It is now more than three years since the UK voted in a referendum to leave the European Union (EU). And yet, no one knows the direction in which the country is heading. A withdrawal agreement is on the table, but this has been rejected on three occasions by the House of Commons, so it would be quite some feat to get it ratified by 31 October 2019 (the next deadline). In a last attempt to find support at Westminster, Prime Minister Boris Johnson proposed to remove the “backstop” for Northern Ireland that was intended to prevent the return of hard border with the Republic of Ireland, while maintaining the integrity of the single market.
Growth and inflationBut his offer to the twenty-seven other EU member states (the 27) is unlikely to find favour either for its form (it has been presented as a ‘take it or leave it’ offer) or for its contents. Thin on detail, legally and operationally questionable, Boris Johnson’s alternative to the backstop suggests that the two Irelands could remain in a common regulatory zone, whilst belonging to two different customs unions (British and European) and that all this could be achieved without re-introducing border checks. At the time of writing, the European Parliament and the President of the Council, Donald Tusk, have given these proposals a pretty frosty reception.
In the unlikely case Boris Johnson reaches a new deal with the 27, he would have the greatest difficulty in ratifying it, having lost his majority in a House of Commons he tried to suspend[1]. This would leave the end-point either as a ‘no deal’, although this has been prohibited by a recent change in the law, or the more likely, but by no means guaranteed, outcome of a new delay accompanied by an early general election.
The economic cost of a no-deal Brexit…Deal or no deal…
Whilst negotiating a withdrawal agreement (WA), the 27 have been actively preparing for the possibility of a no-deal exit. To do so, the Council and Parliament have adopted a series of contingency measures covering areas as varied as fisheries, data transfers, citizens’ rights, transports, chemicals or medicines. Most of the proposed solutions are temporary and subject to reciprocity from the UK (see Box 3); the European Commission has also indicated that they will in no way replace the EU’s rules and preferences, which will cease to apply to the UK on its departure date. The aim is to soften, as far as possible, the impacts of no deal, which nearly all economic actors?–?with UK businesses topping the list?–?believe to be both negative and inevitable.
Some examples of contingency measures adopted by the EU in the event of a no-deal Brexit In a study published recently[2], the Organisation for Economic Cooperation and Development put the loss in UK’s production following a no-deal at nearly 3 points of GDP by 2022. The National Institute of Economic and Social Research (NIESR) puts the figure at 5 points. This is only an average. Given the UK’s role in European value chains, the losses would be particularly severe in several highly integrated sectors, like automotive and aerospace (Chart 2).
Whilst not negligible, the shock would be more bearable for the euro zone (a 0.6 pp loss in GDP after three year, five-times less than in the UK). Clearly, the picture would be very mixed from one country to the next, with Ireland, for instance, seeing an impact on growth eight times greater than that in Spain[3]. As a result, the support measures already include provisions to redirect EU resources (such as from the European Maritime and Fisheries Fund for example) towards the worst-affected sectors and regions.
A no-deal Brexit represents a leap into the unknown and no one can claim to be able to predict its exact consequences. Econometric analysis therefore plays only an indicative role. One of its merits, though, is that it shows that the process will end poorly for pretty much everyone; there will be no winners, only different types of loser. In the run-up to 31 October reason rather than desire is likely to push UK and EU leaders to agree a fresh extension (the third) prior to finally separating… or not. The UK could well hold an early general election, and at the moment the polls are showing a lead for Boris Johnson’s Conservative Party.
… the damage is done
Whatever the final outcome, the Brexit saga has already caused significant damage to the UK economy, which will be hard to repair. The transfers to continental Europe of the European Banking Authority, the European Medicines Agency, the security centre for the Galileo GPS system, or simply the subsidiaries and headquarters of groups seeking to secure access to the single market are all probably one-way moves. For the first time since the financial crisis of 2008, the UK’s balance of payments has shown a chronic net outflow of foreign direct investment.
Economic conditions in the UK are deteriorating. Business surveys remained weak throughout the summer and GDP contracted in the second quarter. At 49.3 in September, the Purchasing Managers Index is at its lowest for ten years, apart from its brief collapse in July 2016 after the Leave victory in the referendum.
