Europe Economy

Brexit back in focus as the UK emerges from lockdown — with no-deal concerns growing

Key Points
  • Brexit is back on the agenda in the U.K.
  • The U.K. is starting to emerge from a three-month coronavirus lockdown.
  • Trade talks with the EU have made little to no progress in recent months.
  • Fundamental differences remain between the EU and U.K. over fishing rights and the so-called "level playing field" ensuring fair competition between the two sides.
An employee of Transport for London sprays Zoono-71 surface sanitizer during a deep clean operation of a train used on the Victoria Line of London Underground network.
Bloomberg

Brexit is back on the agenda in the U.K. as the country starts to emerge from a three-month coronavirus lockdown.

Trade talks with the EU have made little to no progress in recent months and there are growing fears that the U.K. could be heading back toward a "no-deal" scenario at the end of the year, compounding the economic uncertainty posed by the coronavirus crisis.

Fundamental differences remain between the EU and the U.K. over fishing rights and the so-called "level playing field" ensuring fair competition between the two sides, on matters like taxation and rules on state aid, for example. Progress also needs to be made on checks on goods entering Northern Ireland (whose border with the Republic of Ireland is porous, and will be the only land border between the U.K. and EU) from Britain.

On Wednesday, the EU's chief Brexit negotiator Michel Barnier re-emphasized the EU's often-repeated position that it won't allow Britain to "cherry-pick" the advantageous elements of EU membership that it would like to retain when the transition period ends.

"Britain is demanding a lot more from the EU than Canada, Japan or other partners," he said Wednesday, Sky News reported. Speaking to a forum in Brussels, Barnier added that, "in many areas it is looking to maintain the benefits of being a member state without the constraints," Reuters said. "It is looking to pick and choose the most attractive elements of the (EU) single market without the obligations."

The U.K. government has insisted it won't extend the transition period beyond 2020 and has insisted it wants to strike a deal before that time. Despite the assurances, business groups are worried about the limited time left to strike a deal, and what a no-deal Brexit could mean on top of the unprecedented economic hit expected from the coronavirus crisis.

On Thursday, the outgoing head of the U.K. industry body, the CBI, told the BBC that businesses have no space, or resources, to cope with a potential no-deal departure from the EU customs union and single market (membership of which guarantees standards and tariff-free trade) at the end of the year.

"The resilience of British business is absolutely on the floor," Carolyn Fairbairn told the broadcaster. "Every penny of cash that had been stored up, all the stockpiles prepared have been run down."

"The firms that I speak to have not a spare moment to plan for a no-trade deal Brexit at the end of the year — that is the common sense voice that needs to find its way into these negotiations."

Damage of no deal

Business groups are not alone in warning over the dangers of a no-deal scenario.

On Wednesday, the OECD warned that the U.K. was likely to be the hardest-hit developed economy as it predicted U.K. GDP to decline 11.5% in 2020, slightly worse than Italy and France's forecasted slump, and potentially even more (by 14%) if there was a second wave of infections.

Moody's ratings agency warned in a report Wednesday that a no-deal Brexit would "significantly damage the U.K.'s potentially fragile recovery from its deepest recession in almost a century" following the pandemic.

Although such an outcome is not Moody's current baseline forecast, "it is becoming increasingly likely," it said.

"By the end of 2020, when a no-deal Brexit would occur, the size of the U.K. economy would still be significantly below the level expected in Moody's pre-virus forecasts. Its resilience would also be diminished, with higher public debt and unemployment, and lower investment than expected prior to the pandemic," Moody's said.

Moody's said that its base-case scenario continues to assume that the U.K. and the EU will reach an agreement by the end of the year, "albeit a limited one focused on goods trade. But the risks of a no-deal outcome are rising."

Related Tags