'No-deal' Brexit now the only likely outcome

The Shadow chancellor, John McDonnell, says he would back second referendum; but only if it is a 'vote on the deal itself' and not if it includes a remain option [Guardian].

But such a proposal may be moot as the chance of a deal may well be unlikely. Indeed it seems, after Salzberg, that the most likely position Britain will find itself come March 2019 is one of crashing out of the EU and falling back on WTO rules.

Even before May arrived in Austria there were already suggestions that Theresa May's Chequers proposal would be rejected and a no-deal Brexit was on the cards [Guardian / FT]. 

Only ever three options

When Article 50 was invoked there many people thought that the two year period up to the point where Britain left was a 'negotiation' whereby Britain and the EU made a deal upon which both could agree and sign.

But this is not quite the case. As was said, and should have been understood by UK 'negotiators' from the outset, at the beginning of talks there would be no 'cherry-picking' and the 'four freedoms' - freedom of movement of goods, capital, services, and labour - were inseparable.

Thus to be a part of the single market all four freedoms would have to be accepted.

Outside of the single market, one would have to negotiate a separate trade deal with the EU as other third countries have done.

Similarly there is the issue of the customs union, another important element of the EU Single Market. Under its rules, the EU operates as a trade bloc, operating common external tariffs and customs barriers, and negotiating trade deals as one. As a member of the Customs Union, the UK is not allowed to negotiate other bilateral trade deals, but it does benefit from having the same access to many other counties on an equal basis as the other EU member states [Institute for Government]. 

So there were only ever three deals on the table. That Britain remained as is; that Britain became a member of the EEA - thus not being a member of the EU but retaining access to the Single Market and Customs Union, or leaving 'without a deal' and falling back on WTO rules.

In summary those that think that they were in a negotiation with the EU were just plain wrong. They were not [Huffington Post]. 

Britain is essentially in a position where it tells the EU what of the acquis communautaire Britain is happy to sign up to, and the EU tells the UK what it can have in return.

[The Acquis Communautaire is the accumulated body of European Union (EU) law and obligations from 1958 to the present day. It comprises all the EU's treaties and laws (directives, regulations, decisions), declarations and resolutions, international agreements and the judgements of the Court of Justice.]

What the UK can have in return cannot be different from what other countries have in return for the same commitment to the EU's rules and regulations. This is partly because in some cases it would break WTO rules, but also because it would not be in the EU's interests and would be unfair to other member states.

Slogans & unworkable deals

The likes of David Davis had said early into the so-called 'negotiations' that he would like the UK to secure a free-trade deal with no tariffs when it leaves the EU in what he described as "Canada plus plus plus" - a reference to the free trade deal struck between Canada and the EU [BBC]

But such a proposal was obviously wishful thinking since Britain would have to be a third country before the EU could even begin to negotiate such a deal. Furthermore, Davis also seemed to overlook the fact that the Canada/EU trade deal took many years to finalise and does not cover all the sectors Britain might want access to.

Theresa May's red lines and almost immediate rejection of remaining in either the Single Market or Customs Union ruled out Britain becoming an EEA member.

She was also adamant in her position that she would 'respect the vote', declaring that "Brexit Means Brexit".

This could only ever mean one thing. Britain would leave without a deal and fall back on WTO rules.

Her other slogans reinforced this. In December 2016 she declared she would be seeking a "Red, White and Blue" Brexit [Guardian / Independent].

And in May 2017 she declared "No deal is better than a bad deal" and even incorporated this into the Tory Manifesto [Independent].

By proclaiming she sought a "Red, White and Blue" or bespoke Brexit, it was clear any offer would be rejected by the remaining 27 EU members since it would be seen as cherry-picking.

Kicking the can towards the cliff

Her proclamation that no deal was better that a bad deal was, for anyone that was awake, a clear sign that all the UK government was doing was kicking the can down the road, going through the motions, until such point that Britain left without a deal and fell back on WTO rules.

This seems to have been the plan from day one. Indeed it seems clear that Britain had no intention of signing up to any deal that the EU might have presented to the UK, not that it was ever the EU that needed to present an offer.

Indeed it has never been, under the auspices of Article 50, a requirement for the EU to present a deal. It remains entirely incumbent on Britain to present a plan and the EU to either ratify or reject it.

Theresa May's speech last week that inferred the EU had not treated Britain with respect was rather disingenuous.

