Brexit update

EcoPerspectives // 1 quarter 2020  
United Kingdom  
Brexit update  
On 31 January 2020, the United Kingdom will officially leave the European Union and all of its constituent institutions. Brexit will  
therefore happen officially if not in fact, as, during a so-called ‘transition’ period set to end on 31 December 2020, the British economy  
will remain a full part of the single market and the European customs union. Goods, services and capital will continue to move freely  
into and out of the EU, which will continue to have legal and regulatory authority. True separation will only come at the end of this  
period, once the framework of the future relationship has been settled. As has been the case for some time now, this final step does  
not look easy to achieve.  
Winning 43.6% of the vote and 365 of the 650 seats in the House of  
- Growth and inflation  
Commons, the Conservative Party led by Prime Minister Boris  
Johnson was the big winner in the 12 December 2019 general  
election. There are therefore no more parliamentary obstacles to a  
separation of the United Kingdom and the European Union (EU).  
GDP Growth (%)  
Inflation (%)  
On 19 December 2019, MPs voted by 358 to 234 in favour of the  
Brexit Bill, that enshrines the Withdrawal Agreement between the  
United Kingdom and the EU in law (see Box). Ratification is likely to  
follow, after debate in the House of Lords and assent by the Queen,  
which is a formality. Votes in the European Parliament (by simple  
majority) and then the Council of Europe (by qualified majority) will  
follow, for the legal withdrawal to take place at midnight (Paris time)  
on 31 January 2020. The United Kingdom will then officially leave all  
of the EU’s institutions (Parliament, Court of Justice, Commission  
and so on) but will not immediately leave the single market, the  
rules of which it will continue to follow throughout the transition  
period which is expected to run until 31 December 2020.  
1.3 1.3  
Source: National accounts, BNP Paribas  
- Industry in recession  
Purchasing Managers’ Index (PMI), manufacturing sector (rhs)  
Manufacturing production, vol., 6m/6m (lhs)  
A red line that runs straight into a wall  
By this deadline, the UK and EU are supposed to have set the  
framework for their future relationship and to have completd their  
effective separation. However, many European observers believe  
that the eleven month-period available to achieve this is too short.  
The Withdrawal Agreement includes the possibility of extending the  
transition period, but this has been formally rejected by Mr Johnson,  
who has included the 31 December 2020 date in UK law. The  
radical line adopted by the Prime Minister, with a full withdrawal  
leaving both the single market and the customs union) to be  
completed rapidly, will be hard to hold.  
Source: Markit, ONS  
First, because it will encounter significant political resistance. The  
UK’s first past the post electoral system means that supporters of a  
These require the mutual respect of standards (technical,  
employment, health, environmental) and laws (geographical  
indications, intellectual property and so on). The task of undoing all  
of this only to replace it on a case by case basis with tariff or  
cooperation agreements will be onerous and complex. It promises  
tough negotiations with the EU, whose chief negotiator, Michel  
Barnier, has repeatedly stressed that he will not accept any  
agreement that risks the creation of unfair competition from the UK.  
But this is not the only task that lies ahead. By going it alone, the UK  
will also have to renegotiate, with 168 different parties, all of the  
trade treaties (there are 236 in total) that the EU has agreed with  
third countries.  
‘hard’ Brexit have taken control of Parliament, despite receiving a  
minority of the votes cast in the election. Alongside the Conservative  
victory in the House of Commons, the other standout feature of the  
12 December election was the surge in support for nationalist  
parties in Norther Ireland, Wales and Scotland; these parties are  
generally opposed to Brexit and in favour of their countries  
remaining in the EU.  
Secondly, because sooner or later a return to reality will be  
inevitable. Across all areas, from industry and agriculture, via  
energy and transport to data exchange and beyond, the links  
between the UK and EU are governed by a vast corpus of  
legislation and regulations consisting of around 600 structures.  
EcoPerspectives // 1 quarter 2020  
The most difficult part of the whole process  defining Brexit in  
concrete terms is, therefore, still to come, to the extent that the  
relief that may come from ratification of the WA could be short-lived.  
As we approach 31 December, the risk will clearly be that, for lack  
of time or ambition, the UK and the EU end up separating without an  
agreement. In this case, World Trade Organisation (WTO) rules  
would apply, which is in no-one’s interest.  
