Blog Post

Brexit: Now for something completely different?

The life of Brexit. After a week of ECJ rulings, delayed votes, Theresa May’s errands across Europe and the vote of no confidence, we review the latest economists’ opinions to try to make sense of what has changed and what hasn’t.

By: Date: December 17, 2018 Topic: European Macroeconomics & Governance

Luxembourg, December 10th 2018: “The United Kingdom is free to unilaterally revoke the notification of its intention to withdraw from the EU”. This decision of the European Court of Justice came ahead of last Monday’s British parliament vote on the Brexit withdrawal deal, which was subsequently delayed. From that point on, an eventful week followed with an imbroglio of political, economic and legal matters. We review economists’ views on the latest Brexit developments.

While the political arrangements linger, so does uncertainty. Tony Yates argues that Brexit is now more problematic than the financial crisis of 2008, both regarding the procedures to follow and the political drive to follow them. “Although the economic damage has been so far less, and more slow-moving, in many ways I think the difficulties we face now have the potential to be much worse. (…) During the financial crisis, there seemed a basic acceptance of the idea that although the authorities had failed us in managing the financial system, this was a subject that the authorities’ delegated experts were best placed to fix. Not so now.  Economic and technocratic aspects of the costs and benefits of leaving the EU have been relegated relative to other features, like national and cultural identity, on which it is not appropriate to delegate to decision-making elites.  And since the nation at large is divided on these questions, this adds to the paralysis. ”

Seema Malhotra calls this a “high stakes game” where “trade uncertainty threatens to set the UK back by 46 years”, as there is no legal guarantee that the EU bilateral trade deals the UK currently enjoys can be rolled over following Brexit. “The implications for businesses currently trading under these agreements are clear”, and she details: “extra costs, increased duties and slower reaction time when providing after-sales support”. Furthermore, “Leaving the EU with no deal and trading on WTO terms would increase our trading barriers with both EU and non-EU countries alike.”

Jiaqian Chen writes for the IMF Blog on the long-term impact of trade barriers, lower migration and lower foreign direct investment flows. The impacts are computed under two scenarios: the FTA scenario, under which there is a free trade agreement but also restrictions on migration flows; and the WTO scenario, with stricter migration controls and no preferential access to the EU market. In the former scenario, “UK output will be about 2½ to 4 percent lower in the long run compared to a no-Brexit scenario. This translates into a cost of about £900 to £1300 per capita”; In the latter, “the decline in real output relative to no Brexit would be larger, between 5 and 8 percent in the long run (about £1700 to £2700 per capita).” Chemicals and transport equipment would be the most affected sub-sectors in manufacturing. Financial services could also be significantly disrupted.

The economic effects are not only limited to trade. Given the recent fall in 30-year UK bond yields and the potential reversal of the yield gap between two- and 10-year government bonds in the near future, John Wraith, head of UK macro rates at UBS Group AG, commented: “The market clearly believes she [Theresa May] will not get anything material enough from the EU to turn that scale of opposition around, so even if the vote is delayed it’s going to end in the same way — with a big defeat for the government.” Paul Donovan interprets the current exchange rate movements: “The sterling has been weak, the idea being that time spent arguing about who runs the country is time not spent running the country, and if a hard exit (which investors do not want) is to be avoided, it might be quite useful if someone were to run the country.”

Following Wednesday’s confidence vote, the pound has recovered, which John Authers says “is justified”: “What markets want to avoid is a disorderly ‘no-deal’ exit, in which the U.K. suddenly abandons several hundred treaties and has nothing to replace them. A leadership election, which would take more than a month to complete, would have increased this risk greatly.”

James Smith from ING Economics argues that the “sharp fall in last week’s UK services PMI demonstrated fairly clearly that concerns about ‘no deal’ are beginning to have a tangible impact on growth. With the vote increasingly likely to be pushed back into the New Year, we suspect this weaker momentum will persist over the winter.” Growth is expected to slow to 0.2-0.3% over the fourth quarter of the year. Smith also elaborates on what the delay in the parliamentary vote means going forward. “So while May is set to hold meetings in Brussels this week, our feeling is that this could result in the vote being pushed back until well after Christmas. (…) We think it might not be until much closer to this date before we know for sure that ‘no deal’ has been avoided, and in the end Parliament may push the Prime Minister towards a Norway-style deal, or even potentially a second referendum, in order to secure approval from MPs.”

Indeed, some economists’ commentary has been centred on the political and strategic dimension of the events. Chris Dillow writes in his blog that “the high cost of Brexit, far from being a reason not to leave the EU, is only entrenching Brexiters’ opinions, which means that the divisions Brexit is causing will last for years.” Wren-Lewis calls the delay of the meaningful vote on May’s deal a “serious attack on parliamentary democracy”: “Parliament was on the point of overwhelmingly rejecting May’s deal, which could have led to a process whereby parliament debated over the best way forward.”

