U.K. Braces for No-Deal Brexit Aftermath
With the March 29 deadline looming, and he U.K. and the European Union far from reaching an agreement, the unthinkable no-deal might actually happen.
The United Kingdom is scheduled to leave the European Union on March 29, 2019, which is now only 60 days out. While this has been seen by many as a step in the wrong direction for the country, and they are working on hammering out agreements to look to take up the slack at least somewhat, no deal at all would be the worst way to kick this new era off.
It is not that British Prime Minister Teresa May isn’t trying, but the agreement that she reached with the EU ended up being clearly rejected by the U.K. House of Commons, which even included many dissenters from her own political party.
There were even some that believed that this might spell the end for May’s government, although it’s one thing to vote against a bill and quite another to essentially vote yourself out of power, which is what a no confidence vote would have entailed, since it would have required support of many of her own people.
Even though the deadline approaches, there is still time to reach another agreement and get it passed by Parliament if they hurry. This will require a firm commitment on getting this done though, along with an appropriate sense of urgency. While many do feel that this will be successful, there’s still the possibility of it not happening, which would leave the U.K. both out of the trade agreements that being part of the E.U. provides with nothing at all to replace them.
There is a lot on the line here and companies are already making contingency plans should the U.K. government not act in time, which includes not only reaching an arrangement that is suitable to both the European Union and their own politicians. Given how long this has gone on and the fact that we have not made any real progress resolving this yet, there is reason for concern.
A No-Deal Exit Could Actually Happen
So, while the feeling is that there is only a small chance of not having a deal in place in time for the deadline, this does not mean no chance, and the controversy and turmoil surrounding the issue should cause us to believe that this dire situation is not unthinkable.
While trade is a central issue with Brexit, and is where a lot of the fears of not having a deal in place in time lie, there are other issues as well at stake, as a no-deal Brexit will involve other issues as well, perhaps even flights in and out of the U.K.
The Bank of England has warned that the aftermath of such a scenario will cause the worst recession the country has seen since the Great Depression, with the economy predicted to shrink by 8%. Terms like crisis and dire straits come to mind when this sort of number is thrown around, and not without cause.
The plan is to not only have an agreement in place by the deadline but to also have a transition period, which would serve to ease the shock on the economy caused by whatever terms get agreed upon by the parties. A transition period requires a deal though, and we have nothing in place right now and not even anything firmly on the table.
Taking a Bad Situation and Potentially Making it Worse
It’s not that the Central Bank is just stepping up now and preparing us, as Bank of England Governor Mark Carney has been issuing stern warnings for quite a while now, remarking for instance last November that a no-deal scenario would be a “real economy shock,” and if this happens, the Central Bank won’t be able to do much to help things and “be more of a sideshow.”
It’s not hard to imagine how this could lead to an economic crisis, because companies rely so much on trade, and when you make trade more difficult, this will hurt. Plants will close, companies may even move away permanently, and when we look at the contingency plans that are starting to emerge, we may see plenty of this if we don’t get a deal in time.
It’s not that we aren’t at risk of at least some of this happening regardless of whatever terms get agreed to, but not having a plan in place to allow for special rules for trade is certainly the worst possible outcome right now.
No-deal means that the U.K. would go from the E.U. being a free trade zone to a full-fledged customs bureaucracy, which wouldn’t stop trade as much it would slow it down. Not only would the trade deal with the E.U. be tossed, so would the trade deals that the European Union has with other countries, as the U.K. would no longer be a part of the union nor its agreements.
Auto makers such as Honda, Mini, and Rolls-Royce are already planning on shutting down factories after the deadline even if we do get a deal by then, as they re-assess things. This is an industry who already is suffering and had a terrible year in 2018, without Brexit, and are expecting things to get even worse in 2019. A no-deal exit will make things even worse.
Brexit will be painful regardless, but there are degrees of pain, and the parties have to act and act soon if we’re to see this not become an extremely painful event.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.