general » Brexit’s Economic Impact: Bad, Really Bad or Terrible?

Brexit's Economic Impact: Bad, Really Bad or Terrible?
The Economic Effects of the Options on the Table

Photo by Stanley Dai on Unsplash Photo by Stanley Dai on Unsplash

Brexit 2018: On Tuesday, December 11, the House of Commons was scheduled to vote on the Withdrawal Agreement. Avoiding a defeat, the UK government pulled the vote on the deal it had negotiated with the EU detailing on what terms exactly the UK will leave the EU. Given the controversy, it seems worthwhile to recap what the Withdrawal Agreement (if approved) or the alternative would mean for the British and EU economies as a new vote will have to happen soon.

What if the Withdrawal Agreement Passes?

In that case, the situation will be comparable to what it has been over the past two years: while the UK retains access to the EU market during the transition period, there is uncertainty over the future trade relationship. We already see business increasingly losing confidence in the UK and in the management of the Brexit process.

The UK will continue to have preferential access to the EU market for the duration of a transition period. This period is scheduled to last until the end of 2020 but can be extended if both sides agree to do so. During the implementation period, it is reasonable not to expect any larger economic repercussions of Brexit other than those that we have already seen. The reason for this is that there will not be any tariff barriers between the UK and EU that might harm trade. The UK is also obliged to continue to follow EU legislation meaning that non-tariff barriers to trade – that tend to mostly stem from differences in regulation or non-recognition of standards – are not going to rise either.

You can find all the Brexit-related analysis the GED team has compiled here.

One feature of the Withdrawal Agreement is particularly important: the so-called backstop. In the Good Friday Agreement that ended violence in Northern Ireland, it was agreed that that the border between Northern Ireland and the Republic of Ireland would remain open, i.e. there would be no customs checks across this border. If the UK crashes out of the EU without a specific trade deal, the default would be that the border could no longer remain open – with unforeseeable consequences for the peace process in Northern Ireland.

Therefore, the EU has insisted on the backstop, a legal mechanism that would prevent a hard border. If the Withdrawal Agreement passes, the UK will agree to form a customs union with the EU. Northern Ireland will also remain in the Single Market, meaning that any customs checks (that still exist within a customs union) will take place between Northern Ireland and the rest of the UK.

This is important, because it forces the UK to eventually make a difficult decision: Either accept a trade barrier (i.e. customs checks) within its sovereign territory or align itself closely to the EU through a quasi-permanent customs union or even a continued membership of the Single Market (Norway Model). In the case of the Norway option or a customs union, the effects would be relatively small, as you can see in the table below. The first column describes the effects of a customs union. As you can see, these growth effects are relatively small, both for the UK but also for the EU. The effects of a continued Single Market membership without EU membership would be even smaller. Therefore, if the Withdrawal Agreement passes, economically, this would not be too bad news. Politically, it might make little sense however, to give up having a say in EU legislation but be obliged to align the UK closely to the EU rules anyway.

 

What if the Withdrawal Agreement Fails and the UK Revokes Article 50?

Theresa May said very clearly that the choice is her deal, no deal or no Brexit. The latter is relevant, because the advocate general of the European Court of Justice issued a legal opinion (which is not binding yet but likely to be) that the UK can unilaterally revoke Art. 50, i.e. call off Brexit and just remain an EU member. In these cases, there would of course be no negative economic effects. There may even be positive ones, as investors might return activities that had already transferred to the continent to the UK.

What if the Withdrawal Agreement Fails and Brexit Happens Anyway?

no deal scenario is however also a real possibility. If the Withdrawal Agreement does not pass and Brexit is not called off, then the UK is likely to leave the EU on March 29, 2019 without a trade deal. This means that the UK and EU will trade on WTO terms. Thus, tariffs are going to apply – 2.6 percent on average but on individual products, such as agricultural products sometimes much higher. There will also be increasing non-tariff barriers to trade. This means that this will be an economically very costly scenario. In the table above, this is best characterized by the last column. As you can see, the negative impact on growth is considerable – in particular for the UK and Ireland.

Boris Johnson, one of the leaders of the Brexit movement, once said that “Brexit is going to be a titanic success”. The unintended reference to an unfortunate ship heading for an iceberg but was unable to avoid it eluded him. The UK’s management of the Brexit process bears an uncanny resemblance to the steering of the Titanic.

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