She said for EU leaders to reject her plan with no alternative at this "late stage of negotiations" was "not acceptable". But she must known that her Chequers plan would have been rejected as it simply amounted to another cherry-picking exercise. But it appears she is clueless [Guardian].

"At this late stage in the negotiations, it is not acceptable to simply reject the other side's proposals without a detailed explanation and counter proposals," she tersely said during a statement on Friday after returning from Salzburg.

But she should know full well that it is not the EU's mandate, under Article 50, to offer "counter proposals". The EU27 merely have to say yes or no.

Much of Britain's right-wing press suggested the EU had humiliated Theresa May. But the simple truth is that the PM brought it upon herself by putting forward a plan that was clearly going to be rejected.

While the European Council President Donald Tusk had earlier made a joke about cherry-picking when he posted a picture on Instagram he later suggested a "compromise" was possible but the UK proposals had to be "reworked" [BBC].

Meanwhile the pound fell against the dollar and the euro following May's statement, an indication of the hurt that will result when Britain does crash out in March.

Clear statement needed

If Britain is going to remain in the EU or EEA, thus the Single Market and Customs Union, the government need to put on the brakes and make clear to business that Britain's future is certain. If not the government have to make that clear also, even if that is an uncomfortable thing to hear.

With less than 6 months to go and it seeming all too certain that a hard, no-deal Brexit is on the cards, businesses may have to make some hard decisions now. To make decisions in March next year could prove too late and very costly for companies that remain and have to operate under WTO tariffs.

In January 2017 Theresa May walked into the Long Gallery, where Churchill threw his Coronation banquet in 1953, and announced her Brexit plan dressed in a suit which could only be described as pyjamas [Daily Mail].

Should her plan be rejected by the EU, she suggested she was to turn Britain into a low-tax Singapore of the west, essentially sleepwalking Britain back into the past. According to Adam Posen, an American economist and President of the Peterson Institute for International Economics, who spent three years as a policy maker at the Bank of England, this is a fantasy. "It won't make Britain like Hong Kong in the '70s. It will make Britain like Britain was in the '70s. That is a step backward, a step away from freedom and a step away from prosperity." [FT / tvnewswatch].

Labour's plan is no better

Jeremy Corbyn's plans to transform Britain's economy, should Labour win the next general election, by re-nationalising large sectors such as water, the post office and railways. But his plans are raising eyebrows and damaging the UK in the eyes of international investors who are already worried about the impact of Brexit on company profits and economic growth.

"Corbyn and McDonnell are viscerally anti-Europe; Corbyn voted against the European Union back in '74 and consistently since," says Posen. "If the Labour leadership were different you could have a remain vote, come back. But as long as the Labour leadership is these two nut jobs and it will remain these two nut jobs for the foreseeable future - run by the unions - you will not see a turnaround. So the UK is going to have to cope with the economic aspect."

With the prospect of another financial crash on the way, compounded by the US/China trade war and rising global debt, the future for Britain is far from bright.

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Prepping for a no-deal Brexit

Prominent Brexiter Liam Fox recently said he now believed the risk of a no-deal scenario had increased and there was now a 60/40 chance of Britain essentially crashing out of the European Union and falling back on WTO rules [Guardian].

This comes from a man who in July 2017 proclaimed that a post-Brexit free trade deal with the EU should be the "easiest in human history" [Guardian].

Fox has blamed the "intransigence" of the Brussels machine, but has seemingly failed to understand that Europe's so-called intransigence is essentially written into the immovable pillars or four freedoms, that of the free movement of goods, capital, services, and labour.

In a post-Brexit statement, the heads of state said, "Access to the single market requires acceptance of all four freedoms." It was also clearly stated from the outset that there would be no cherry picking. And that position has not changed.

And so after more that two years since the EU referendum there has been no sign of any deal that can be signed off.

Indeed it has become clearer in the last few weeks that no deal will be struck.

Mixed messages

Whilst there have been mixed messages coming from Brussels there is the general consensus that Theresa May's so-called Chequers Plan still amounts to cherry-picking and as such will be rejected.

And even within her own ranks May has seen dozens of Tory gathering to discuss the possibility of ousting over the plan which they themselves oppose.

This week saw May meeting with cabinet members to discuss the possibility of a no deal Brexit and what strategies the government might need to implement.

It seems that only now after more than two years since the referendum, do even the most ardent Brexiters realise that extricating Britain from the EU is not perhaps the easy job they had all proclaimed.

