UK said to be seriously preparing for a Brexit ‘no deal’

  • Reports early Monday from The Telegraph newspaper said that U.K. leader Theresa May will appoint a "cabinet minister for no deal Brexit"
  • The European Union is set to give a mandate to its negotiating team to begin transition talks later this month; however it is uncertain for now when the second phase of the Brexit process could begin
Theresa May, U.K. prime minister, leaves number 10 Downing Street to make a statement on the terror attack in London, U.K., on Sunday, June 4, 2017.
Chris Ratcliffe | Bloomberg | Getty Images
Theresa May, U.K. prime minister, leaves number 10 Downing Street to make a statement on the terror attack in London, U.K., on Sunday, June 4, 2017.

The U.K. now looks to be seriously contemplating the idea that it could leave the EU without a fully-formed trade agreement with the rest of the bloc.

Reports early Monday from The Telegraph newspaper said that U.K. leader Theresa May will appoint a "cabinet minister for no deal Brexit" this week. This is seen an attempt by the prime minister to demonstrate to the EU that the country is serious about leaving even if it fails to reach a trade deal. Such a minister would work alongside Brexit Secretary David Davis and deliver constant updates on preparations for the eventuality of a no trade deal scenario.

Joan Hoey, regional director of Europe at the Economist Intelligence Unit, told CNBC via email there is "some logic" to such appointment. "No deal is not the government's objective, but it is the fall-back position in the event of an unsatisfactory deal. If the government is serious about walking away if the EU fails to offer an acceptable deal, it needs to prepare seriously for such an eventuality, and that requires a senior minister within the department for exiting the EU," she said.

The U.K.'s Department for Exit of the European Union did not confirm the specific appointment of a minister for a no deal scenario when contacted by CNBC. A spokesperson said that the new appointments will be handled by the prime minister "in the usual way."

This comes as May is set to give a broader reshuffle of her cabinet this week. So far on Monday, Brandon Lewis has replaced Patrick McLoughlin as Conservative Party chairman. Northern Ireland Secretary James Brokenshire has resigned for health reasons. More announcements are due to follow Monday.

Where are we in the negotiation process?

The European Union is set to give a mandate to its negotiating team to begin transition talks later this month; however it is uncertain for now when the second phase of the Brexit process could begin.

Though the U.K. remains a full member of the European Union until, at least, March of 2019, transitional talks need to end by October of this year to allow enough time for parliamentary approval across the EU — giving U.K. and EU negotiators less than 10 months to decide how both sides will cooperate in the future.

"Realistically, only the framework of a trade deal will be agreed by the time the U.K. withdraws in 2019, as completing the withdrawal agreement will take priority this year. However, transition arrangements will allow negotiations to continue, and we expect a deal to be in place by 2021," Hoey from the EIU told CNBC via email.

According to Kallum Pickering, senior U.K. economist at Berenberg, there is just a 20 percent chance that there will be no trade deal between the two sides.

"After the recent progress in the negotiation and on the divorce terms we reduced our risk of hard Brexit to 20 percent (from 30 percent previously). But with so many interests — and political careers — at stake, the risk that talks could fall through at any point remains a serious risk," he warned, adding that such a scenario would have an impact of a 1.5 percent contraction on the U.K.'s long-term growth trend.

Hoey from the EIU also warned that the risk of a breakdown in talks is high. "Many in the EU will still want the U.K. to be punished in some way, lest it sets an example for other possible departures," she told CNBC, adding that nevertheless "compromises should make a deal possible given the strong economic incentive to maintain existing trade ties."