Brexit negotiators must compromise to avoid fallout

Both sides cannot afford a Brexit deal failure as the European and UK economies  are not growing  strongly 

European Union (EU) and UK Brexit negotiators will have to come to a workable Brexit compromise to prevent a severe financial and economic dislocation.

Sterling has fallen slightly but minimal movements of both European and UK stock markets indicate that participants are sanguine about the very real possibility of a UK crash out of the EU, without a deal.

Economists, dealers and analysts who take this optimistic view contend that the March 29 Brexit date may be “unofficially postponed” until an early hours accord takes place. Politicians and civil servants on both sides have a different view. They are beginning to draw up contingency plans to counter Brexit without a deal. When Dominic Raab, the UK’s new Brexit Secretary, arrived in Brussels this week, the European Commission (EC) issued a paper that warned  about the negative economic consequences of a deal failure.

Besides costly customs checks, Brexit without a deal would cause problems with transport and airspace regulations. Facilities for a no-deal scenario would have to be hastily agreed.

Leo Varadkar, the Irish prime minister, said his government is making contingency plans for “the unlikely event of a no-deal hard Brexit”.

He said that Ireland would need 1,000 new customs officers and veterinary inspectors to deal with changes in trade rules with the UK. Meanwhile, the UK government has instructed departments to plan for contingencies if the withdrawal takes place without an agreement.

Both sides can’t afford a Brexit deal failure as the European and UK economies, albeit recovering, are far from strong. The gross domestic product (GDP) of Germany, France, the UK and other major European nations is still below levels of 2008, prior to the financial crash.

                                                                Key European economic statistics
  GDP 2008

$billions

GDP 2017        

$billions

 

Growth %

 

jobless %

 

Inflation %

 

Debt % of GDP*

Germany 3,752 3,677 2.3   3.4 2,1 374
France 2,923 2,583 2.2   9.2 2.0 302
Italy 2,391 1,935 1.4 10.7 1.3 260
Spain 1,635 1,311 3.0 16.7 2.3 268
Portugal    262    218 2.1   7.9 1.5 314
Ireland    275    334 8.4   5.1 0.4 323
Greece    354    200 2.3 20.2 1.0 302
UK 2,990 2,622 1.2   4.2 2.4 283
*Total Government, corporate & household debt as %of GDP as at 4th quarter 2017                                                                                                                                              Source:  BIS & Trading Economics

Germany’s total government, non-financial corporate and household debt are a worrying 374 per cent of GDP. A sizeable proportion of Germany’s exports, including automobiles, are sold to the UK. Italy, currently the weakest large EU economy, is only growing by 1.4 per cent with an unemployment rate of 10.7 per cent. Spain, Greece and France also have high jobless rates, particularly youth unemployment.  Germany, the strongest nation within the EU, is currently growing by only 2.5 per cent per annum, while inflation has accelerated to 2.1 per cent. Yes, the eurozone and UK have recovered from the recession of 2009, but the eurozone’s GDP of US$12.6 trillion is 11 per cent below 2008 levels.

“When I read that no-deal would not be a big impact on Europe overall, first of all, I doubt the analysis but secondly, no deal would be very disproportionately shared,” said Liam Fox, UK’s International Trade Secretary. He estimated that the GDP reduction could be “something like 4 per cent for the Netherlands, 3.5 per cent for Belgium and 7 or 8 per cent for Ireland”.

The IMF  forecasts that average economic growth of the 27 remaining EU states would fall by as much as 1.5% by 2030. The UK would suffer a loss of 4%.

Bank of England (BOE) governor Mark Carney told a UK Treasury Committee that a no-deal Brexit would have “big” economic consequences, prompt a review of interest rates and leave many bankers idle.

The transition deal that would effectively keep Britain as a non-voting member of the bloc from Brexit day until the end of 2020, has not been ratified yet, Mr Carney warned. The BOE Financial Stability Report noted the risks from derivative contracts between UK and EU firms. They are estimated at £29 trillion ($37 trillion), of which £16 trillion mature after the March Brexit date. This would have an impact on some £67 trillion of European global contracts.

© copyright Neil Behrmann

This editorial was first published in The Business Times, Singapore

Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.

See reviews of both books on: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

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