If only those that voted for Brexit had listened to some of those so-called experts and economists instead of dismissing them as being a part of a so-called project fear.

Economic warnings

Adam Posen, an American economist and President of the Peterson Institute for International Economics, spent three years as a policy maker at the Bank of England and has described Brexit as stupid or at the very least misguided [YouTube].

Being part of the EU was a safety in numbers issue, Posen says. "People wanted to be in the UK because it acted as a platform to an important trading block, that being Europe."

"I think it's the wrong decision for the UK but they are entitled to it," Posen said back in July 2017. But slowly the country and its people will find themselves being "Mugged by reality".

The UK had a long standing ambivalence with the EU. But it nonetheless had the best deal it was ever going to get, given it was not a part of Schengen, it hadn't adopted the Euro, and for the most part it set its own rules concerning finance.

Negative Supply Shock

By withdrawing into itself the UK is going to suffer a negative supply shock and is already doing so, Posen claims.

"A Negative Supply Shock means you are reducing the productive capacity of your economy or the ability of your economy to purchase things for the same amount of money as you used to."

"Putting up trade barriers is bad for your economy," the economist says, and "the withdrawal from the EU is a form of putting up trade barriers, full stop."

"Now you can debate how much, how big, which industries, what happens in the end. But it is a withdrawal."

"Moreover you are ruining your competitiveness specifically with your largest trading partner. It is a fact of life that you trade with countries that you are continuous with and the countries that you are historically interactive with than with countries that are far away. That is true for countries like the US with NAFTA and it is true for the UK."

"No matter how much there's been a 'special relationship', no matter how much the UK tries to be a global exporter, the fact is you've got twice as much trade with the EU, more than twice as much investment with the EU, than with the US or the rest of the world."

"As David Cameron pointed out while I was at the Bank of England, the UK does more trade with Ireland than all of the BRIC countries combined; Brazil, Russia, India and China. So this is negative full stop."

No economic upside

Posen like many other economists clearly sees the pulling out of the Single Market as a bad move, and feels that many people fail to see its importance.

"There is a distinction that gets made … which is important, it is the distinction between a trade deal and access to the single market. The single market covers all sorts of things that aren't simply the price of goods off the boat. It's whether your auto parts meet safety standards, whether your chemicals or your food additives have been recognised, whether you fit standard sizes of various objects, it's whether accountants are accredited, it's whether your university degree is recognised in other countries' universities."

"Now there's a large body of research … that say many of these things are a restraint from trade. In reality they are partially restraints on trade and partially beneficial because they set standards and make it easier to have large markets."

"But since the UK is primarily an exporter of high end products and services; financial services, business services, media services, cultural services, educational services, how much do they lose by not being in the single market even if you have a trade deal? And the answer is a lot."

"Most of the financial regulation that affected the UK was set in the UK and not set by Brussels, and while the UK was in the EU they had a prominent voice of setting those regulations in Brussels."

So, Posen sums up, "There is no economic upside to this."

No return

There are many remainers who hope the whole Brexit debacle will be stopped. But Posen is far from optimistic on this front.

"The [2017] election was not about Brexit…  It's perhaps ironic for people to understand, the real reason the election was not about Brexit and there's no turn around on Brexit, is not because of anything to do with the Tory government, it's to do with the fact that the current extreme left wing leadership of Labour Party is horribly entire."

"Corbyn and McDonnell are viscerally anti-Europe; Corbyn voted against the European Union back in '74 and consistently since. Again, that's his right."

"If the Labour leadership were different you could have a remain vote, come back. But as long as the Labour leadership is these two nut jobs and it will remain these two nut jobs for the foreseeable future - run by the unions - you will not see a turnaround. So the UK is going to have to cope with the economic aspect."

Economic impact

And what of that economic impact. Posen, back in 2017 said the UK would see higher inflation, lower purchasing power, and a weaker pound. And the pound too would have a way to go as it adjusted further with Europe.

"The UK has very large budget deficits, large trade deficits, that means going beyond their savings they're going to have to pay it back. But since the Brexit vote we've seen a boost in consumer borrowing, while corporate investment has gone negative and trade has gone the wrong way."

"So in other words the household balance sheets are getting worse, the government balance sheet is getting worse, the trade balance sheet is getting worse, at the same time they are going to be pulling themselves out of economies of scale in their biggest markets. And at the same time there is inflation which means the real purchasing power and ability to pay off those debts is going to go down."

"Not good."

