The authoritative source for independent research on UK-EU relations

27 Jul 2017

UK-EU Relations

Theresa May claims it would be “better than a bad deal”. Philip Hammond thinks it would be “a very, very bad outcome”, while Jeremy Corbyn says it is “not an option”. Boris Johnson is of a mind that it would be “perfectly OK”. As Brexit negotiations roll on, and as it becomes clearer that getting an exit deal will not be straightforward, it is worth pondering what “no deal” might mean for the UK.

There are four possible outcomes to the Brexit process. The first is what we might call “smooth Brexit”. Through some miracle, we negotiate not only the Article 50 divorce but also a trade deal.

The second is transitional Brexit, whereby we sign an Article 50 deal but run out of time on trade. Because talks are progressing, however, we agree provisions with the EU whereby little, if anything, changes for a set period, giving time to sort out the future relationship.

Then come a variety of “no deal” scenarios. A cliff-edge Brexit means we’ve sorted Article 50, but trade talks do not progress, and so we exit and regulate our trade with the EU using World Trade Organization rules.

A chaotic Brexit, in contrast, means we fail to come to an agreement on Article 50. We cease to be a member state, with nothing resolved on money, citizens or Northern Ireland.

Chaotic Brexit could play out in two ways. If there’s no agreement over the divorce by March 2019, we simply leave. Alternatively, following an acrimonious breakdown in negotiations, the UK may decide unilaterally to stop payments to the EU and revoke the European Communities Act: a “premature Brexit”.

Each outcome will have different implications. In legal terms, chaotic Brexit is appropriately named. While the European Union (Withdrawal) bill stipulates that EU rules on “choice of law” will continue to apply, this will not bind other member states. Legal uncertainty will be time consuming but is only the tip of the iceberg.

While a cliff-edge Brexit would imply customs checks, tariffs and regulatory barriers between the UK and the EU, with a premature Brexit none of the necessary infrastructure would be in place, causing chaos at ports. Complex cross-border supply chains would be interrupted. Drugs developed in the UK would not have their approval recognised in other member states, and clinical trials would be disrupted.

It gets worse. Air transport is not covered by the WTO, so there are no rules to fall back on. And airlines need to arrange their schedules a year in advance. It is conceivable that, following a chaotic Brexit, planes to and from the UK would cease to fly, if only because the lawyers would caution them against doing so.

The political implications of a hard border in Northern Ireland — which a chaotic Brexit would make inevitable — hardly need spelling out. Even the talk of no deal has destabilised the province, in the context of simmering tensions over the breakdown of power sharing.

The economic implications would also be severe. The highly integrated agri-food business would be severely disrupted. Indeed agriculture throughout the country would be affected. We expect major retailers to have contingency plans, so we would not anticipate food shortages. However, a chaotic Brexit would make the task of separating our WTO entitlements and obligations from those of the EU much harder, particularly if talks broke down acrimoniously.

Meanwhile, our fishermen might benefit from being able to catch more fish, but they would face tariffs exporting their catch to the EU, their major export market.

With no agreement, EU citizens in the UK would find themselves in limbo. The British government could implement the proposals it has tabled in the Article 50 negotiations. But these are contingent on reciprocity from the EU, and this is unlikely to be forthcoming on the UK’s terms. The situation would be worse for British citizens in the EU: while the withdrawal will incorporate EU law into UK law, there will be no equivalent elsewhere: on Brexit day, British citizens will no longer be EU citizens, with potentially significant implications.

If a chaotic Brexit begins to appear certain or even likely, then we can expect businesses to act in anticipation. Above and beyond this fall in business confidence, we could expect a further significant fall in the exchange rate and consequent rise in inflation. Under such circumstances, the much-maligned Treasury forecast of a significant economic shock might, belatedly, be vindicated.

None of this means a chaotic Brexit is certain or even probable. But what it does strongly imply is that it is an outcome the British government should strive to avoid. It would be a legal morass and an economic disaster.

Even with time to prepare, major sectors would face disruptive change. Legal uncertainty, regulatory limbo, the re-imposition of customs checks, and the ambiguous status of resident citizens will all be major issues, with no obvious solutions. What conceivable deal could be worse than this?

By Professor Anand Menon, director of The UK in A Changing Europe. Read the ‘Cost of No Deal’ report. This piece originally featured in the Financial Times.


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