The reality of ‘no deal’ needn’t be a catastrophe
AS the odds lengthen on Theresa May’s Brexit deal ever winning Parliamentary approval, the prospect of a “no deal” Brexit looms ever larger.
For now, the European Union is adamant that there is no such thing as a “managed no deal” – fearful that making a “no deal” look too comfortable risks turning it into a self-fulfilling prophecy.
Michel Barnier has insisted there will be no “mini-deals”. If the divorce deal falls then “it is over and each side will take its own unilateral contingency measures,” he told MPS in Sept.
To ram home the point the EU this week published a confrontational “no deal” planning document which set out “limited” and one-sided measures defending it from the “significant disruption” of a “no deal”. But behind the scenes, member states are already questioning whether such a hardline approach is really viable.
Experts believe that, if the UK plays its cards right politically, a managed “no deal” could yet emerge. EU officials have speculated about an extension of Article 50 for a few months, to create a “parachute” to put temporary measures in place. Charles Grant, the director of the Centre for European Reform, is confident that if the crunch comes, EU member states will strike bilateral side-deals with the UK to cushion the blow. “For now the Commission is taking a strong line, but EU member states will have to look after their own interests”, he predicts.
The reality of a “no deal” is likely to be disruptive, but not world-ending. Or in the earthy phrasing of a senior diplomat from an EU trading power: “‘No deal’ won’t be an explosion, it will be a wet fart.”
The money
Unofficially, both EU and UK sources are clear that any discussion of a managed “no deal” starts with money. The UK has signed up to a £39bn financial settlement which could still be used to form the basis of a deal.
Failure to pay would risk a credit rating downgrade and Philip Hammond has already noted that Britain is a “country that pays its bills”. The politics would be tricky, but leading Brexiteers have suggested Britain would pay £20bn for a “no deal plus” to “remain friends” with the EU. Whether it was the full amount, or a reduced or staggered payment, the UK would have little choice but to “pay to play”.
Citizens
The agreement to protect the rights of EU and UK citizens on both sides of the Channel would need to be implemented on a reciprocal basis. There is no reason to think this would not happen. Visa-free travel is expected to continue, on a reciprocal basis, for tourists and businessmen. In the longer term, if the UK was to curtail EU free movement with a work permit scheme, the EU would reciprocate in kind.
Ireland
In the short term, neither the UK or the Irish governments is expected to put up a border even though in the longer term WTO rules will require the UK institutes checks. On the Irish side, if there are no checks, then the EU is likely to start checks between Ireland and the 26 other EU states.
On a temporary basis the border could be managed, perhaps by a legally contentious WTO exemption on national security grounds, but choices could not be deferred indefinitely.
Finance & the City
The EU is heavily reliant on the UK for financial services and capital, which means that regulators are already in the process of setting up a series of “mini-deals” to avoid the risks posed to the City of London. A deal is already close to offer legal certainty to £41trillion worth of derivatives contracts. If the EU Commission moved to support these deals – and in reality it will have little choice – the City will have what Mark Carney, the Bank of England governor, has termed a “glass half-full” situation. “It’s cold comfort, but it will be worse in Europe than it is here,” he told MPS. Still, even allowing stimulus measures such as cutting interest rates, house prices could take a significant hit. Economists believe “no deal” could shave at least two per cent off GDP by the end of 2020. It might not be a full-blown catastrophe, says Andrew Goodwin of Oxford Economics, but “no deal” would still cause massive economic disruption and shake confidence. “Markets have only priced in a 20-30 per cent chance of ‘no deal’. Obviously if ‘no deal’ actually happened I wouldn’t be surprised if we saw a 10 per cent drop in the value of sterling,” he says.
Trade & Customs
The current default EU Commission position is “all relevant” EU legislation will apply to imports and exports, including tariffs, VAT and a total ban on food of animal origin until the UK registers as a “third country”. The result would be a virtual blockade.
Dutch and French diplomats have clashed with the Commission on this approach, with one French diplomat pointing out that it would require a 25-mile (40km) customs terminal to comply with necessary checks. France is already putting in place laws to give it extraordinary powers to recognise certifications of UK companies and workers temporarily.
Similarly, when it comes to hauliers, the Commission is saying the UK must apply to a licence scheme that currently
The EU will retain the power to make life difficult for the UK, but it will need to consider how it uses that power
only covers 5 per cent of the volume of traffic. But again, affected member states including Germany, Czech Republic, Poland, Belgium and Ireland are pressing for more.
So in a benign “no deal” scenario, the EU could introduce temporary measures to keep goods trade flowing, allowing the UK to register as a “third country” in order to create a new legal base for exports. Alex Stojanovic of the Institute for Government says the door is open for the EU to create a fast track equivalence deal, of the kind it has with New Zealand, which obviates the need for a large number of checks. However, there would still be costly frictions, and the UK would be at the mercy of the EU as to how serious these would be.
Data
UK Services trade with the EU was worth £89billion last year, all of which is reliant on the ability to transfer data across borders. The UK has already put the EU’S General Data Protection Regulation onto its statute book. For now the EU is refusing to say it will reciprocate the UK’S stated intention of allowing data to flow freely from the EU, but industry experts note that when the US-EU data Safe Harbour deal collapsed, the EU allowed a period of non-enforcement of its rules. Giles Derrington of Tech UK says the EU and UK are “increasingly looking at something similar” in the event of no-deal but even if a “data drawbridge” did go up, other legal avenues such as “standard contract clauses” are also available. These are not a fail-safe, but already cover some 80 per cent of personal data transfers. In short, in the right political environment, the data would keep flowing.
Conclusion
If a point is reached when “no deal” becomes inevitable, then the interests of both sides would become equally aligned in avoiding a catastrophic outcome. As seasoned diplomats such as Sir Ivan Rogers have pointed out, the EU will retain the power to make life difficult for the UK, but it will need to consider how it uses that power, and to what long-term end.
The fundamental question of what future relationship Britain and the EU want – and how this can be squared with a mutual commitment to avoid a hard border in Northern Ireland – will remain. A punishment approach, beyond gratifying a short-term desire to demonstrate the EU’S power, will not advance the search for answers.