Aarti Shankar warns that “Theresa May’s delay tactics could yet pay off”: “the predicted size of her defeat in parliament could have made her position as leader untenable. She therefore chose to pursue talks with the EU that could help overcome MPs’ widespread and deep concerns about the Irish backstop arrangement—and so help pass her deal”. Shankar argues that Tusk’s inflexibility on renegotiating the withdrawal deal in general and the backstop in particular “might change if the UK parliament remains deadlocked in January. After all, the EU has also shown it wants a deal. Its concerted effort to get over the sufficient progress line last December, and its last-minute shift to include a previously unacceptable UK-wide customs union backstop, all point to this”.

Wlfgang Münchau argues that “Despite its many unique features, Brexit has the characteristic of a classic EU negotiating procedure, starting out as a multiple-choice catalogue but always ending up as binary. So when we predict – as we do – that the decision will be deal-versus-no-deal, we are cutting through a lot of the politics that still needs to happen between now and then. The reason we see a rising danger of a no-deal Brexit is our assessment that the UK parliament lacks the alternative majorities needed to push through a referendum or an outright revocation.”

Even if the UK parliament were to push through a second referendum, Simon Kaye explains on the LSE Blog there could be a paradox of preferences, also known as the “Condorcet cycle” between the options of a deal, remain or no-deal. Poll data suggests that “a majority would prefer May’s deal to remaining in the EU outright; almost all polls show that a majority prefers remaining in the EU to leaving; and a subset of these show an even clearer majority preference for remaining over a no-deal exist. Finally, a majority prefers leaving the EU without a deal to the government’s Withdrawal Agreement. Deal > Remain > No-Deal > Deal.”

Therese Raphael boils down the results of Wednesday evening’s vote of confidence on Bloomberg Opinion: “It is hard to see their [the MPs’] answer as anything other than a vote of no confidence in the hardline Brexiters who have been pushing for months to replace May with a leader who would champion a no-deal Brexit”(…) But what does that mean for the future of Brexit itself? “Here little has changed: her party is divided and the fate of Brexit is undecided. There is still no parliamentary majority for Theresa May’s deal, which she will bring to a vote most likely in January, and no majority for holding a second referendum.”


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

Rules-based trading system and EU-Australia

At this event the Australian Minister for Trade, Tourism and Investment, Senator the Hon Simon Birmingham will speak about Australia-EU bilateral trade, the FTA negotiations and the importance of multilateral rules-based trading system

Speakers: Senator the Hon Simon Birmingham, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 22, 2019
Read about event More on this topic

Upcoming Event

Feb
8
08:30

The world’s response to China’s Belt and Road Initiative

This event will look at the Chinese Belt and Road Initiative as well as the response from the rest of the world.

Speakers: Alicia García-Herrero, Jean-Francois Di Meglio, Theresa Fallon and Uri Dadush Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: The economics of no-deal Brexit

Bruegel director Guntram Wolff is joined by senior fellow Zsolt Darvas to rake through the possibilities and probabilities inherent in a no-deal Brexit scenario, covering trade, the Irish border, citizens' rights and the EU budget.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 16, 2019
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read article More on this topic More by this author

Blog Post

EU budget implications of a no-deal Brexit

A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More on this topic More by this author

Policy Contribution

The implications of no-deal Brexit: is the European Union prepared?

The author, based on a note written for the Bundestag EU Committee, is exploring the possible consequences of a no-deal Brexit for the EU, assessing preparations on the EU side and providing guidance on the optimal strategy for the EU, depending on the choices made by the United Kingdom.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 14, 2019
Read article Download PDF More by this author

Parliamentary Testimony

German Bundestag

The implications of no-deal Brexit: is the EU prepared?

Hearing on Brexit in the EU Committee of Bundestag on 14 January 2019, exploring the possible consequences of a no-deal Brexit for the EU and assessing preparations on the EU side.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, German Bundestag, Testimonies Date: January 14, 2019
Read article Download PDF More on this topic

Policy Contribution

The Belt and Road turns five

Five years after its launch, Michael Baltensperger and Uri Dadush reflect on China’s Belt and Road Initiative. The plan to revive ancient trade routes has the potential to enhance development prospects across the world and in China, but that potential might not be realised because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated.

By: Michael Baltensperger and Uri Dadush Topic: Global Economics & Governance Date: January 10, 2019
Read article More on this topic More by this author

Opinion

Lose-lose scenario for Europe from ongoing China-US negotiations

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: January 9, 2019
Read article More by this author

Podcast

Podcast

Director’s cut: Wrapping up 2018

With 2018 drawing to a close, and the dawn of 2019 imminent, Bruegel's scholars reflect on the economic policy developments we can expect in the new year – one that brings with it the additional uncertainty of European elections.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: December 20, 2018
Read article More on this topic More by this author

Opinion

China’s view of the trade war has changed—and so has its strategy

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 19, 2018
Read article More on this topic

Opinion

How a second referendum could be the best way to overcome Brexit impasse

A new vote based on the revocation (or not) of Article 50 would give the UK government a clear signal to proceed in one direction or another, and thus trim down the number of options being touted – most of which are unworkable as things stand.

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: December 14, 2018
Load more posts