The danger of no Brexit deal to UK economy
Risks are all on the British side, and EU leaders know this
What will happen to the British economy if the Brexit talks end with no deal being struck? This is an important question and one that few politicians and pundits try to address in detail. In a TV interview on Monday night, Theresa May again repeated her mantra that “no deal would be better than a bad deal” and that Britain has to be prepared to walk away from the table. But how likely is this to happen? And what would be the result?
There are two reasons why the UK-EU talks might collapse into a disorderly Brexit. First, some aspects of the negotiation are genuinely difficult to resolve. Britain is being asked by the EU to pay billions into the bloc’s budget, a demand London firmly resists. The EU also insists that the UK must maintain freedom of movement and subservience to the European Court of Justice during any transitional period after March 2019. These are concessions that Mrs May could find impossible to sell at home.
Second, a lot of Conservative politicians, and a few ministers, genuinely believe Britain can walk away from the talks without incurring much economic damage. Last week, Conservative Home, the leading website for Tory activists, ran a week-long series on what would happen if there were failure to reach an agreement. The tone of the series is captured by one contributor who suggests that shifting to World Trade Organisation rules would be “a walk to a beach, not a cliff-edge drop to destruction”.
Many business leaders and economists vehemently disagree with this assessment. As John Springford and Simon Tilford of the Centre for European Reform argue, there are three ways in which a “cliff edge” Brexit would severely damage the UK economy. EU tariffs would immediately be payable on imports from Britain, averaging about 4 per cent but varying hugely. British car exports would face a 10 per cent tariff. This would be hugely damaging for the motor industry, which relies on components crossing borders many times before a vehicle is assembled.
Second, the UK’s departure from the Customs Union would mean that rules of origin immediately come into force to determine the national origin of any product. “This process would be time-consuming and costly and many firms . . . would be unable to comply and would cease exporting to the EU,” say the CER authors.
Third, the UK would enter a regulatory no man’s land and many British products would no longer be accredited for sale across the continent. Sales of British pharmaceuticals or chemicals in the EU would not be authorised; UK-based financial firms would lose their passporting rights; airlines would not be able to fly between airports in the union. All this would happen overnight.
Britain’s threat to walk away from the negotiating table would carry weight if it risked damaging the European economy as well. But the pain for the EU would be nowhere near as great. Some central bankers argue that there will be substantial financial stability risks to the EU from a sudden end to the operation of EU law in Britain. But the CER’s authors think that Brussels could grant UK-based clearing houses temporary equivalence for a year to help contain the fallout.
Instead, the economic risks are all on the UK side. “British exports of goods and services would shrink very sharply,” say the CER authors. “The hit to exports and to the attractiveness of the UK as a place to invest would in all likelihood provoke a sharp fall in the value of sterling.” This would lead to a rise in inflation, the erosion of disposable incomes, a fall in consumption and a deep recession.
Mrs May’s threat to walk away with no deal is the political equivalent of Britain shooting itself in the foot — or worse. The EU’s leaders know this and, as a negotiating tactic, it does not trouble them at all. What is far more worrying is that many Conservatives continue to view a descent into WTO rules as an attractive option. The more Mrs May utters her mantra that “no deal is better than a bad deal”, the more emboldened these Conservatives will feel.
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