UK PM Burnham sows seeds of "Breturn" that could excite markets: Mike Dolan
By Mike Dolan
LONDON, Oct 1 (Reuters) - Never mind Britain's stretched budget numbers. The real surprise this week was new Prime Minister Andy Burnham's push to re-engage with the European Union — including the possibility of rejoining. It may matter far more for markets. Even a whiff of "Breturn" could move sterling assets.
Better EU relations have been in the policy mix since the Labour Party returned to power in 2024, but sweeping geopolitical events over the past 18 months, combined with a change of prime minister determined to pursue his core beliefs about how the country should be repaired, are now supercharging the idea.
If even Canada is now eyeing "associate" EU membership in a bid to rally the "Middle Powers", the risk that Britain could be adrift as rivalry between the world's economic and military superpowers intensifies is very real.
At his Labour Party's annual conference on Tuesday, Burnham, who campaigned to stay in the EU in a 2016 Brexit referendum, argued the nation should again consider options for "Britain's long-term relationship with our European partners."
He said all options from closer relations to rejoining the EU single market to re-applying for membership would be on the table for his party and the wider public to consider.
But instead of setting it aside on a long to-do list, Burnham doubled down on the idea in interviews right through Wednesday — re-emphasising that full reversal of Brexit was one of the options.
Britain can't decide this on its own, of course. EU governments have shown little appetite for reopening accession talks, domestic opposition remains vocal, and any transition would carry its own costs. Moreover, any process could take many years. But the direction of travel could well excite investment and markets long before the destination.
At the core of Burnham's message was the most basic observation: "Brexit has done more harm than good."
More than a decade after the narrow referendum to leave the EU, that view has substantial support among the public and many economists.
With the referendum's anniversary marked in June, reams of analysis on the economic impact poured out. While formal Brexit didn't happen until the height of the 2020 pandemic, making cause and effect hard to disentangle, the only real debate among economists now is how much the decision hit trade and gross domestic product (GDP) — not whether.
The Office for Budget Responsibility estimates range from a cumulative 4-percentage-point hit to UK productivity to a long-term lowering of 15 percentage points of imports and exports. The total effect on British GDP is estimated at anywhere up to 6-8 percentage points.
Even more benign scenarios — such as Deutsche Bank's "doppelganger" approach, which looks at how Britain might have performed if it hadn't left — see the cumulative GDP hit at as much as 4 percentage points.
That's before you get to the business and financial complications related to renewed barriers, red tape and movement restrictions between Britain and its biggest trading partner. Even the loudest rallying cry of Brexit — to reduce immigration — didn't reduce overall numbers to any significant degree; it only shifted their origin.
Opinion polls show significant regret — underlining why Burnham may feel confident in broaching the issue politically.
A YouGov poll published early in September showed 55% of respondents felt Brexit marked a "wrong turn" — compared with just 21% who thought the opposite and 11% who were equivocal. A separate poll found some 55% in favour of rejoining. And an Ipsos poll earlier in the year showed 52% favoured re-applying for EU membership compared with 33% who wanted to stay out.
SLOW BURN?
It's true that Burnham's speech initially produced no financial-market fireworks. Bond markets were more focused on pension and social care reforms and other domestic initiatives, broadly applauded by commentators.
Helped by an upgrade to second-quarter GDP estimates, sterling was more buoyant on Tuesday against both the dollar and euro — and gilts may have surfed some of the Burnham momentum too.
After all, the pound was the biggest casualty of the 2016 referendum, with its effective exchange rate index plunging 14% in just three months after the vote. After a slow rebuild, it's taken a decade to get back close to where it was before the shock — even though it remains down about 10% against the euro and dollar and still has a considerable gap to close.
A harder job will be to repair the widely worrying underperformance of UK equities .FTSE over the past decade and what many still see as a gaping "Brexit discount" between UK stock valuations and those of euro zone counterparts — never mind Wall Street.
For some, Brexit, or its reversal, now seems as central to Britain's most pressing issues as welfare reform and defence. Burnham's intervention suggested a willingness to confront the really big questions rather than dancing around them.
Economist Anatole Kaletsky at GaveKal Research reckoned Burnham's speech may be seen as a pivotal moment for the UK economy and "a bullish inflection point for sterling assets."
"These are the great issues that will determine whether Britain prospers or stumbles in the decades ahead," he added.
A decade of confusion and loss of direction in Britain might be coming to a close — just as the rest of the world becomes harder to navigate.
(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)
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