Andrew Hammond is an associate at LSE IDEAS, a foreign policy think tank at the London School of Economics and Political Science.
As Boris Johnson’s government doubles down on its no-deal Brexit rhetoric, it was revealed Friday that the British economy contracted in the second quarter of 2019, the first such instance since 2012. While foreign exchange markets are increasingly pricing in a no-deal scenario, this disorderly outcome to the United Kingdom’s exit from the European Union is still misunderstood by the public in Britain and around the world.
With a thick Brexit fog still hanging over the country, there is only one current certainty about Britain’s exit from the EU: The default position legally is that the country will leave the Brussels-based club on Oct. 31, barring a further extension, whether a deal with EU officials is agreed to or not.
Throughout much of the period since Britain’s 2016 referendum, the prospects of Britain crashing out of the EU with no deal were widely dismissed, including by the previous, Theresa May government. However, this scenario is now a growing possibility, with Mr. Johnson asserting that the country must leave on Oct. 31 come what may.
The concept of no deal is, even now, widely misunderstood. It would not just mean that London will automatically leave the EU without the rules that regulate Britain’s relationships with the 27 other member states. Many economic relationships with the rest of the world would also be undermined, as these are underpinned by trade treaties the EU has negotiated with countries from Canada to Japan. With the departure deadline fast approaching, only about a quarter of 40 post-Brexit trade agreements have been signed.
A common mistaken belief also held by many is that there is only one no-deal outcome, when there are in fact multiple no-deal scenarios. At the extreme end of the spectrum is a chaotic no-deal Brexit in which negotiations between Brussels and London break down acrimoniously. A version of this option, despite the economic harm it may cause Britain and the EU, cannot be completely dismissed given the dogmatic position Mr. Johnson appears to be adopting.
In the event of a no-deal Brexit, Ms. May’s government sought to emphasize the range of measures it had in the works to cushion the blow. This included unilateral action to maintain as much continuity as possible, such as granting truckers from the other 27 EU countries the right to use their licences in the U.K. after Oct. 31 and bringing into force agreements in critical areas, such as aviation and civil nuclear co-operation and safeguarding, that would otherwise fall away.
However, if a no-deal scenario does come to pass, it is unclear what the EU’s full scope of measures may be. Given the massive political time and capital both sides put into trying to reach a withdrawal agreement, a no-deal outcome will generate significant acrimony and there will be a lot of finger pointing over which side is to blame.
Despite Mr. 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, it is the short-term challenge that could be particularly intense, which is why the Bank of England has asserted that the country could tip into recession.
Part of the reason why the short-term effects could be so severe is that, while it will ultimately be viable for Britain to trade as a third country with the EU and the rest of the world under World Trade Organization rules (and other international agreements), this will not happen straight away. Firstly, the negotiation of those new trade schedules will be neither automatic nor straightforward. Secondly, many economists think that, compared with the status quo, trading on WTO terms will have a negative impact for Britain, at least initially.
This is why so many British MPs are still trying to prevent a no-deal option through parliamentary means, aided by the activist House of Commons Speaker John Bercow. Last month, for instance, MPs voted to stop the new Prime Minister from proroguing Parliament this fall to potentially facilitate a no-deal Brexit.
However, the big problem facing those MPs who want to avoid a no-deal scenario is that they can’t just show there is a majority in the House against this option; they also need to cultivate a legislative majority in favour of an alternative outcome – including another referendum or perhaps even a revised version of Ms. May’s withdrawal deal – which has proved elusive so far.