Why Prime Minister May is wrong to say no Brexit deal is better than a bad deal

Key Points
  • OMFIF argues Theresa May's 'no deal' Brexit argument is flawed.
  • Weakened trade deals would cause the U.K. economy to flounder.
  • The EU is aware of the risks for Britain.
Britain's Prime Minister Theresa May
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British Prime Minister Theresa May's claims that no deal would be better than a bad deal are wrong and will not help strengthen the U.K.'s hand in Brexit talks, new analysis from the Official Monetary and Financial Institutions Forum (OMFIF) has said.

In the final day of campaigning before Britons take to the polls, the independent think tank has criticised May's position and said that the cost of walking away from the negotiating table without a deal would far outweigh the cost of accepting a poor deal with the EU.

"EU negotiators are dismissive of British threats to walk away with no deal," OMFIF wrote in a report released Wednesday, arguing that the EU is acutely aware of the losses the U.K. would suffer outside of the union.

Without a deal, EU exports of goods and services are expected to shrink sharply as businesses face new tariffs of 10 percent (for car exporters) to 14 percent (for food exporters). This would provoke a fall in the price of sterling, a rise in inflation, and, ultimately, a "deep recession", which would lower tax revenues and the scope for fiscal stimulus, the report claims.

The Bank of England would then face the dilemma of choosing to raise interest rates to stabilise sterling or keeping them low to stimulate the economy, it added.

"The costs to the UK economy of failing to strike a deal would dwarf those of signing up to a bad deal," authors John Springford, OMFIF director of research, and Simon Tilford, OMFIF deputy director of the centre for European reform, suggested.

May has long argued that her hard-line approach to Brexit talks would strengthen the U.K.'s position and convince the EU to form a mutually beneficial agreement. Meanwhile, left-wing opponent Jeremy Corbyn has said that leaving the EU empty handed would be the worst case for Britain.

The incumbent initially called the election in April in a bid to boost her parliamentary majority and strengthen her hand in Brexit talks. However, her once strong lead against Corbyn has narrowed in recent days and the two are now neck and neck in opinion polls.

"(Corbyn) has managed to shift from being someone who is absolutely unplayable and unwinnable to somebody who seems to have a chance," David Marsh, who co-founded OMFIF, told CNBC on Monday.

"She (May) didn't need to (call the election) and it looks now as though she has been faulty in her judgment and that's something which will count against her in the polls,"

Marsh added that the election, which has been overshadowed by terror attacks in Manchester and London, and continued defense talks, could also serve to overshadow May's Brexit hand.

"Europe is consolidating its view on the Brexit negotiations and Mrs May will go into battle distinctly weaker," Marsh noted.

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