Brexit: The worst has been avoided

6 January 2021  
Hubert de Barochez  
Here we are. The UK has since 1 January departed from the EU in economic terms. While the  
country officially left the EU on 31 January 2020, a transition period had maintained it within  
the EU’s single market and customs union until the end of 2020. During this period, negotiations  
were held in order to define the terms of the two parties’ future relationship. The British and Eu-  
The United Kingdom has since 1 January  
fully exited the European Union, and a  
free-trade agreement has been found, as  
has been customary with Brexit, at the  
last minute.  
ropean negotiators eventually found a trade and cooperation agreement on 24 December 2020  
see box). This agreement covers the following topics: trade in goods and in services, digital  
trade, intellectual property, public procurement, aviation and road transport, energy, fisheries,  
social security coordination, law enforcement and judicial cooperation in criminal matters, the-  
matic cooperation and participation in Union programmes . It includes a free-trade agreement  
with no tariffs or quotas on any goods. The negotiations were stuck on three points for many  
weeks, but compromises have eventually been found.  
While that is good news for the British  
and European economies, Brexit is still  
The first main disagreement concerned the two parties’ commitment to respecting a “level  
playing field”, which means a framework that aims to maintain open and fair competition in the  
long term. The Europeans initially wanted the British to align dynamically on their standards  
environmental, social, fiscal, etc. This would have forced the UK to keep pace with the EU’s  
hard” and will surely trigger substantial  
economic losses in the long term.  
standards if those were to be raised in the future. Meanwhile, the UK insisted on regaining full  
sovereignty over the setting of its regulation, particularly on the topic of state aid. In the end, the  
two parties committed to “uphold common high standards” and agreed on “detailed principles  
on state aid to prevent either side from granting unfair, trade-distorting subsidies”. Moreover,  
each party will have the right to take “unilateral measures to safeguard their economies against  
unfair competition from the other party”.  
The second major point of divergence concerned fisheries. On this issue, the UK had the  
high ground as the dispute had to do with access to UK waters for EU fishermen. While  
the Europeans initially asked unchanged access conditions – which means unlimited ac-  
cess – the UK offered to reduce the quotas for European fishermen by at least 60% and to  
renegotiate their access every year. Finally, in light of the limited capacity of British fi-  
shermen and of the importance for them of the EU market, European fish boats will conti-  
nue to have generous access to UK waters until at least 2026, renouncing to only 25% of  
their quotas by then. Only from this date will the conditions be renegotiated annually.  
Finally, the British and European negotiators could not agree on the governance of the  
agreement, which means on a dispute resolution mechanism. As the Europeans wanted,  
there will be a single governance framework for the overall agreement. Disagreements,  
including on topics such as level playing field and fisheries, will be discussed by the  
Partnership Council, which will be tasked to oversee the implementation of the deal. In  
case the Partnership Council failed to solve the issue, an independent arbitration tribunal  
will settle the matter through a binding ruling, which could include the reintroduction  
of tariffs or quotas. Should one party fail to respect that ruling, the other will have the  
possibility to “cross-retaliate”, which means to impose sanctions in other economic sectors.  
Questions & Answers: EU-UK Trade and Cooperation Agreement, European Commission, 24 December 2020.  
The bank  
for a changing  
Eco Flash 21-01 // 6 January 2021  
This free-trade agreement has prevented a return to the WTO base  
rules for the exchanges between the UK and the EU, which would  
have meant the imposition of tariffs and quotas. As such, that is good  
news, particularly for the British economy – the EU is, by far, its main  
commercial partner. That said, given that it has left both the EU’s  
single market and customs union, Brexit was still “hard”. Despite this  
agreement, the shock to its economy could therefore be substantial.  
The Office for Budget Responsibility (OBR), which provides independent  
forecasts to the Treasury, estimates that the “new trading relationship  
The EU-UK Trade and Cooperation Agreement was found on  
24 December after nearly ten months of negotiations. On the  
British side, both the House of Commons and the House of Lords  
approved the agreement on 30 December. The Queen then gave  
Royal Assent to the deal, which officially became UK law only a  
few hours before the end of the transition period.  
will] lead to a long-run loss of output [for the UK] of around 4 per cent  
On the European side, the agreement came too late to be  
approved by all parties in due course. The ambassadors of  
all twenty-seven EU member states therefore approved the  
provisional application of the deal until 28 February 2021.  
Unless that deadline is postponed, the European Parliament and  
then the European Council will need to give their consent to the  
agreement before then. While MEPs have warned that they will  
not just rubber stamp the deal, it is quite unlikely that they will  
reject it.  
compared to remaining in the EU”. According to the same source, a no-  
deal exit would have cost an additional 2 percentage points of GDP .  
Therefore, while a break down of the negotiations would have been  
harmful for the British economy, it is the exit from the EU’s single market  
that would in any case have had the biggest negative impact on activity.  
Investors made no mistake about that. The pound barely reacted to  
the news that a deal had been found, suggesting that this scenario  
was already priced in to the market. However, the British currency has  
risen by less than 2% against the euro since the two parties said on  
1 December that a no-deal exit was the most likely scenario. The  
deal therefore does not seem to generate much optimism among  
investors. In fact, at EUR 1.12, the pound remains nearly 15% below  
where it was right before the Brexit referendum in 2016. Admittedly,  
that also reflects the particularly large impact of the Covid-19 crisis  
on the British economy and the country’s persistent current account  
deficit. However, the pound was already very weak before the  
pandemic started and that deficit largely predates the referendum.  
According to us, Brexit will have important consequences for economic  
policy in the UK. We anticipate that the government and the Bank  
of England will have to maintain much more accommodative fiscal  
and monetary policies than would otherwise have been needed .  
In addition to its substantial impact on the economy, and partly  
because of it, Brexit could have major political consequences. The  
Scottish Parliament and the Northern Ireland Assembly both voted on  
0 December to reject the deal found by the negotiators. In 2016, the  
Scottish and the Northern Irish voted for Remain by 62.0% and 55.8%,  
respectively. Admittedly, Scotland voted by 55.3% in 2014 to remain  
in the UK. However, at the time, some were concerned that leaving  
the UK could mean the end of Scotland’s membership to the EU.  
Hubert de Barochez  
United Kingdom: what will be the economic consequences of a hard Brexit?, BNP Paribas, Eco Conjoncture n°9, 30 November 2020.  
The bank  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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