The risks of a no-deal Brexit



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Rémy Davison is Jean Monnet Chair in Politics and Economics at Monash University and the former Acting Director of the Monash European and EU Centre. He was appointed a United Nations Global Expert in 2010. He regularly briefs Australian and overseas government officials on trade, investment and security issues. His forthcoming book is The Political Economy of the Eurozone Crises.


 

As the UK heads towards a possible hard Brexit and Prime Minister Theresa May surviving a leadership challenge, Rémy Davison outlines the risks associated with a no-deal Brexit. 

Remy Davison | 19/12/2018 | 0 Comments


In the wake of Theresa May’s abortive attempt to pass the Brexit Withdrawal Bill through Parliament, the UK now stands at the precipice: it risks crashing out of the EU on 29 March, 2019 with no exit agreement. 

The EU-UK Withdrawal Agreement (WA) was finalised in November 2018 and May planned to bring on the vote in the House of Commons in early December. However, faced with the prospect of losing in the Commons by 200 votes, May chose to postpone the vote and returned to Brussels to meet with Angela Merkel and EU leaders to obtain further concessions to placate both sides of the UK Brexit debate.

Immediately following the abandonment of the Commons debate, May faced a no-confidence motion in her party room, which she overcame, unconvincingly, 200-117. She now faces the daunting task of persuading her party to pass the WA in January 2019. This will be the government’s last chance to avoid a no-deal Brexit.

Equally, the EU has a vested interest in an orderly Brexit, as the European economy would also suffer in the event of a chaotic UK withdrawal. Global markets are also particularly susceptible to shocks at present, given the cessation of the European Central Bank’s quantitative easing program in December 2018; an unpredictable US-China trade war; and a significant slowdown in China’s domestic demand.

An impossible trinity

In reality, Prime Minister May faced an impossible trinity. First, she was compelled to appease the Conservative hardliners who insisted upon the implementation of the 2016 Brexit vote and have persistently sought to sabotage an orderly Brexit. Second, May needed to pacify the DUP, whose vote was critical to the maintenance of her minority government. And third, she needed to provide certainty and stability to UK industry and finance in order to avoid a chaotic Brexit that would do immense damage to the British economy. However, the impossibility of this task was clear: only two of these three objectives could be achieved simultaneously. 

The WA was necessarily a compromise between a ‘hard Brexit’ and a transition arrangement that would do least harm to the economy and industry. The WA also paves the way for a EU-UK free trade agreement (FTA), once the WA is ratified. 

The Withdrawal Agreement envisages a EU-UK FTA.

The 585-page WA delivers three core elements of a soft Brexit. First, the EU and UK will ultimately aim for a free trade agreement (FTA) employing a common rule book that aims to achieve cooperative customs arrangements. However, in order to obtain an EU commitment to negotiate a FTA, the UK needed to finalise its departure terms in the first instance. These are at the crux of the WA.

The prospect of a hard border in Ireland

Second, the agreement achieves a key British negotiating point: no hard border between the Republic and Northern Ireland (NI).

Politically, this was critical for May, as her DUP coalition partner would not countenance special and differential treatment for Northern Ireland. The proposed ‘backstop’ solution would have seen the whole of Ireland remain within the EU for now, an unacceptable compromise for the DUP.

The fundamentally Eurosceptic DUP campaigned in favour of Brexit, due largely to an influx of intra-EU low-wage labour into NI. This was at odds with NI electors who voted overwhelmingly in favour of Remain (56:44). Thirty-five per cent of NI exports (excluding Britain) are dependent upon free trade with the Republic, while the rest of the EU is its second biggest export market.

Concomitantly, EU-UK plans to grant NI special and differential treatment were opposed by the Scottish government, as NI’s integration with the EU Single Market (SM) would have delivered a considerable comparative advantage over Scotland.

The UK stays within the EU Customs Union and Single Market  - for now

Third, the agreement means the UK remains integrated with the EU CU until the end of 2020, or until a solution can be reached to resolve the Irish border issue. The WA leaves the UK within the EU SM temporarily, but it also means that, in the short term, Britain foregoes its right to sign a new set of FTAs with third countries.

The duration of the UK’s CU membership can be extended by mutual agreement. The short-term implications of this are extensive. First, the UK cannot enter into any new trade agreement with a third party – such as Australia – until it exits the CU.

Second, CU membership means the UK remains subject to all EU border and customs requirements; for business, this is a positive aspect, as UK tariffs will remain harmonized with the EU, while SM membership is retained, ensuring the Four Freedoms (free movement of goods, services, labour and capital) continue for 21 months.

May promised that Brexit meant leaving both the CU and the SM; in reality, under tremendous pressure from peak groups, such as the Confederation of British Industry (CBI), the Conservative government was forced to retain membership of the CU and SM. To do otherwise would have ignited industrial chaos. Already, major employers, such as Jaguar Land Rover, have axed 5000 jobs, victims of Brexit uncertainty and falling Chinese demand.

A Norwegian half-way house?

A ‘Norway-plus' solution has been canvassed publicly, notably by Work and Pensions Minister, Amber Rudd. Norway, Iceland and Liechtenstein are members of the European Economic Area (EEA), which grants them access to the SM. In return, EEA members conform with the Four Freedoms and contribute to the EU budget. However, they do not have representation in either the EU Councils or the European Parliament. They are also subject to the EU market law regime and the European Court of Justice.

In contrast, Switzerland has remained outside both the EU and EEA; instead, it has signed over 100 bilateral agreements with the EU to maintain access to the SM. However, the Norway model of  ‘pay and obey with no say’ has proven deeply divisive among Brexiters. Moreover, Britain cannot simply accede to the EEA agreement.

Brexit will affect UK investment in Australia

There are serious implications for Australia arising from Brexit.

The UK is Australia’s second-biggest investor and Europe’s financial centre. In 2015, UK direct and portfolio investment in Australia totaled $499 billion. Once excluded from the SM, British banks will no longer have ‘passporting’ rights to offer financial services throughout the EU-27. London-based firms have already begun shedding staff and shifting operations to Frankfurt, Paris and Dublin. 

Theresa May concluded a WA that was ‘Brexit only in name’, but she had few alternatives.

The Bank of England, Treasury and every credible private and public-sector economic forecaster has warned of dire consequences of a hard Brexit.

Recent UK economic performance already lags behind its EU stable mates, including Germany, France and Italy, on almost every major economic indicator. The lesson of economic disintegration is clear: no country has ever withdrawn from a FTA and experienced increased living standards. 

 


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