UNDERSTANDING A NO-DEAL BREXIT / GEOPOLITICAL FUTURES

Understanding a No-Deal Brexit

The U.K. has a week to avert a no-deal departure from the EU. What will happen if it fails?

By Jacob Shapiro

 

The United Kingdom has until April 12 to avert a no-deal Brexit. If the British Parliament is unable to pass a negotiated divorce by then, the U.K. will leave the European Union without a deal in place to govern their economic relationship. A no-deal departure is bad for both sides, though, and so remains one of the least likely scenarios for how this extended drama will play out. It is more likely that the U.K. will request (and be granted) an extension or that the House of Commons will reach a consensus at the 11th hour. Even so, the hour is late, and Britain has elected to squabble internally over what its national interest is rather than ruthlessly pursuing that national interest. The possibility of a no-deal Brexit is now real enough to consider what such a departure would mean.   Impossible Negotiations Britain’s internal politics have complicated a process that, on paper, should have been relatively simple. Two and a half years after the U.K. voted to leave the EU, there’s no consensus on what “leave” actually means. Unlike the EU, which has been able to articulate its demands without recourse to popular approval, the British government has had to articulate and pursue what it believed was in the best interests of the British people while building consensus for that position in Parliament. The British government succeeded at the former and failed miserably at the latter. The deal Prime Minister Theresa May’s government negotiated was rejected by the Parliament, as was virtually every other permutation of the agreement. As a result, instead of a single British viewpoint expressed by a duly empowered and legitimate British representative, the U.K.’s most important decision in a generation is now being endlessly debated by lawmakers interested primarily in demonstrating how important they are to their constituents. That's not a knock against the lawmakers – that's how representative democracies work. Representative democracies also elect political executives to make the difficult decisions something as fraught as Brexit requires. Every decision here for the U.K. is a tough one, and it is unreasonable to ask a lawmaker to risk pain for his or her constituency even if the country would be better off in the end. This dynamic has helped tilt the deal May’s government negotiated in the EU’s favor. True, the EU is a much larger economy than the U.K., but May’s government has been negotiating with both hands tied behind its back since the very beginning. May’s greatest political strength – her pragmatism – became her worst enemy as she managed to produce a deal that everyone hated and that she did not have the authority to sign. Hard bargaining for key compromises in the best interests of the British people turned out to be only step one of the process; British negotiators also had to consider what kind of agreement would be palatable to Parliament. That was a recipe for disaster. May’s instinct to accommodate and build consensus doomed her from the beginning; a tough negotiation turned out to be the arena least suited to her political virtues.   Economic Disarray The United Kingdom and the European Union now stand at the edge of a precipice of a no-deal Brexit, the ramifications of which would be many. Some are even predictable. In both the short and medium term, the British economy will be worse off than if it had stayed in the EU. It's true that many of the pre-Brexit prognostications suffered from overactive imaginations, but an April 16 report by the Organization for Economic Cooperation and Development did a decent job at predicting the practical import of the U.K.’s vote to leave. It said that the U.K.’s gross domestic product would be 3 percent smaller by 2020 than if it stayed in the EU; that comports with both the Bank of England and Centre for European Reform’s estimates that the U.K.’s GDP is roughly 2.5 percent smaller today than it would have been had Britain voted “remain.” (PwC and the National Institute of Economic and Social Research also had reports that were close to the mark.) The OECD report predicts that by 2030, the impact will be even greater. It estimates that the U.K.’s real GDP will be somewhere between 3 and 8 percent smaller than if it remained in the EU. It also predicts a decline in foreign direct investment, an increase in the current account deficit, and a decline of nearly 6 percent in exports to the EU – even with a free trade agreement in place. Of course, predicting these kinds of macroeconomic developments given the current uncertainty is something of a fool’s errand – that’s why so many of the predictions after the Brexit referendum were wrong. But even some Brexiteers admit that a no-deal Brexit would in the short term hurt the British economy, which has in recent decades become a services-focused economy that leverages its proximity to the EU and London’s position as one of the world’s most important financial capitals. It is possible to negotiate new trade deals and to reshape the British economy. But even in the best-case scenario, that kind of fundamental reorientation will take years and will negatively affect the livelihoods of millions of British workers. The British government has various plans to attempt to mitigate the damage. On trade, for instance, in the event of a no-deal Brexit, the British government might remove tariffs on 92 percent of imports from the rest of the world and on 82 percent of imports from the EU, aiming to increase trade with non-European countries while protecting British companies in key sectors from European competition. But, like all things in the U.K. right now, these measures are highly controversial. Of course, if a no-deal Brexit happens, trade between the U.K. and the EU will not simply stop. A no-deal Brexit means the two will trade under World Trade Organization rules and tariff levels. For the U.K., that will mean specific sectors – like car manufacturing and agricultural production – will lose unfettered access to European markets. For British consumers, it will mean higher prices on some goods and services. The WTO’s director general perhaps said it best last August when he said a no-deal Brexit is “not going to be the end of the world … but it’s not going to be a walk in the park either.”   British Disunion The bigger and more problematic issues, however, are political. Remember, the United Kingdom comprises four countries: England, Scotland, Wales and Northern Ireland. Only in England and Wales did a majority vote for Brexit. In Scotland and Northern Ireland, large majorities voted “remain.” For the English and the Welsh, even a no-deal Brexit could arguably reflect the will of the people. The short- and medium-term economic uncertainty and dislocation was the price London paid for reclaiming its sovereignty from the EU. Not so in Scotland and in Northern Ireland. The majorities in these countries did not choose to suffer economic hardship in return for British sovereignty – they would have preferred to keep relations with the European Union as they were. For them, a no-deal Brexit would be just the latest in a long list of English impositions.

