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Economic & Strategy Viewpoint
The deadline draws nearer but uncertainty persists. Where will the UK be this time next year?
The June 2016 EU referendum is now almost 30 months behind us – and the deadline by which the UK has to leave the Union, with or without a negotiated deal, lies merely six months ahead.
At the time of publication, negotiations between the UK and EU officials have not yet resulted in an agreement. In July, the UK government published a white paper on its envisaged future relationship with the EU – the “Chequers agreement” – and it has satisfied very few parties. Neither Brexit supporters nor Remainers are happy with the compromises it outlines, and time is running out.
If an agreement cannot be reached, and the 29th March 2019 deadline is not deferred, then the UK would leave the EU without any deal. This is referred to as a “no-deal” or “cliff-edge” Brexit. “The trade-offs and consequences of Brexit are sharply coming into focus,” says Azad Zangana, Senior European Economist and Strategist at Schroders.
He believes that while there is a widely shared hope of arriving at a deal, splits within the UK’s major political parties – among other factors – could result in a “no-deal”.
“The UK and the EU have been clear that ‘nothing is agreed until everything is agreed’,” Azad says. “The UK government has started to issue advice to businesses and officials about the potential impact of a no-deal Brexit. This, extraordinarily, includes the need to stockpile food and medicine.”
Officially called “The future relationship between the United Kingdom and the European Union”, the white paper published on 12th July is colloquially known as the “Chequers agreement” – it was at the prime ministerial country retreat, Chequers, that Theresa May sought to persuade minsters to support it.
Despite initially indicating their support, two key pro-Brexit ministers – Boris Johnson and David Davis – resigned in protest shortly after the agreement was released. Even President Donald Trump, visiting the UK at the time, criticised the document, to the embarrassment of Theresa May.
The Chequers proposals would allow free trade for most goods including agricultural produce, based on common standards, but giving the UK the ability to diverge should it choose to.
A new “Facilitated Customs Arrangement” would mean no customs and border checks, but would require the UK and EU countries to levy appropriate tariffs as goods passed through.
There would be ongoing participation in key European agencies, but the UK would retain the right to agree separate trade deals with other countries. Significantly, the proposals do not include a free trade agreement relating to services, something which is likely to lead to some loss of access by the UK to EU markets.
There would be no free movement of labour, but instead reciprocal visas for tourism, business travel and study would be introduced. “Overall, the proposal looks like it sits somewhere between the Canada trade deal and the European Free Trade Association, also known as the ‘Swiss option’,” says Azad.
But he warns of the consequences for no agreement relating to services. “With services making up 80% of UK output and more than half of the UK’s exports, we are disappointed the government has not pushed for a free trade agreement in services,” he says.
Insurance, banking and investment management are likely to suffer, Azad warns. “It is clear that market access for the UK financial services firms will be materially lower,” he says. “For many finance firms, especially investment banks, this is the hardest form of Brexit they could face.”
He points out that the sector employs more than one million people in the UK and contributed £72 billion in tax for the year 2017 – or 11% of total receipts. “Damaging financial services will not only lead to the loss of high value-added jobs, but also hurt public finances and public spending,” he says.
The chart above, drawn up by Schroders Economics Group, maps out at a macrolevel the different ways in which Brexit might unfold. It may change: several key meetings lie ahead, including an EU leaders’ summit on 17th November. It shows how from the current position there are two effective routes. One would entail an “agreed” path, where the UK would enter a transition period of 21 months, during which permanent arrangements would be confirmed and ultimately introduced.
This transition period could result in a spectrum of outcomes from “hard” to “soft” Brexit. The alternative path from here, come the deadline, would be a “cliffedge” scenario, which would take the UK straight to the position of having no trade agreements in place with the bloc other than the World Trade Organization rules.
“We have excluded the option of remaining in the EU,” Azad explains. “That is because there is not enough support for Parliament to override the referendum result; and there is not enough time, or the political will, for a second plebiscite.”
“The problem for the Prime Minister is that the Cabinet reflects a divided country,” says Azad. “In the referendum, 48% of those who took part voted against Brexit, and while some are now content with leaving the EU, the majority want a soft Brexit, which would include access to the single market and free movement of labour.”
He points out that while Brexit supporters are themselves divided on some of these issues, a “worryingly large” faction want a “no-deal” scenario, as they see this as the quickest route out of the bloc.
“Brexiters complain that the UK will become a satellite state of the EU, being forced to be a ruletaker without having any influence over how those rules are made,” Azad says.
“Brexiters are being shortsighted,” he argues. “If they truly believe the country agrees with their vision of a hard Brexit, they should back the current proposal as it stands, then seek to change the relationship in future.
“The risk is that the Prime Minister loses further support from both sides of the debate, potentially leading to a leadership challenge or even a general election.
“This would almost certainly delay Brexit proceedings, but could even lead to a cliff-edge Brexit at the end of March 2019.”
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