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: 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 communication@bruegel.org.

View comments
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read about event More on this topic

Upcoming Event

Jun
25
08:30

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read about event More on this topic

Upcoming Event

Jul
12
09:30

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Eric Cornuel, Ding Yuan, Jiang Jianqing, Pascal Lamy, Li Mingjun, Signe Ratso, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff and Xu Bin Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

External Publication

Liability: When Things Go Wrong in an Increasingly Interconnected and Autonomous World: A European View

In the following article, Scott Marcus first considers the sources of potential defects and what might be done to redress them. He then goes on to consider what constitutes a product defect as well as the associated liability in light of recent (and potential future) EU Directives.

By: J. Scott Marcus Topic: Innovation & Competition Policy Date: June 6, 2019
Read article More on this topic More by this author

Opinion

Europe’s citizens say they want a more political EU

The recent European Parliament election suggests that a growing share of European voters sees things differently from national governments. Whereas citizens clearly used their votes to express policy preferences, very few governments are ready for a more political EU leadership.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 4, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Reflections on the European elections

Bruegel director Guntram Wolff hosts Ferdinando Giugliano, columnist for Bloomberg and La Repubblica, and Krzysztof Blusz, political analyst and senior fellow at WiseEuropa – Centre for European Strategy, for a discussion about the results of the European elections, both across Europe and within the states of Italy and Poland.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 29, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage: The EU financial services landscape after Brexit

Bruegel fellows Rebecca Christie and Nicolas Véron discuss how the map of the EU's financial services industry has begun to change, and how it might eventually settle.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: April 30, 2019
Read about event More on this topic

Past Event

Past Event

The emerging new geography of financial centers in Europe

What shape is the new financial continent of Europe?

Speakers: Rebecca Christie, Valerie Herzberg, Nicolas Véron and William Wright Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 29, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article Download PDF More on this topic

Working Paper

What drives national implementation of EU policy recommendations?

The authors use a newly-compiled dataset to investigate whether and why European Union countries implement the economic policy recommendations they receive from the EU.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 25, 2019
Load more posts