What ‘No-Deal Brexit’ Means and Why It’s a Big Risk: QuickTake

LONDON (Capital Markets in Africa) – The threat of a no-deal Brexit is back, and companies on both sides of the English Channel are gearing up once again for the scenario they consider the worst case. Boris Johnson, the U.K.’s new prime minister, has vowed to lead the country out of the European Union on Oct. 31, whether or not he secures a deal to smooth the process of untangling more than 40 years of integration.

What does a no-deal Brexit mean?

It means a U.K.-EU divorce with no agreement in place on how to continue doing business with each other. Absent a negotiated deal to smooth the transition, many rules, permits and accords evaporate overnight. Free trade between Britain and the EU would give way to basic World Trade Organizationimport-export tariffs and become subject to border checks where now there are none. Data-sharing across borders would be at risk — plunging businesses into legal jeopardy — and some financial transactions would be blocked. Contracts risk becoming invalid. EU citizens living in the U.K. and Britons living on the continent could be stranded without permission to remain.

Why would anyone want that?
For devoted Brexiteers, leaving without a deal is much better than remaining in the bloc or leaving with a deal that keeps the country bound to the EU’s rules. The latter is how they characterize the divorce deal Johnson’s predecessor, Theresa May, struck with the EU but couldn’t get through Parliament. They call it BRINO — Brexit In Name Only. Some Brexiteers also welcome the opportunity that a no-deal exit would bring: Britain would be free, they say, to strike new trade deals, slash tariffs, and get rid of regulation that makes it harder for Britain to compete. It’s also about negotiating tactics: Johnson has said it’s important to wield the credible threat of walking away without a deal in order to secure a better agreement than May did.

How bad could it be?
Bank of England Governor Mark Carney has said a no-deal Brexit could, in the worst case, shrink the U.K.’s gross domestic product by 8% within a year and send property prices plunging by almost a third. (Some lawmakers accuse the BOE of scaremongering and say the likely impact wouldn’t be nearly that severe.) The effects of a no-deal divorce would be felt in many ways. Customs delays would be so bad that the British government has plans to turn a major highway near the Port of Dover into a holding zone for trucks. Bottlenecks could bring shortages of everything from imported food to manufacturing components and medicine. Regulations on vehicle safety, medicines and food standards, now coordinated at the EU level, would need new U.K. versions. A hard border could emerge between Northern Ireland and the Republic of Ireland, threatening peace there — and raising questions about the eventual reunification of Ireland. Scotland would probably demand a second referendumon independence. The police are prepared for unrest.

Wasn’t there meant to be a smooth departure?
Yes. The two sides reached an accord on a transition, or grace period, that would keep all rules and tariffs the same until December 2020, by which time the future relationship was meant to be hashed out. But that was part of the wider divorce deal — which the U.K. Parliament voted down three times, and which Johnson wants to renegotiate. Parliament has also come out against a no-deal outcome, but Johnson could try to ignore them. He has refused to rule out the option of suspending the legislature to push through an exit — though Parliament has moved to block off that option.

Why is a no-deal Brexit even possible?
It’s written into U.K. law that Britain will leave on Oct. 31. In theory, that will happen with or without a deal. Britain got stuck with this deadline in the first place because EU law says that once a country signifies its intention to quit, the clock starts ticking to an exit date. The deal May negotiated in Brusselskeeps ties to the bloc too tight for some and too loose for others — that’s why it hasn’t been ratified by Parliament. Johnson says he will get a better deal, though the EU has repeatedly said it won’t renegotiate, and he has boxed himself in with pledges on what he can achieve. That makes a no-deal exit more likely.

Could it be averted?
Two extensions have been granted and another is possible if all 28 EU members agree. But Johnson has vowed he won’t extend again: he has said Britain will leave on Oct. 31 “do or die, come what may.” Some lawmakers in Parliament are trying to figure out how to stop a prime minister leading the country into legal limbo. The most powerful weapon in their arsenal is bringing down the government, but they could instead use legislation to force the government’s hand, as they have done before. It will also be fought in the courts: Lawyers are working on at least two suits to prevent Johnson pursuing a no-deal split without Parliament’s consent. The other option is for the British government to tell the EU it has changed its mind and doesn’t want to leave. For now, that option is purely theoretical. Britain voted in a referendum in 2016 to leave the EU. Another referendum — or a general election on a clear platform to remain — would be needed to go back on that.

How is everyone preparing for a no-deal Brexit?
The U.K. government is preparing for bottlenecks and supply shortages, but has been criticized for not doing enough. The EU has told governments and companies to plan for the worst and has taken a series of unilateral measures. Belgium and the Netherlands, which have ports facing Britain, have led the way hiring border officials and boosting resources. Companies are stockpiling. One rare area of collaboration between Britain and the EU is on financial markets: Officials in Brussels arranged for the bloc’s firms to be able to continue using critical London-based market infrastructure even if there’s no deal, and there’s also an agreement covering the oversight of mutual and hedge funds. An agreement will also allow airlines to keep flying to each others’ territories.

Source: Bloomberg Business News