The expert magazine of Ostrum AM

Brexit will take place on December 31 at midnight with or without a deal. Strong divergences and the very short time to reach an agreement increase the uncertainty and the risk of a hard Brexit.

It’s urgent to find a deal

UK officially left the European Union on January 31, 2020 at midnight. A period of transition then began during which relations remained unchanged with the aim of reaching a trade deal. Boris Johnson has decided not to extend it and, on December 31 at midnight, Brexit will actually take place with or without a trade deal.

Negotiations are in their final stretch before the European Council on December 10 and 11. Divergences between the United Kingdom (UK) and the European Union (EU) remain strong. They relate to three points: fishing (access conditions to British waters), conditions of fair competition, in particular as regards State aid, and governance : mechanism for settling disputes in the context of a possible trade deal. The British government insists on the need to regain its sovereignty and regain control when the EU doesn’t want a deal at any cost.

As this week turns out to be decisive, Boris Johnson is once again bringing the highly controversial UK internal market bill to the House of Commons. It partly returns to the divorce agreement signed between London and Brussels and in particular to the Irish protocol intended to avoid the appearance of a physical border between Ireland and Northern Ireland, whatever the terms of exit from UE. These provisions aim to preserve the Good Friday agreement that ended 30 years of civil war. This bill was strongly condemned domestically and internationally and rejected by the UK upper House.   The EU has launched legal proceedings against the UK and said it will not sign a deal if the divorce Treaty is not respected.

The British government also wants to introduce a tax bill on Wednesday that also goes against the Irish protocol. Tensions between London and Brussels will therefore increase at a crucial point in the negotiations.

Strong disruptions are to be expected even in the event of an agreement

On December 31st at midnight, the UK will exit the single market and the European customs union, implying a loss of fluidity in the trade of goods and services and ending the free movement of people, with its main trading partner. Border controls will then be introduced, generating additional costs and increased delivery times. The Covid-19 epidemic has also delayed preparations for Brexit, in particular with regard to the mechanism to comply with the Irish protocol. The National Audit Office has signaled that trade relations between UK and EU will experience serious disruption from January 1, with significant risks to the arrangement to comply with the Irish protocol.

Strong impact of Brexit on growth

Brexit will take place as the British economy is one of the most affected by the Covid-19 crisis. The UK experienced its deepest recession in just over 300 years in the first half of the year and is facing a second wave of the epidemic. The Office for Budget Responsibility has just released a report. Its conclusions are in line with the average of previous studies carried out. A Brexit with a trade deal has an estimated impact of -4% on average on long term UK growth. A Brexit without a trade deal (« hard Brexit ») weighs 6% on it in the long term. In the short term, in the event of a hard Brexit, GDP would contract by an additional 2%.

Without a trade deal, trade will be subject to the rules of the World Trade Organization, which will result in increased tariffs and non-tariff barriers. This will particularly penalize sectors that were relatively less affected during the Covid-19 crisis. To the rise in customs tariffs will be added a marked depreciation of the pound which will result in higher inflation likely to weigh on the purchasing power of households. In the long term, potential growth will be affected by lower productivity, linked to the decline in foreign direct investment and lower trade, and lower growth in the working population, following lower migratory flows from the European Union.

Time is running out to find an agreement and limit the impact on growth, which will be significant in any case.

Aline Goupil-Raguénès
Developed Countries Strategist

MyStratWeekly December 7 2020

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  • Aline Goupil-Raguénès

    Aline Goupil-Raguénès

    Developed Countries Strategist