Hopes turn to an orderly “no deal” Brexit

Those hoping for summer respite from Brexit will be bitterly disappointed. Three months left to finalise the terms of the UK’s withdrawal and there is still no agreement in sight. There is also no guarantee that the final agreement—if one is reached—would make it through the UK parliament. The chances of extending Article 50 negotiations seem remote. Is it time to start planning for “no deal”?

The European Commission certainly thinks so. In recent months it has published around 60 sector-specific notices highlighting areas for immediate consideration, from new licensing requirements to data-sharing rules, many of which are not covered by WTO terms. The UK government is expected to do the same.

Some commentators have suggested that even if the UK and the EU27 failed to agree a full withdrawal deal, they would still prepare separate, time-limited agreements to fall back on. Their proposal is worth considering. The thinking runs that even if negotiations break down on one issue, mini-agreements could be struck elsewhere to minimise the chaos. It would be in effect “no-deal-lite.”

It’s an interesting thought. But even these steps cannot fully mitigate the risks of a “no deal.” They would also come at a price.

This is because it is not just a question of tariffs. Once the UK leaves the EU single market and customs union, it will no longer share a common regulatory space with the EU. At the moment British goods are considered EU goods: they meet a whole range of EU standards (from health to environment to production methods) and are part of a complex system of monitoring, compliance and authentication, which is shared between member states and European institutions.

Take the example of a British company exporting goods to the EU. Under a no deal scenario, it would need to fill in all sorts of paperwork to prove that its products still complied with EU rules of origin, customs duties and VAT. Likewise, transport companies would need to ensure they had the correct certification and licences to travel through the EU. This would present a logistical and bureaucratic headache, especially given that some forms are issued at the EU level, and others by national authorities. There would also be financial implications. Any obstacle that delays trade or makes it less efficient often results in higher costs for producers—costs that are usually passed on to consumers.

Forward planning would be necessary in other areas too. In the event of no deal, the UK would no longer be covered by the US-EU Open Skies Agreement—an air transport deal that allows American and European airlines to fly between the US and the EU, EEA countries and, with some caveats, Switzerland. The same goes for the Schengen Information System.

In both cases, the EU27 and the UK could look into negotiating time-limited agreements which covered off the worst of the damage—although Michel Barnier would first need to receive the go-ahead from EU capitals. Timing would also be an issue. Discussions would need to be wrapped up to allow sufficient time for parliamentary scrutiny in member states and, depending on the kind of agreement, ratification too. For example, the US-EU Open Skies Agreement is a “mixed agreement”—in countries like Belgium, national or regional parliaments may need to vote on some of the changes. While parliaments are unlikely to reject the agreements outright, they could suggest amendments.

These last-minute deals would not be easy to strike, nor would they come without their own set of conditions. The EU27 would almost certainly press the UK to accept more than it might like, including a greater remit for the European Court of Justice over UK participation in these areas. New arrangements would also be conditional on the UK paying the so-called “divorce bill.” There is no guarantee that these deals would make it through the UK parliament.

Under this scenario, there would be two options: extend Article 50 negotiations, or ensure that there are at least some arrangements in place to fall back on. But even then, they would come at a price. Economic damage to both sides, while hard to quantify, would still be significant, at least in the short-term as financial markets would react and investment would slow. The political damage could be just as important. Britain’s departure from the EU without a withdrawal agreement would make it harder to rebuild trust if and when both sides decided to return to the negotiating table. Any lingering goodwill would be squandered and political capital on both sides would be weakened.

Negotiating Brexit was never going to be easy. At the moment, the UK government wants a deal. The EU27 want one too. Translating that political will into legal reality will be the test over the next few months. With so much uncertainty lying in the balance, it should also remain the priority.