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Parliamentary Testimony

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: Date: January 14, 2019 Topic: European Macroeconomics & Governance

This note, written at the request of the Bundestag EU committee, explores the possible consequences of a no-deal Brexit for the EU and assesses preparations on the EU side. It also provides guidance on optimal strategy for the EU assuming different choices taken by the UK.

Overall, a no-deal Brexit would be disruptive in the short-term.

  • There would be immediate very significant administrative and logistic challenges in trade. Preparations to reduce those disruptions are underway but unlikely to be sufficient. But while MFN tariffs will affect some sectors strongly, the macroeconomic effect on the German economy may not be huge.
  •  If the UK was not honouring its financial commitments to the EU, around €16.5bn would be missing for the remainder of the multi-annual financial framework. The gap could be filled thanks to a higher “own resources” ceiling. The overall missing “Brexit bill” is estimated at around €45-50bn.
  • Not honouring financial commitments would be considered by the EU as akin to default and would likely lead to an uncooperative no-deal Brexit. It would be more disruptive than a cooperative no-deal Brexit, in which the EU and the UK cooperate on a number of pressing emergency files.
  • The Commission has issued a number of draft regulations to mitigate the effects of no-deal Brexit, including on issues such as aviation and visa. I review them and judge them to be comprehensive. Nevertheless, they cannot undo the effects of a no-deal Brexit, which will be highly disruptive in some sectors.

The effects of a no-deal Brexit in the medium to long term are difficult to assess as one needs to assume a benchmark. A no-deal Brexit would deteriorate long-term political relations, which will render new trade arrangement and other cooperation in the future less likely.

A specific concern is the situation in Ireland, which is also the most contentious part of the Brexit negotiation. If the EU wants to protect the integrity of its single market, a no-deal Brexit will mean the imposition of customs border controls on the island. The EC draft legislation aims preserving elements of the peace process but a border could lead to renewed violence.

The overall strategic direction I would advise the EU to take is to increase the cost of no-deal Brexit to UK as much as possible (respecting ethical limits), while at the same time showing more flexibility on the political declaration and possibly the withdrawal deal itself.

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