Britain in the '70s

"Do the mental exercise. If this were 1974 Britain and you were on a fixed exchange rate and you had this set of macroeconomic indicators you would be predicting a pound crash.

"Thankfully Britain is Great Britain UK is not part of the Euro area and does not have a fixed exchange rate. But if you do that exercise it just reminds you of just how unsustainable the current British path is."

"The Theresa May government has indicated they might try to become Singapore on the Thames. There are a dozen problems with this but I will highlight one in particular."

"May's plan to dictate which employers get permits for foreign workers in order to control Britain's borders, essentially this is the industrial policy of the pre-Thatcher Labour party of the '70s and the '60s."

"But this is a fantasy. It won't make Britain like Hong Kong in the '70s. It will make Britain like Britain was in the '70s. That is a step backward, a step away from freedom and a step away from prosperity."

Self-interests

As for the they need us more than we need them and the idea that Germany and other will roll over to help Britain get a cherry-picked deal which ignores the four freedoms is once again fanciful.

In 1992 when Britain dropped out of the ERM, Helmut Kohl, Chancellor of Germany from 1982 to 1998, simply turned around and shrugged - "it's up to them" he is reported to have said.

"Germany might lose some of its auto industry. But if one realises that 18,000 employees is 120th of 1% of the German workforce and there's already huge overcapacity in the German auto industry," Posen suggests.

Repeated warnings

Of course Posen is just one economist, but his views have been repeated by many others. One only has to pick up a copy of the FT and read articles by its editor Martin Wolf, or watch a few hours of Bloomberg TV to realise the economic hit Britain is going to experience.

The same story is repeated concerning the type of Brexit that Britain embarks upon. Any form of withdrawal from the EU is seen as bad, economically speaking. But a so called hard Brexit may cause untold damage.

And it is becoming clearer to many that a no-deal hard Brexit where Britain falls back onto WTO rules is on the cards.

Effects of a no-deal Brexit

But what will happen should Britain crash out without a deal. Even leaked and officially released government reports paint a grim picture which suggest a whole range of things may result [Guardian]. 

For those heading into Europe there is a distinct possibility British drivers will require an International Driving Permit [Guardian]. An International Driving Permit or IDP is currently sold at just 90 Post Offices across the UK, are only valid for 12 months and cost £5.50. Reportedly there are plans to increase the number of Post Offices selling them to 2,500 from 1st February 2019. But there are other issues concerning IDPs with suggestions that more than one IDP might be required. Edmund King, President of the AA, said, "In some circumstances, such as driving into France and then Spain, drivers will need two separate IDPs as Spain, Eire, Malta and Cyprus have not ratified the 1968 Vienna Convention." [Autoexpress]

Currently all UK vehicle insurance companies provide the minimum third party cover to drive in other EU countries. However after leaving the EU they will not be bound to these obligations and drivers may have to take out separate insurance cover and obtain a so-called Green Card. Similarly, roam free mobile phone tariffs that were wiped away by EU legislation could return since companies would no longer be obliged to adhere to such rules. Of course insurance companies may continue to provide basic cover as standard and mobile service providers may continue to offer roam-free contracts, but they won't be obliged by law or statute.

Travellers might also face further problems should they have less than six months on their passports. And all British passports might also need to obtain a visa. Under current EU rules countries outside the block need to apply for a permit to travel and have more than 6 months on their passport.

The additional cost to drivers heading to the EU could run into several hundred pound if extra insurance and passport renewals are required. IDPs are perhaps only a nominal cost but the extra paperwork and inconvenience will anger many people heading to Europe.

It is the extra bureaucracy that is perhaps the biggest headache should Britain crash out. As many economists and those involved in imports and exports have made clear, paperwork and testing of products might increase substantially, which could create major problems at ports. Some estimate indicate the workload for port authorities and customs could increase by more than 500%.

Supply chain chaos

Indeed it is just these sorts of delays as well as increased tariffs and prices which may well lead to a breakdown in supply chains which in turn could lead to shortages in factories and in shops.

It is these scenarios that could result in big problems across the country. A sharp decline in the pound would in itself increase the price of food and other items in the shops. But there could well be a supply and demand issue if ports become clogged and deliveries don't get through. Furthermore if the correct paperwork is not presented or accepted, then everything from food to medicines, even fuel and car parts, could be delayed.

Even the hint that such events could unfold could lead to panic buying. And this in itself could create major headaches for retailers.

