane to the days when the band’s lead vocalist, George Osborne, was predicting immediate recession in the event of a Brexit vote.

In the event, consumers carried on spending and the economy carried on growing. That’s not to say everything is going to be plain sailing in the two years of negotiations that lie ahead. Nor is it to deny that Britain has some deep structural problems that badly need fixing.

But it does mean treating with caution predictions that Britain will end up – as another 60s icon put it – on Desolation Row. That was the argument when Britain rightly declined to join the single currency in 2003 and it proved to be spectacularly wrong. It is not inevitable that the UK will suffer damage from Brexit. If the right decisions are made, the economy can flourish. This will be made easier if there is a free trade deal between the UK and the EU 27, but access to the single market is actually less important than making the right calls domestically.



The idea that Brexit guarantees economic disaster is based on two assumptions, both questionable.

Assumption number one is that Britain is leaving an EU that is doing well. That might have been true when the UK joined what was then the European Economic Community in 1973, but it is not the case today. Europe has taken longer to recover from the financial crisis than any other part of the developed world; four of its countries have needed emergency bailouts; one of its founder members, Italy, has seen living standards stagnate for two decades. Two European countries at either end of the continent suffered worst from the financial crisis: Iceland, which is not part of the euro, saw its banks go bust but is now booming; Greece has had a bigger and longer slump than that endured by the US in the Great Depression and is still on financial life support.

Trade does not lead to innovation and investment; rather innovation and investment lead to trade

The single currency, which has amplified the impact of the financial crisis for many member countries, is part of the story. But so is a lack of economic dynamism. Consider the companies that have emerged from nowhere to have a big impact since the single market came into being in 1993: Google, Facebook, ebay, Amazon, Uber. The common feature is that they are all American. Many of these companies have emerged from US universities, which fill 17 of the top 25 places in the world rankings compiled by the Times Higher Education. Britain has five slots, the rest of the EU has none.

Europe has become more sluggish as economic policy has become centralised. Per capita GDP in the original EU6 states gradually converged on American levels in the first four decades after the second world war, peaking at 80% in the 1980s. It has since fallen to 65% of US levels.

Over the past decade the volume of UK exports to the EU has grown by only 4% due to stagnation in many eurozone markets, while exports to the rest of the world have grown by 42%. On current trends, the share of Britain’s trade accounted for by the EU will be 30% by 2030, a level last seen in the early 1960s. The latest balance of payments figures show that Britain runs a deficit with the EU, but a surplus with the rest of the world.



The second assumption is that membership of the EU is all that stands between the thriving Britain of today and the low-wage tax haven of tomorrow. Actually, Britain is already a low-wage, low-investment, low-productivity economy that happens to be bolted on to a massive financial centre.

It would be fatuous to argue that the EU is somehow responsible for the structural defects of British capitalism, because the dominance of finance over industry and the reluctance to invest in new plant and skills has been a feature of the economy for at least a century.

But at the margin, membership of the EU has accentuated those trends. The economic geography of the single market involves an international division of labour so that countries concentrate on what they do best. Germany is best at precision engineering; Britain is best at finance and so has acted as the merchant banker for the rest of the EU. That has made London extremely rich, but widened the gap between the capital and the rest of the country. It is no accident that London was so strongly for remain in the referendum, but its economy has more in common with the crescent of prosperity running through northern Italy, eastern France, the Low Countries and the western Länder of Germany than it does with the rest of the UK.



Similarly, free movement of labour has allowed employers to meet extra demand by taking on more staff at the minimum wage or just above, rather than by investing. That helps explain why employment is at record levels, but productivity has been feeble.

The cry from employers now is that curbs on migration will push up their costs and lead to consumers paying higher prices. Actually, consumers are already paying through the taxes that fund the in-work benefits which subsidise poverty wages.

There is an argument that says the UK currently has the best of both worlds: it is inside the single market, yet outside the single currency. Up to a point that’s true, but it ignores the fact that the recovery since the financial crash is built on unsound foundations. The feelgood factor is the result of ingesting large doses of monetary happy pills; ultra-low interest rates and quantitative easing. Mainland Europe is just as addicted to the drugs.



In their different ways, both Britain and the eurozone are zombie economies: Britain because the economy runs on worryingly high levels of debt; the eurozone because there is no political appetite for the further integration that might make the single currency work.

The big challenge for the UK government is not negotiating a free trade deal to replicate as far as possible the access granted by the single market; it is to remedy long-running defects so that the economy is more competitive and sustainable. Trade does not lead to innovation and investment; rather innovation and investment lead to trade.



Does the UK need Brexit to have a modern industrial strategy, to devolve power or boost public investment? In theory, no. In practice, change comes only during periods of upheaval, when it’s clear the status quo is no longer working. Historically, it is crises that force governments, businesses and individuals out of their comfort zone. Brexit is just such a crisis – for both Britain and the eurozone. It would be a crying shame to let it go to waste.



• This article was amended on 4 April 2017. An earlier version said Iceland “is not … part of the single market”. To clarify: as a member of the European Economic Area, Iceland does participate in the EU’s single market, with exemptions for agriculture and fisheries policies.