Brexit: Deal or No Deal

The last few years in European affairs have been dominated by the controversially proposed exit of Great Britain from the European Union, or as it is colloquially known: Brexit, since the Prime Minister (PM) David Cameron first promised a national referendum in 2013. The aforementioned referendum was held three years later, asking the British People to make a seemingly simple choice: to remain or to leave. The result was in favor of leaving by 52 percent of the vote, thus bringing to the forefront the struggle between the EU and Great Britain on the matter of parsing out the details on how to actually proceed with leaving. Three years and a new PM later, the world still waits as proposals and resolutions are flung back and forth across the negotiating table of Parliament with no apparent end in sight. The possibility of a no-deal Brexit looms, and the economic implications of such a move keep Great Britain (and the rest of us!) on the edge of our seats.

Should PM Theresa May not be able to succeed in passing a resolution or plan through Parliament, a no-deal Brexit outcome is quite possible with no agreements, no plan for the future. Such an outcome is unfavorable for Britain and the EU, and the economic impacts would be felt nationally and globally. International Monetary Fund chief Christine Lagarde echoed this sentiment in her argument that a messy or no-deal Brexit represents the biggest short-term risk to the British economy, and that “the higher the impediments that arise in the new relationship with Europe, the higher the cost.” Europe, as Britain’s largest export market and source of foreign investment, has aided in the establishment of London as a global financial center. The new relationship dynamic which would emerge in the aftermath of a “no-deal” would be full of uncertainty and could jeopardize all the gains made in economic growth since Britain joined the organization almost 50 years ago. The costs would also be felt in other European countries such as Portugal, whose largest tourist market is the British People. Trade relationships could be disrupted, and as Lagarde predicts, “loss of financial market confidence outside your borders could lead to higher sovereign and bank interest rates, which would weigh on growth”. On global economic conditions, Lagarde cites the risk of a faster-than-expected deceleration of growth spurred by rising trade tensions, high global debt levels, and slower Chinese growth, among other factors.

One of the arguments from Brexit supporters is that leaving the EU will allow the British economy to further prosper without being shackled by foreign influence. Increased independence as a nation will allow Britain to have greater agency when deciding on trade partners both inside and out of the EU. However, after an official economic analysis by the British government, it has been estimated that the British economy would be 3.9 percent smaller by 2035 than if it would stay. The analysis was facilitated using figures of current non-EU countries under terms similar to PM Theresa May’s proposal. The report concludes also that the benefit of trade deals with fast-growing economies outside the EU would be negligible. An assumption was made that, by 2035, Britain would have trade deals with the United States, Australia, New Zealand, China, India, Malaysia, Brunei, Kuwait, and Bahrain. Given this, the gains from trade only comprise around 0.2 percent of GDP. To put the data into context, consider table 4.12 included in the report which provides a summary of drivers of the long run aggregate GDP impact.

Compare the no-deal scenario as previously discussed and the White Paper scenario (an agreement is reached between Britain and the EU that clears uncertainties about future relations and lays out a basic plan for moving forward as two separate entities). Factors considered in determining trade contributions of each alternative are tariffs, non-tariff barriers, and new trade deals. The total trade impacts for each (measured in percent GDP change) are -7.6 and -0.7, respectively. While it must be said that that trade gains between the two are tied as highest among the options, the tariffs and other non-tariff barriers which would be in place following a no-deal scenario far more than offset any trade gains. This analysis, published in late November 2018, provided strong evidence to contradict any who would argue that Britain’s economy would be for the better in the long-term outside of the EU. It has led to the now all-too-familiar doctrine, on both sides, of minimizing the damage of any withdrawal. The worst-case scenario, that being a messy no-deal Brexit, predicts that Britain’s GDP would fall 9.3% (as estimated by the British government). Another report, this one from the Bank of England on the worst-case scenario of the other side, predicts a shrinkage of the economy by 8% in a year. Additionally, bank analysts predicted a 30% plummet in house prices and devaluation in the pound from $1.27 down to $1.10. Philip Hammond, the chancellor of the Exchequer, acknowledged that in a purely economic sense Britain would be worse off under any proposed withdrawal than if they had stayed.

Britain gave formal notice to quit the EU on March 28, 2017, thus setting the initial formal date for the exit to two years later. The date has since been pushed back to April 12th, 2019 as Prime Minister Theresa May scrambles to find any proposal that satisfies Parliament and minimizes effects of the exit. In a desperate last bid to get any kind of deal passed, she said she would resign if or when her Brexit deal was put into effect. In a meeting of conservative lawmakers wherein the resignation offer was discussed, May told them that “a new approach, and new leadership” may be needed. The announcement of her conditional resignation has turned some heads. Boris Johnson, the former foreign secretary, and former party leader Iain Duncan-Smith were two key lawmakers swayed by this. The promise to resign certainly had momentum, but failed to put to rest debates over Brexit. Just one party unsatisfied by the current state of negotiation is the hardline Northern Irish group holding May’s minority government together, the Democratic Unionist Party. The DUP directly concerned with the so-called Irish Backstop provision within her proposal which would have Northern Ireland remain in a customs union with the EU should an agreement not be reached between the EU and Britain. It was certainly a bold tactic by PM Theresa May, but it has essentially led back to square one. There has even been talk of a second referendum from Chancellor Philip Hammond despite such a position having been previously ruled out by May. Negotiations seem to be only going in circles, and if these conditions persist as the April 12 deadline quickly approaches, a no-deal Brexit and the economic implications attached become more and more likely.

Sources

BBC News. (2018, November 28). Brexit will make UK worse off, government forecasts warn. Retrieved from https://www.bbc.com/news/uk-politics-46366162

Castle, S. (2018, November 28). All Brexit Deals Worse for Economy Than Staying, U.K. Government Says. Retrieved from https://www.nytimes.com/2018/11/28/world/europe/uk-brexit-economy.html?module=inline

HM Government. (2018, November). EU Exit: Long-term economic analysis. Retrieved from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/760484/28_November_EU_Exit_-_Long-term_economic_analysis__1_.pdf

John, T., & Nobilo, B. (2019, March 28). Brexit still deadlocked as UK Parliament rejects alternative plans. Retrieved from https://edition.cnn.com/2019/03/27/uk/theresa-may-brexit-intl-gbr/index.html

John, T. (2019, April 4). No-deal Brexit law passed as Theresa May faces fury from her own side. Retrieved from https://www-m.cnn.com/2019/04/03/uk/brexit-no-deal-bill-yvette-cooper-theresa-may-gbr-intl/index.html?r=https%3A%2F%2Fwww.google.com%2F

PÉrez-peÑa, R. (2019, January 30). What Is the Irish Backstop, and Why Is It Holding Up Brexit? Retrieved from https://www.nytimes.com/2019/01/30/world/europe/irish-backstop-brexit.html

RTE News. (2019, March 04). IMF'S Lagarde warns of 'messy' Brexit consequences. Retrieved from https://www.rte.ie/news/business/2019/0304/1034141-imf-warns-on-messy-brexit/