No deal will lead to prolonged and severe political and economic uncertainty

No deal will not “get Brexit done” rather, it will usher in a period of prolonged uncertainty for citizens, workers and businesses, which is unlikely to be resolved anytime soon, a new report by academic think tank The UK in a Changing Europe reveals.

The report – No deal Brexit: issues, impacts and implications – shows that once the UK is outside the Article 50 framework it will be far harder, and take far longer, to get a deal with the EU. All member states’ national (and some sub-national) parliaments would need to ratify any deal.

The EU is unlikely to start negotiating a future relationship with the UK until the major issues in the Withdrawal Agreement – citizens’ rights, the divorce bill and the backstop – have been resolved. And the EU could withdraw or allow to expire any of the unilateral mitigations it has put in place, such as on road and air transport.

While the UK’s priority will be the continued flow of goods – even if this results in loss of tax revenue – the EU has emphasised it will implement existing rules, rather than prioritise the maintenance of trade flows.

The imposition of tariff and non-tariff barriers between the UK and its largest trading partner will be a major shock to the UK economy. Beyond that, the fall in the pound – most if not all of which will be priced in well before October 31 – will push up inflation, as after the referendum, reducing real wages.

However, disruption on day one may not be as immediate and visible as earlier reports have predicted. Businesses, and government, have put in place contingency plans to mitigate against the worst effects. Therefore, the financial system will not collapse, the stock market will not crash and interest rates won’t skyrocket.

But much is unknown: how consumers might behave, how business will react, and the policy response both here and in the EU. A recession is highly probable – but its depth and severity are uncertain.

The UK economy will, however, eventually adjust to the new realities of life outside the EU. Our earlier research, which analysed the long-run effects of trading with the EU on World Trade Organisation (WTO) terms, found that, after 10 years, a WTO Brexit would reduce the UK’s income per capita by between 3.5% and 8.7%.

Other report highlights include:

  • Security: the UK will immediately lose access to EU databases and other forms of co-operation including the European Arrest Warrant, the Schengen Information System and Europol. This will hinder policing and security operations in a world where data is key to solving crime.
  • Northern Ireland: the economic damage no deal would inflict on Northern Ireland would be felt from day one. Checks would be required on goods moving from Northern Ireland (NI) to Ireland, particularly animals and food products, which form a third of NI exports to Ireland. Northern Irish businesses in the food sector would, in many cases, face tariffs, reducing their competitiveness overnight and potentially making them unviable.
  • Goods and manufacturing: the immediate impact of no deal would be keenly felt by manufacturing sectors across the UK which operate ‘just-in-time’ production systems across Europe, such as Airbus, Toyota and Jaguar Land Rover. Even minor delays at the border will have large knock-on effects that put at risk the viability of these systems.
  • Financial services: the medium and longer-term impacts of a no-deal Brexit on the financial services sector are harder to predict and potentially more severe. Under a no deal Brexit, it is unlikely that the UK’s financial services sector would return to its pre-2007/08 levels in terms of employment, output and tax revenue.
  • Healthcare: the co-ordination of social security, on which cross-border healthcare rests, will immediately cease, which means planned treatment in other member states will be disrupted. The European Health Insurance Card (EHIC) for emergency treatment will no longer function

Professor Anand Menon said: “Clearly it is difficult to make hard and fast predictions about what the implications of no deal will be. Equally, its immediate impact might not be as severe as some people are claiming.

“What our report makes clear is that leaving without a deal will have significant negative consequences for the UK economy. Nor will it mark the end of Brexit, merely herald in the start of negotiations that promise to be significantly more difficult than those we have witnessed to date.”

The 34-page report was written by: David Bailey, Catherine Barnard, Helena Farrand-Carrapico, Meredith Crowley, Sarah Hall, Katy Hayward, Tamara Hervey, Anand Menon, Steve Peers, Jonathan Portes and Thomas Sampson. You can download the executive summary here.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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