In the year 2000 and 2001 fuel protests and blockades virtually brought Britain to a situation where fuel almost ran out at forecourts up and down the country. Hints of possible blockades have created the same scenes of panic buying. Cold weather snaps too have seen supermarkets emptied of bread, milk and other everyday items.

Even the fear of a no-deal Brexit could result in similar problems. And price hikes could exacerbate the problem and might even lead to civil unrest, especially if such price increases are seen as deliberate profiteering.

In such scenarios the army may even be called upon to assist the police, according to a leaked report last week [Guardian / Daily Mail].

It is unclear how long such events might continue. It could be weeks or months depending how badly supply chains become disrupted.

Inflation and recession risks

As for the medium to long term the future is no less bleak. Moody's the ratings agency, says the risk of a no-deal Brexit has risen materially that a sharp fall in pound, a spending squeeze and recession are all possible consequences [FT / Guardian] 

"The immediate impact would likely be seen first in a sharp fall in the value of the British pound, leading to temporarily higher inflation and a squeeze on real wages over the two or three years following Brexit. This in turn would weigh on consumer spending and depress growth, with a risk of the UK entering recession," Moody's said.

Mark Carney, the Bank of England's governor, brought little optimism as he warned the cabinet that a chaotic no-deal Brexit could crash house prices and send another financial shock through the economy.

During a cabinet meeting Carney painted a bleak economic picture of unemployment reaching double figures in percentage terms, house prices falling by 25-35% over three years, and transport links with the EU, including air travel and the Eurostar, stalling [BBC / Guardian].

As the country hurtles towards Brexit, the warnings of a possible shortage of medicines and blood, and even cheese, there are some who are planning for the worst.

In July it was reported that the head of AmazonUK, Doug Gurr, had warned the Brexit secretary, Dominic Raab, that Britain could face "civil unrest" in the event of a no-deal Brexit. Soon after EVAQ8, an online retailer selling survival supplies, saw sales rise by 52%.

A day later, and after weeks of speculation, Raab confirmed the government was planning to stockpile food in the event of a no-deal – and accordingly, EVAQ8 sales went up 103%.

Medical concerns

One major concern is that hospitals and pharmacies might see a shortfall in the supply of medicine.

For those with medical conditions such as diabetes, there is a particular concern since nearly all insulin available in the UK is made overseas [Channel 4 News / Independent].  

Sir Michael Rawlins, chair of the Medicines and Healthcare products Regulatory Agency, told the Pharmaceutical Journal earlier this year.

"We make no insulin in the UK. We import every drop of it. You can't transport insulin around ordinarily because it must be temperature-controlled.

"And there are 3.5 million people [with diabetes, some of whom] rely on insulin, not least the Prime Minister."

There is one company, Wockhardt UK, that produces animal-based insulin at its site in Wrexham, Wales. They estimate that their products are used by about 1,500 to 2,000 patients a year.

But that's less than half of one percent of the 421,000 people who rely on insulin in the UK according to an estimate from the Clinical Practice Research Datalink in 2010.

There has been no clear message from the government concerning this particular issue. However, Sanofi, a large producer of insulin and vaccines, is building up stocks of a wide range of medicines in British warehouses, creating a 14-week supply starting from April 2019 [Guardian].

Prepping for Brexit

It might seem crazy to begin prepping as Americans call the act of preparing for disaster scenarios. But stocking up on essentials is exactly what some individuals are beginning to do.

On a medium to long term there is perhaps little one can do to mitigate price hikes. But on the short term it might in fact be sensible to have at least a few back-up supplies for the eventuality of supermarkets running out of essentials.

It is a distinct possibility Britain could see fuel, food and medicine shortages if ports become gridlocked. And even if one is proved wrong those supplies will get used after all, unless you've stocked up on hundreds of tins of Spam.

There is much advice out there as to what to stock up on. But essential one should only buy food one like, and that has a long shelf life.

Other often overlooked essentials are of course household items such as toilet paper.

Water and electricity supplies are unlikely to be hit but a good stock of bottled water, candles and a camping gas stove with a good supply of canisters might be worth keeping in stock.

It has to be stressed that storing gas canisters and fuel can pose a major fire risk so one has to be careful [Huffington Post / EVQ8 / Guardian / Guardian / Reddit / Economist / Express].

After a long summer break away in Europe it feels like I've arrived back in crazy town. But perhaps not quite as crazy as it might get in a little over six months time.


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