What would No Deal Brexit really mean?

no deal brexitMore than a year has passed since we all voted to leave the European Union, but we are no closer to understanding what separation really means.

The longer the Brexit negotiations grind on, the further they seem from agreement. With every week that passes, exit from the European Union gets closer, yet London and Brussels seem to get even further apart. Without a detailed agreement with our former partners, there is a possibility that we will crash out of the EU with no agreement. Some observers suggest that a No Deal Brexit could be the biggest crisis for the UK economy since the crash of 2008. Others believe that a No Deal Brexit could actually be a very astute move.

The negative view

Bremainers state that the UK contribution to the EU budget may be smaller than many people believe.  Thanks to a rebate secured under Margaret Thatcher’s premiership, the UK pays 0.6% of its GDP into the EU budget while France, as a similarly-sized economy, contributes 1% of its GDP.  This suggests that the UK actually has a fairly good deal; in return the EU provides a range of subsidies, a ready market for British exports, and a source of everything from cars to food.

A hard Brexit would mean the country would automatically adopt World Trade Organisation (WTO) terms, which would remove all these advantages.  Tariffs would be imposed on goods that the UK sends to the EU, and on goods the EU sends to the UK. According to the Centre for European Reform, tariffs on most industrial products would be 2-3%, and higher on cars. There would be an overall tariff of 14% on agricultural products in general, but up to 32% on a bottle of French wine.

With a No Deal scenario, businesses would lose their passporting rights, which allow them to sell their services across the EU without obtaining licences in each individual country. The financial services industry, which accounts for a significant slice of the UK economy would be particularly vulnerable.

Of course, all these restrictions would apply to EU businesses wanting to trade in the UK as well UK businesses looking at Europe.  The negative view on a No Deal Brexit sees Europe facing many new problems as well as the UK.

A positive outlook

Some economists take a more positive view of the effects of a hard Brexit. Some even go so far to suggest that it would permanently boost GDP, thanks to reductions in regulatory red tape and freedom to strike new trade deals.

According to this view, the EU has been a brake on the UK economy, costing a fortune in contributions and distorting the economy by keeping inefficient producers in business. Without a deal, the UK would be free to sign trade agreements around the world, which might make trade with Europe seem rather less important.

This opinion suggests that far from keeping UK prices low, EU membership has actually increased them. Cheaper food would result from imports from global trading partners, while UK businesses would suddenly have access to markets around the world that are effectively denied to them now. This school of thought even suggests that Brussels would be obliged to give our banks, funds and other institutions access to EU markets under WTO rules.

What is the likely outcome?

Whatever the actual result on the economy, ‘No deal’, it is not the government’s preferred option. Despite the lack of progress, it may not occur. Mrs. May and Jean-Claude Juncker, perhaps wary of the potential costs to both side of failing to reach an agreement, have now announced that negotiations will be ‘accelerated’ and some kind of transition deal is starting to look more likely. Just what form this transition will take remains to be seen, although proposals of two or more years for a negotiated withdrawal, giving more time for the necessary compromises have been mooted.

Although there are those who predict financial boom as well as those prophesying catastrophe, no one really knows what the future holds. The UK economy has held up well so far. However, the impact of Brexit may have been delayed rather than avoided and some uncertainty is likely. It might be prudent to look at your own investments and ensure that your portfolio is properly diversified, with a spread of assets that can go on working for you.

To discuss your investment options in the light of any type of Brexit, simply call us at Continuum.

Your capital is at risk. Investments can go down as well as up.

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