Two years have passed since 51.9% of British residents voted leave. And now, with Britain scheduled to exit the EU on the 29th March 2019, the looming deadline is now only a few months away. Unfortunately for the United Kingdom, the Brexit situation is hectic - to say the least - and Parliament is more divided than ever. On Monday the 10th of December, the European Court of Justice (ECJ) excited Remain campaigners by ruling that Article 50 can be revoked without the approval of Member States [1]. Two days later, forty-eight of Theresa May’s own MPs triggered a secret vote of confidence on the basis that her policy betrays the 2016 referendum result [2]; it is clear she does not have the backing of her own Conservative party, let alone the rest of the population. Many have found Theresa May’s withdrawal agreement—which we have recently learnt is not up for renegotiation—hard to stomach [3], thus the possibility of a no-deal Brexit is very real. In the midst of the ECJ ruling and the secret ballot, it is an appropriate time to examine the possible options Britain is faced with and the potential impacts each will have on the local economy.
The Economy as it is
Though Britain seems to inevitably be heading for the exit, there are theoretically still a couple ways they may remain in the EU, or at least temporally prolong their stay. Firstly, though not expressly stated in Article 50, the European Court of Justice has in a recent case ruled that a withdrawing member state may be able to revoke its intention to withdraw from the EU unilaterally without the unanimous consent of the European Council. Secondly, there could be a second referendum [4], which was made more likely after Theresa May decided to cancel the commons vote on her Brexit deal in fear of sweeping defeat [5].
According to the managing director of the International Monetary Fund, Christine Lagarde, staying in the European Union will be more advantageous than any conceivable Brexit deal [6]. As claimed by the Office of National Statistics, approximately 44 percent of British exports are currently to EU member states, which is a total of just under 300 billion pounds per year [7]. It is evident that Britain’s membership has translated into boosted trade, largely due to the Union being a common market which guarantees the ‘four freedoms’ of goods, capital, services, and labour. This provides British businesses with unfettered access to over 500 million potential customers, and in return allows British companies and consumers to purchase goods and services from the mainland.
Furthermore, tariffs are eliminated and so are administrative burdens as member states all share a unified set of standards. Essentially, this has the effect of reducing costs of production which makes British businesses more competitive on a global scale. With EU membership also comes a notion of economic stability associated with the British economy, which helps attract inward investment and acts as a springboard for trade with the rest of the world. Ultimately, although revoking Article 50 and opposing the majority vote from the referendum will inevitably have political ramifications, statistics show that should Britain remain, the local economy will avoid short term losses and grow faster in the long run as well.
May’s Withdrawal Agreement
In the words of Christine Lagarde, “whatever the deal is will not be as good as it is at the moment” [8]. This was before the possibility of Britain accessing the single market without being a member of the Union was swiftly rejected by leading European officials. Now, the only deal that the UK is left with is the withdrawal agreement drafted by Theresa May, in November. Immediately after May’s deal was made public, British economists and think-tanks attempted to quantify how this agreement would impact the local economy. A general trend among these attempts is that the UK’s economy would be negatively affected. For instance, it was forecasted that May’s Brexit deal is expected to cost the UK economy up to £100bn over the next decade compared with remaining in the EU. Likewise, the Bank of England predicts that under this current deal, GDP will be at least 1% higher in five years’ time if the UK had voted to remain. In defence of her withdrawal agreement, May denied her deal would make Britain poorer, insisting the economic analysis ‘does not show that we will be poorer than the status quo’. This is true to some degree; essentially, the British economy will continue to grow, however at a much slower rate than if it were to stay in the EU. Lastly, according to the Prime Minister, this deal is unfortunately the best one available for jobs and the economy. This was later confirmed when European Council President Donald Tusk recently declared that EU leaders will not renegotiate the terms of Britain’s Brexit deal, shutting down any chances of a ‘better’ deal MPs were pushing for.
No-Deal Brexit
With less than four months to go until Brexit day, it is still far from certain if the Britain will exit the EU with a deal. Rather, it is increasingly likely Theresa May will not get the House of Commons’ approval for her draft agreement. What is clear is that leaving empty-handed would devastate the UK economy, and would be the worst option relative to the two above. According to Ranko Berich, head of market analysis at Monex, ‘a true no-deal scenario would mean that the U.K. reverts to WTO trading rules without a transition period’, with all current regulatory and trading relationships with the EU terminating immediately on Brexit day. This, in the words of the Bank of England, “would be worse than 2008 crisis”. Crashing out of the European Union without any transition period to a new trading relationship could probably trigger an immediate economic crash and a subsequent deep recession. In the short term, the immediate discontinuation of common regulation would see goods be subject to new customs checks and bureaucracy and thus disruptive delays. It is likely that the pound would plummet—as it did after the referendum—and inflation would soar due to a sharp supply shock which leads to demand for goods and services exceeding low supply. To tackle this interest rates would need to rise as the increased cost of borrowing money decreases consumption. However, in the long run, this is harmful for economic growth. Commerzbank optimistically estimate more economic slowdown in already substandard growth, but many other banks and forecasting firms such as Credit Suisse and Fathom Consulting believe that the UK will even experience a short-term recession [9].
Jonathan Simpson
Brexit Section Feature Writer
6 January 2019
[1] https://www.bbc.com/news/business-43212899
[2] https://www.bbc.com/news/uk-politics-46509288
[5] https://www.independent.co.uk/news/uk/politics/brexit-economic-crash-recovery-uk-eu-imf-theresa-may-philip-hammond-a8542036.html
Disclaimer: The views expressed are that of the individual author. All rights are reserved to the original authors of the materials consulted, which are identified in the footnotes above.
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