With ‘No Deal’ Scenario Set for Brexit, is the UK Ten Weeks Away From Economic Doomsday?

Almost all projections show a hard break from the EU will lead to severe economic repercussions for the UK. Yet Prime Minister Boris Johnson doubles down on his campaign promise that the UK will leave the EU -- whether or not a deal is in place. Source.

As the unofficial Mid-October deadline for a Brexit deal passed with no avail, British Prime Minister Boris Johnson addressed the UK on October 16 and made clear the likelihood of a No-Deal Brexit: “I concluded that we should get ready for 1 January with arrangements that are more like Australia’s based on simple principles of global free trade.” Steeped in a bedlam of uncertainty and fear over how intensely a hard exit from the European Union (EU) will crater the UK’s economy, the center of the world’s financial services industry stares at a recession that could dramatically shrink the power of one of the most powerful nations in the world. 

The UK is currently in the “transition phase” of leaving the EU. This started January 1, 2020, and lasts until December 31, 2020, allowing both sides to follow the same pre-Brexit rules of interaction while negotiating stipulations for Brexit. The COVID-19 pandemic has exacerbated the difficulties of any economic agreements. Yet, even before the pandemic, the EU and the UK were long locked in a war of attrition at the negotiating table. Among the main points of contention between the two sides are free-trade guidelines, border checks on goods, and Fisheries. 

Points of Contention

Although the fishing industry is relatively non-consequential for the EU and UK -- less than 1% of the UK's economy -- coastal communities on both sides of the channel depend on the industry. The UK wants to be able to sell fish in the EU market without any hindrances. In response, the EU wants its member nations to have access to English waters -- drawing the ire of British Parliament. British negotiators have asserted that they do not want other nations crowding out UK fishing boats on UK fishing waters. 

The most important aspect of negotiations between both sides have centered around free-trade. In short, the UK wants to come to terms with the EU on a free-trade agreement that mimics the one the EU has with Canada. This would translate to zero-percent tariffs on most products and negate any quotas -- meaning that there is no limit on the quantity of a specific product being traded. The EU says it will not agree to this type of deal without a “level playing field” (a trade-policy that prevents businesses operating in other countries from gaining competitive advantages by being subject to the regulations of different countries). It’s incumbent on both sides to successfully broker a trade agreement, as mutual free-trade is the centerpiece to Brexit. 

This is because the UK is subject to the World Trade Organization (WTO), by virtue of leaving the EU. Members of the WTO are endowed with a list of tariffs and quotes which they must abide by when trading with other nations they don’t have a trade agreement with. This is where the problem starts for the UK and EU. At the core of the free-trade quandary are the WTO’s “most favored nation” rules -- member nations cannot favor or advantage one country over another in trade. This means that for the UK, normal offerings in trade agreements can’t be made with the EU -- like offering to lower tariffs on the EU -- without providing that concession to every other country in the world (which would damage UK domestic business and create an influx of cheap imports). The small margin of error for the UK explains the delays of Brexit, but also makes it that much more imperative that a deal must get done. 

The projected 3% difference between a Free-Trade agreement and trading under the WTO’s rules may seem small, but would cost the UK hundreds of Billions of British pounds in losses. Source

What’s at Stake with a No-Deal Brexit

Firstly, the EU is the UK’s biggest trading partner, as the BBC reports in 2019 that the EU accounted for 43% of the UK’s exports and 51% of its imports. The domestic impacts are just as important. The UK’s Office for Financial Responsibility (OBR) reported conservative estimates of Brexit’s financial impacts. OBR predicts that house prices will lower by 8% greater than previously thought. Additionally, they expect business investments to decrease by 10%. Internationally, OBR predicts that the British pound will fall by 10% in comparison to the EU’s Euro: a startlingly high drop off for a historically valued and solid currency -- and an important piece of the world order -- that is sure to suffer even more due to inflation brought on by the pandemic. 

Additionally, CNN reports that CitiFinancial and the Institute for Fiscal Studies (IFS) believe that the UK’s economy will shrink by 9.4% this year -- its largest decrease since 1921. Citi and IFS also project that if no trade deal is reached, the UK stands to lose $25 billion (20 billion british pounds).

And yet Brexit’s most crippling effects may be in the recession of the financial sector. London is home to the world’s capital for financial services, ranking second on the Global Financial Centres Index (2019), and is witnessing its financial firms leave. Since the Brexit referendum was passed in 2016, over 300 financial firms have relocated elsewhere in Europe. Even worse, they have flocked to major cities in the EU. Frankfurt has seen 43% of London banks come to them; while Amsterdam has been the popular destination for London trading firms. As a result, The Economist cites an estimate that 1 trillion British pounds will leave the UK. Thus the EU stands to benefit from the migration of workers and firms at the expense of the UK. 

Impact On Other Countries  

Signed on April 10, 1998, the Belfast Agreement, also called the Good Friday Agreement, ended decades of violence and political conflict between North Irish Protestants and Irish Republican Catholics. With Brexit potentially threatening the agreement, it adds another layer of complication to already faltering talks. Source

Outside of economics, Brexit heats up foreign policy between the UK, Northern Ireland, the EU, and the U.S. Specifically, Brexit holds the possibility of breaking international law. A recently proposed law in Britain would allow the UK to “override rules on checking goods” travelling from Northern Ireland to places in the UK -- violating a previous agreement with the EU. Confounding this is that Northern Ireland is part of the UK but the Republic of Ireland is a member of the EU. The fissure between the two sovereigns directly threatens the Good Friday Agreement that former U.S President Bill Clinton was integral in brokering. The U.S interests in the Good Friday Agreement thus further muddies the waters for Brexit, especially as the U.S response will vary greatly depending on who wins the presidency come November 3rd. Vice President Joe Biden -- who is of Irish descent -- tweeted, “We can’t allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit. Any trade deal between the U.S. and U.K. must be contingent upon respect for the Agreement and preventing the return of a hard border.” President Donald Trump’s response is not clear.

As leaders from the UK and EU continue to meet, millions hope that a last second Brexit deal lessens the hurt of a purportedly unavoidable economic recession. Brexit fatigue has overtaken just about everyone, as PM Boris Johnson himself has eschewed prudent negotiating and made clear he will drive Brexit through any wall -- deal or no deal. But as the world is still fighting the COVID-19 virus, the future of millions of British and EU residents, and the economic balance of the world order, will be decided by whatever collaboration and compromise can be made in the next ten weeks.