 

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No-deal is particularly significant for Scotland. When Scotland agreed to join the newly constituted United Kingdom in 1707, the economic benefits of doing so outweighed the cost of its sovereignty (a decision that, at the time, was highly controversial and widely protested). In the centuries that followed, union with England was a good deal for Scotland; by virtue of this relationship, Scotland greatly benefited from its participation in the Industrial Revolution. A well-planned Brexit that appropriately looked out for Scotland’s interests is one thing, but a no-deal Brexit is by definition the opposite. A no-deal Brexit would mean that for the first time in more than three centuries, it might be better for Scotland to be out of the Kingdom than in it (assuming, of course, the EU would be willing to fast-track Scottish membership, a step Brussels has thus far been coy about at best). In a 2014 referendum, Scots narrowly voted against independence (55.3-44.7), and most recent polls still suggest a majority would vote to remain in the U.K. if a new independence referendum was held today. But it is not at all clear whether that would still be the case after a no-deal Brexit. Northern Ireland’s situation is different. King James VI and I, who ruled Scotland and England before the union in 1707, sent settlers to colonize parts of Ireland in the 16th century to neutralize an Irish threat to both his crowns. After centuries of oppressive English and subsequently British rule on the Emerald Isle, Northern Ireland elected not to join a newly declared Irish Free State in 1922. The majority of its population was composed of Protestant descendants of the original colonizers, and they preferred to remain part of the United Kingdom. That majority is fast receding. In the 2011 census, Protestants made up 48 percent of Northern Ireland’s population and the Catholics 45 percent. At least one academic expert recently told the BBC that by 2021, Catholics would likely be a majority in Northern Ireland. This demographic transition is inevitable, as is its eventual union with the Republic of Ireland. It is an issue of when, not if. There would be very real logistical problems at the border between Ireland and Northern Ireland to solve in the event of a no-deal Brexit. But as complex and fraught as those problems are, there is an even deeper and more complicated issue to consider. The Good Friday Agreement, the 1998 peace settlement between the Irish and British governments, requires a poll be held if “it appears that a majority of those voting would express a wish that Northern Ireland should cease to be part of the U.K. and form part of a united Ireland.” It’s not clear whether such a majority would exist in the event of a no-deal Brexit, but the fact that the question has to be asked speaks volumes. The current situation being what it is, the chance for a peaceful transition would be greatly helped by patience on all sides. A no-deal Brexit could force the issue in Northern Ireland, especially if Northern Ireland’s economy, which is relatively weak compared to the rest of the U.K., experiences intense difficulties because of a no-deal withdrawal.

 

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A no-deal Brexit would be bad for the short and medium-term economics of the United Kingdom. It would open a Pandora’s box of questions for the U.K. and potentially challenge the very union itself. It would be detrimental for the European Union, which also stands to see GDP growth and a host of other economic indicators fall in the event of a no-deal Brexit. At the beginning of the year GPF predicted that the U.K. would leave the EU with a deal in place, and that is still, it seems to us, the most likely scenario. But we have been given sufficient pause in our confidence to ask, “what if?” No doubt British and European officials are asking themselves the same and are working tirelessly to prevent a no-deal scenario. It remains to be seen if that will be enough.