Rethinking Europe

No Deal Exit? UK Should Think Twice

Even in case of a hard Brexit, the UK would probably end up having to accept most of the Withdrawal Agreement.

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Takeaways


  • The option of a no-deal hard Brexit may not be fully available to the UK in the sense that some Brexiteers seem to believe.
  • Even in case of a hard Brexit, the UK would probably end up having to accept most of the Withdrawal Agreement.
  • Other trading partners may draw their own conclusions if the UK does not honor its commitments to the EU.

Under the new Prime Minister, the UK could choose to leave the EU without a deal. The immediate economic disruption would probably be limited, for the EU27 even more so than for the UK.

Planes would still fly, trucks would still roll, medicines would still be delivered and financial regulators would see to it that existing derivatives contracts would not blow up.

In practice, the transition to general border controls and the ensuing damage to cross-Channel supply chains would probably be gradual.

Nonetheless, the option of a no-deal hard Brexit may not be fully available to the UK in the sense that some Brexiteers seem to believe. Whatever the outcome of the Brexit saga, the UK and the EU27 will remain close neighbors and partners who will need each other regularly to settle all sorts of bilateral issues.

EU27 has the advantage

Given the relative size of their economies, the EU27 will usually have more economic leverage than the UK, be it in their bilateral dealings or in their negotiations with third parties.

After a no-deal Brexit, the EU27 would present the UK with the demand to first pay its dues as specified in the Withdrawal Agreement at every instance at which the UK and the much bigger EU27 would have a need to negotiate in the future.

Other trading partners may draw their own conclusions if the UK does not honor its commitments to the EU. And the more the UK deviates from EU regulations, the less access it could have to the EU27 market.

In other words, even in case of a hard Brexit, the UK would probably end up having to accept most of the Withdrawal Agreement.

The exception might be the Irish backstop. From the EU27 angle, a hard border in Ireland would be a very sad outcome, even though the consequences for all of Ireland would be more directly felt in the UK than in much of the EU27.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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