Opinion

What does a possible no-deal Brexit mean?

With Brexit getting closer, it is still extremely difficult to predict which one of the possible outcomes will materialise. Guntram Wolff examines what exactly it would mean for the UK to 'crash out' of the EU, for both parties.

By: and Date: January 24, 2019 Topic: European Macroeconomics & Governance

This article was published by Caixin, Expansión and Nikkei Veritas.

Caixin logo

Expansión media logo

nikkei veritas logo

On March 29th 2019, two years will have passed since the United Kingdom notified the EU of its intention to withdraw from the European Union. As it stands, the UK will then become a third country and cease to be a member of the EU.

With the deadline getting closer, it is still extremely difficult to predict which one of the four possibilities will materialise: (1) the UK exits based on a withdrawal agreement, (2) the UK exits without any agreement signed, and the exit is therefore disorderly, (3) the UK asks for an extension period, or (4) the UK unilaterally revokes its Article 50 notification and chooses to remain in the EU. After this week’s decision of the British House of Commons, a no-deal Brexit sounds like a more likely scenario.

Given such uncertainty, the EU is actively preparing for the scenario of a no-deal Brexit – and rightly so. It would have serious short-run consequences both in the EU, and even more so in the UK. A no-deal Brexit would have a significant impact in key areas: the EU budget, EU-UK trade relations, the Irish border, specific sectors such as aviation and, last but not least, EU citizens living in the UK and conversely UK citizens living in the EU.

The first issue at stake in the event of a no-deal Brexit is money: the UK could decide not to honour its financial commitments to the EU. The overall long-term Brexit bill is estimated to be about €45-50 billion. In the ongoing budget period 2019-20, the EU would lose some €16.5 billion, which other members would have to pay for. Germany alone would have to increase its contribution by about €4 billion according to estimates by my Bruegel colleague Zsolt Darvas.

Filling this gap is neither a legal nor an economic problem for the EU. But the EU would justifiably consider the non-honouring of the UK’s financial commitments as a hostile act. De facto, the EU would consider it as a default of the UK, with implications for political relations. The EU might want to condition short-term collaboration with the UK on payment of the outstanding amount.

Second, and economically much more relevant, a no-deal Brexit has major implications for the trading relationship. There would be immediate and significant administrative and logistical challenges. For example, the port of Dover, one of the main entry points for lorries into the UK, could do customs controls only for a fraction of the 2.6 million lorries that arrived in 2017. But it is not just customs controls at the border. There are immediate administrative challenges – for example, the checking of regulatory conformity of products, as well as veterinary, sanitary and phytosanitary checks. Preparations to reduce those disruptions are under way, but are unlikely to be sufficiently advanced by March 30th of this year to prevent major short-term disruptions in trade.

A no-deal Brexit would be bad news for the EU as well as for the UK in the short term

Somewhat less relevant, tariffs would rise from the current level of zero to the then-applicable WTO most-favoured nation (MFN) tariffs of the EU. The EU and the UK have notified the WTO that the UK will apply the EU MFN tariffs post-Brexit. Those tariffs are not very high, but in some sectors, such as the automotive sector, the tariff does amount to 10%, hitting that particular industry on both sides. In the medium term, regulatory barriers could turn out to be more costly, but all of this will depend on the future relationship between the UK and the EU, which a no-deal Brexit is rendering more uncertain.

The biggest and most significant concern is the situation in Ireland. A possible border in Ireland was already the most contentious part of the Brexit negotiation. But if the EU wanted to protect the integrity of its single market, a no-deal Brexit would mean the imposition of customs controls on the Irish border. This would be a paradox: the very rule in the Brexit withdrawal agreement that aimed to prevent a hard border may have been the main reason for the UK to reject the deal and, in turn, would lead to a hard border. Faced with a choice of an immediate hard border, the EU and the UK might be ready to go back to the negotiating table to prevent violence on the island of Ireland. So, I would argue that the Irish situation is the main reason why there may still be a deal in the coming weeks.

When it comes to specific sectors, the European Commission has issued a number of draft regulations to mitigate the effects of a no-deal Brexit. For example, on financial services, the most important contingency plans have been made and both the Commission and the British authorities have shown flexibility on clearing to limit financial stability concerns. In the aviation sector, in turn, a no-deal Brexit would still lead to many flight cancellations, but not all flights from the UK to the EU would be grounded.

Last but not least, a no-deal Brexit would create significant uncertainty for citizens on both sides of the channel. The total number of EU citizens living and working in the UK and UK citizens living and working in the EU amounts to around five million. Will their rights be preserved, at least partially? For example, accumulated pension rights in one country can be taken home when returning after working abroad, according to an EU right. Will this right be lost, and these citizens consigned to losing parts of their pension?

Overall, a no-deal Brexit would be bad news for the EU as well as for the UK in the short term, creating lots of uncertainty and causing various disruptions. The effects of a no-deal Brexit in the medium to long term are more difficult to assess, as an alternative long-term relationship is yet to be defined.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Blog Post

Banks post-Brexit: regulatory divergence or parallel tracks?

Post-Brexit UK bank regulation is not likely to compromise on international standards, but will place greater emphasis on competition, making close UK-EU dialogue essential.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 6, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

UK banks in international markets

Implications of UK-euro area divergence in regulation and supervisory practice

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 25, 2021
Read article More on this topic More by this author
 

Blog Post

New EU insolvency rules could underpin business rescue in the COVID-19 aftermath

Corporate bankruptcies are set to rise in the context of COVID-19. EU countries should speed up adoption of recent insolvency reforms and, in addition, offer consistent treatment to restructuring finance.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: March 24, 2021
Read article More on this topic More by this author
 

Blog Post

Financial services: The Brexit dust begins to settle

The phase of greatest Brexit-related uncertainty for the European financial sector ended on 1 January. Although too early to discern more than the broadest contours of the future landscape, it is increasingly apparent that London will be less dominant than before.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 11, 2021
Read about event More on this topic
 

Past Event

Past Event

The economics of biodiversity

Join us in conversation with Sir Partha Dasgupta and Frans Timmermans to mark the publication of The Economics of Biodiversity: The Dasgupta Review

Speakers: Sir Partha Dasgupta, Maria Demertzis, Frans Timmermans and Guntram B. Wolff Topic: Energy & Climate Date: March 3, 2021
Read article Download PDF More on this topic
 

Working Paper

COVID-19 credit-support programmes in Europe’s five largest economies

This paper assesses COVID-19 credit-support programmes in five of the largest European economies, and examines how countries have dealt with trade-offs raised by the programmes.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: European Macroeconomics & Governance Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

The double irony of the new UK-EU trade relationship

The Trade and Cooperation Agreement signed between the European Union and the United Kingdom goes against six decades of UK efforts to avoid being economically disadvantaged in Europe. Tracking the evolution of the EU-UK relationship over the last 60 years can help in understanding this.

By: André Sapir Topic: European Macroeconomics & Governance Date: January 12, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

The future of EU-UK relations (again!)

At the eleventh hour of negotiations, what will the future of the EU-UK relationship look like?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 13, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The future of EU-UK relations (again!)


At the eleventh hour of negotiations, what will the future of the EU-UK relationship look like?

Speakers: Maria Demertzis, Giuseppe Porcaro, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 13, 2020
Read article More by this author
 

Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
Read article More by this author
 

Podcast

Podcast

One rule to ring them all? Europe's financial markets after Brexit

What effect will brexit have on Europe's financial markets?

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 26, 2020
Load more posts