- The main provisions of the Withdrawal Agreement  
On 17 October 2019, the UK Prime Minister, Boris Johnson, and the  
27 EU Heads of State or Heads of Government, agreed a Withdrawal  
Agreement. This incorporated the bulk of the previous version agreed  
by Theresa May in November 2018 (but never ratified), with the major  
differences relating to Northern Ireland, where the previous text was  
heavily revised. In summary, under the WA:  
The economy is slowing down  
/ A transition period will run from the date of withdrawal until 31  
The final months of 2019 saw a continued slide in business climate  
indicators, as the industrial recession strengthened its grip  
December 2020, to allow the UK and EU to negotiate their future  
relationship. During the transition period, the UK will no longer be a  
member of EU institutions but will have continued access to the single  
market; it will follow the rules of the market (which, most notably,  
means that it will be unable to conclude trade agreements with third  
countries) and will remain subject to rulings from the European Court  
of Justice.  
Figure 1). The economy as a whole probably stagnated over the  
fourth quarter, with growth for the year of 1.2% on average. This  
was in line with the European average, as the euro zone economy  
also slowed and Germany flirted with recession. However, it looks a  
more modest performance when seen in the light of the trend in  
sterling , whose fall in value would normally be expected to boost  
2/ The status of foreign residents is secured. The 4 million EU  
citizens resident in the UK, and the 1 million UK citizens resident in  
the EU on the withdrawal date, will be free to remain and continue  
their activities, and will have their rights guaranteed (in terms of  
access to healthcare, education, employment, receipt of pension  
benefits, family reunification and so forth).  
However, the exchange rate elasticity of the UK’s international trade  
is considered to be low . Net exports did not increase in 2019,  
making a negative contribution to growth. Clearly, imports in  
anticipation of Brexit could have played a role in this, but the UK has  
also seen a deterioration in its cost competitiveness. Actions to  
increase the minimum wage are not the main cause of this. Even  
though it was described as historic, the increase announced by  
Mr Johnson (6.2% in April) does little more than continue the  
process of making up for lost ground that began under David  
Cameron. This has sought  but not yet achieved  the restoration  
of purchasing power losses suffered by workers after the 2008  
3/ The UK undertakes to settle its financial liabilities to the EU,  
under multi-year commitments made (the 2014-2020 budget, for  
European projects, etc.). Although the WA does not specify an  
amount (the final amount will depend on the terms of the agreement  
on the future relationship), UK sources estimate the financial  
settlement at around EUR40 billion.  
crisis . Its diffusion effect is highly dependent on the state of the  
4/ Northern Ireland will have special status, in order to satisfy the  
economy; it ceases to be significant above the first quintile of the  
income distribution (NIESR, 2018) .  
requirements of the 1998 Good Friday Agreement and avoid the  
reintroduction of a hard border with the Irish Republic. In contrast to  
the provisions of the original WA, Northern Ireland will be able to form  
its own customs union with the rest of the UK after the transition  
period (that is to say it will apply UK tariffs). The ‘backstop’ that would  
have kept the EU and the UK in a single customs territory on a  
temporary basis has thus been removed, but not without significant  
concessions and restrictions. Northern Ireland will therefore continue  
to apply European customs rules for those products coming into its  
territory that could then be exported to the single market. With an  
open border between the North and the Republic, this will inevitably  
result in the introduction of controls on imports from Great Britain or  
third countries. Northern Ireland will also continue to follow EU rules in  
a number of areas such as agriculture, energy (it will remain in the  
single market for electricity), state aid and the application of VAT. This  
protocol will apply for renewable 4-year periods. It will be subject to  
the control of a joint UK and EU commission, with the Northern Irish  
Assembly having a say on renewal.  
The weakening of the competitive position is in reality due above all  
to the slowdown in productivity growth, which has been particularly  
marked in the UK over the past decade . It seems unlikely that  
Brexit will provide the solution to this problem.  
1Between December 2015 and December 2018 the pound fell 20% against the  
euro and 16% in nominal trade-weighted terms. Source: Bank of England  
2See for example Bussière M., Gaulier G. and Steingress W. (2016) Global  
Trade Flows: Revisiting the Exchange Rate Elasticities, Banque de France,  
Working paper n°608, November  
Source: European Commission  
3Between the first quarter of 2008 and the first quarter of 2015, the index of real  
weekly wages (fixed and variable) across the economy fell by 11%. It has since  
recovered, but at the end of 2019 was still around 3% below its pre-crisis level.  
National Institute of Economic and Social Research (2018), National Minimum  
Wage and National Living Wage impact assessment: counterfactual research,  
Since 2009, average annual growth in hourly labour productivity has been 0.5%  
in the UK, compared to 1% in the euro zone. Source: Eurostat.  
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