🔒 WORLDVIEW: Our Brexit prediction – 70% chance of “no deal”

By Felicity Duncan

In the UK, the Brexit circus continues unabated. As Britain continues to struggle to leave the European Union, the quagmire seems to deepen daily. With no prospects for an acceptable deal and the October 31st deadline drawing ever closer, people are starting to strap in and prepare for the worst in a crash that will have consequences around the world.

Many possibilities yet remain, and there is a chance that things could work out OK. But on current trajectories, the future for the UK and EU seems pretty clear. Late last year, I estimated there was a 40% chance that the UK would crash out of the EU with no deal. Here’s my current set of predictions.
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Prediction: Hard Brexit

At this point, I reckon there is a 70% chance of a hard Brexit on October 31 – in other words, the UK will leave the EU with no deal whatsoever.

Why?

Over a two-year negotiation process, former prime minister Theresa May negotiated a withdrawal deal that would have:

  • Involved the UK paying the EU a £40 billion or so “divorce bill”
  • Protected the rights of the EU citizens living in the UK
  • Guaranteed an open border in Ireland through the so-called Irish backstop

The UK parliament rejected May’s withdrawal deal three times. The EU has said – repeatedly – that the deal is not open for renegotiation. If May’s deal is the only one available (it is) and the UK parliament will never accept it (it won’t), then the UK can either unilaterally call off Brexit or leave without a deal.

Calling off Brexit is unacceptable to the “incumbent” Conservative party – which lacks a majority but is in charge thanks to the support of the right-wing Northern Irish DUP. The Conservatives (or Tories) are about to select a new leader and both candidates, namely Boris Johnson and Jeremy Hunt, have promised to deliver Brexit this year.

Logically, then, all that remains is a “no deal” Brexit. This is the preferred option for many hardline Tories, although others would prefer to avoid this outcome.

Alternatives: Unicorns and pixies

Despite this situation, there is plenty of magical thinking about alternatives on display at Brexit HQ.

Both Hunt and Johnson insist that they will be able to negotiate a better deal with the EU before the deadline. This strains credulity. By the time one or other of these chaps has taken up residence in 10 Downing Street, there will be less than four months to negotiate a new deal (remember, May’s non deal took two years to negotiate). Plus, the EU has said it isn’t interested in renegotiating the deal, and it’s difficult to negotiate without the other party involved.

Furthermore, neither of the two candidates has a realistic plan for what the new deal would look like. The core stumbling block is Ireland. If the UK leaves the EU, there must be a hard border between the Republic of Ireland and Northern Ireland (which is part of the UK). Under the terms of the Good Friday Agreement, an international treaty negotiated to end decades of internecine violence in Northern Ireland, the border between these two must remain open.

To fudge a solution to this, the EU agreed to a convoluted plan that would keep Northern Ireland and thus, the UK, in a customs union after Brexit until a free trade agreement that maintains the open border could be negotiated. It’s not ideal, but it should keep the trade disruption and shooting to a minimum.

The UK doesn’t like this idea. But the only solution to squaring this circle that the Tory candidates have offered is Johnson’s dismissal of this as a problem that could be resolved with unspecified “alternative arrangements” and Hunt’s “plan” to use technology that does not yet exist to do border checks without erecting a border. Neither of these ideas seems fated to succeed in an actual negotiation with the EU.

The core problem is that the UK seems to believe that the EU will make decisions based purely on a hard-nosed economic analysis – i.e. “trade with the UK is good so we will break all our own rules to keep that trade alive.” But so far the EU has consistently put political considerations, including the interests of the Republic of Ireland, an EU member state, above economic considerations. It seems unlikely this will change much now.

Consequences of a hard Brexit

The reality seems to be that, at this point, the EU is OK with letting the UK leave without a deal. It won’t be pretty, but it will at least be finished. Here’s what the consequences of this will likely look :

  • Ireland experiences major economic disruption, somewhat offset by EU support –although, in the long-term, Ireland may benefit as the last remaining English-speaking country in the EU
  • Violence reignites in the UK/Northern Ireland – ultimately, there’s a 50/50 chance Northern Ireland votes to leave the UK and re-join Ireland as a single island nation (the EU has said it will automatically allow Northern Ireland into the EU if this happens)
  • Scotland pursues an independence vote – Scotland wants to stay in the EU, and many Scots are now angling for an independence referendum after Brexit. There’s a 35/65 chance that Scotland will leave the UK in the next 5 years and join the EU
  • Disruptions to the UK economy, including a long-term decline of its auto manufacturing and other heavy industry, which may take several years to unfold
  • Over the long-term, London loses ground to New York and Hong Kong/Shanghai as a financial centre as some financial services operations shift to Frankfurt, Dublin, and Amsterdam to serve the EU
  • UK GDP growth falls below trend for the foreseeable future – think 0.7% growth with a population growing at about 0.5%, in other words, it will experience relative decline compared to many other developed nations
  • The UK struggles to attract skilled workers, immigration from India, Latin America, East Asia (and South Africa) increases significantly to compensate for the lack of EU migrants and an ageing British population
  • The UK seeks to negotiate a trade deal with the EU – the EU asks for its divorce bill money, citizens’ rights, and a solution in Ireland as the price of entry. Negotiations take at least 4-5 years
  • The UK seeks to do a trade deal with the US – Trump, who is hostile to trade, rushes to the negotiating table but pushes very hard for a deal that benefits the US at the expense of the UK, as he has in deals with the EU, China, Mexico, and Canada. Negotiations take several years, and the Irish border forms a key stumbling block to Congressional approval of the deal

Some will argue that the UK could always do deals with former colonies like India, or Commonwealth countries, to bolster its lost European trade. It certainly could do deals, most of which would take 3-5 years to negotiate. But those trade volumes would have to grow by double digits for a decade to adequately substitute for the trading benefits of being in the EU (such as the EU’s large number of free trade agreements). Plus, India isn’t too keen on a deal unless it’s one that is highly beneficial to rapidly growing India.

Ultimately, the UK will be forced to choose between close regulatory alignment with either the US or the EU (or possibly China), thus ceding a significant degree of domestic autonomy to regain lost trading ground. It will probably settle into position as about the 10th or 11th biggest economy in the world as its slow growth and trade struggles bite. Growth may pick up down the line, but only assuming that conflict between the US and China doesn’t drive a train through global trade and that the UK is able to salvage a good relationship with Europe.

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