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Whatever lies ahead for Britain and its economy, the likely prime minister in waiting, Boris Johnson, is determined to take the nation out of the EU on October 31. Photo: AP
Opinion
Opinion
by Andrew Hammond
Opinion
by Andrew Hammond

Why a no-deal Brexit is a big deal for Britain and the rest of the world

  • With Boris Johnson tipped to become Britain’s prime minister, a no-deal Brexit is suddenly likelier than ever, but few people really understand what that means for businesses and the economy
Andrew Hammond
Andrew Hammond
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As the British Conservative Party leadership race enters its final few days, Boris Johnson remains the overwhelming favourite to become prime minister this week. The clash between Johnson and Jeremy Hunt has seen a no-deal Brexit assume growing likelihood, despite the fact that this disorderly outcome is still widely misunderstood.

In trading last week, markets were rattled following Brexit remarks from both Johnson and Hunt. With the pound battered in foreign exchange markets, the UK currency fell to its weakest point since April 2017.

With a thick Brexit fog hanging over the nation, there is only one certainty: the legal default position that Britain will leave the European Union (EU) on October 31, barring a further extension, whether an exit deal is agreed or not.

The no-deal prospect has been widely dismissed in much of the period since Britain’s 2016 referendum, including by Theresa May’s government. But this scenario has become a growing possibility with Johnson asserting that Britain must leave on October 31, come what may.

However, the no-deal concept is, even now, widely misunderstood by much of the British public, let alone international audiences. It would not simply mean that Britain would automatically leave the EU without many, if not all, of the rules that regulate its relationships with the union.

Many economic relationships with the rest of the world will also be undermined, as these are underpinned by EU trade treaties. With October 31 fast approaching, only around a quarter of 40 planned post-Brexit trade agreements have been signed.

The stark choice for Britain: no Brexit or a no-deal Brexit

A common misconception is that there is only one no-deal outcome, when there are multiple plausible no-deal scenarios. At the extreme end of the spectrum is a chaotic exit and an acrimonious breakdown in negotiations between Britain and the EU.

Despite the economic harm this might cause, such a chaotic option cannot be completely dismissed, given the dogmatic position Johnson appears to be adopting. In contrast, Hunt (a Remainer in 2016) is advocating a more nuanced approach that holds out the option of a further delay if a deal appears imminent at the end of October.

In the event of a no-deal Brexit, May’s government has a range of measures underway to cushion the blow. This includes unilateral British action to maintain continuity, such as allowing road hauliers from the EU-27 to use their licences after October 31, and bringing into force agreements in critical areas, such as aviation and civil nuclear cooperation and safeguarding.

From the EU side, it is unclear what the full scope of cushioning measures might be. However, given the massive political time and capital both sides have spent on a withdrawal agreement, a no-deal outcome will generate significant acrimony and a lot of finger-pointing.

Despite Johnson’s apparent dismissal of the impact of a no-deal Brexit on the British economy, there is a consensus among forecasts that this is wishful thinking. Longer-term forecasts aside, the short-term challenge could be particularly intense, which is why the Bank of England has asserted that the nation could tip into recession.

Comedy of errors: meet the cast of Britain’s Brexit tragedy

Part of the reason the short-term impact could be so severe is that, while it will ultimately be viable for Britain to trade with the EU and rest of the world under World Trade Organisation (WTO) rules (and other international agreements), this will not happen straight away. Firstly, the negotiation of new trade schedules will be neither automatic or straightforward. Secondly, many economists think that trading on WTO terms will have a negative impact on Britain compared to the status quo, at least to begin with.

This is why so many MPs are still trying to prevent a no-deal option through parliamentary means, aided by the activist Commons Speaker John Bercow. Last month, for instance, there was a cross-party motion, led by the Labour Party, which would have seen the House of Commons taking control of the chamber’s business from the government, but the vote was defeated 309-298.

It has been shown on previous occasions that there is a Commons majority against a no-deal exit. And on Thursday, MPs voted to stop the new prime minister proroguing parliament this autumn to potentially facilitate a no-deal Brexit. But these MPs also need to cultivate a legislative majority in favour of an alternative outcome – including possibly a fresh referendum or a revised version of May’s withdrawal deal – and this has proved elusive so far.

Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics

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