Could a Messy Brexit Really Trash the Global Economy?

As Brexit looms, segments of the international community are voicing concerns that the UK’s exit from the EU could wreak havoc on the global economy, particularly in the case of a 'no-deal' or chaotic exit.

Are they overstating the case?

The “no-deal” option (under which the UK and EU relationship will automatically revert to being governed by WTO rules) is generally frowned upon by markets. But it’s the disorderly” or “chaotic” Brexit scenario that has governments and the business community really worried. That’s because in the latter scenario, the UK won’t have time to sort out a new framework of regulations on customs and trade before it cuts treaty ties with the EU on 29 March. And that’s when things could start to get a little messy.

What might a 'no-deal' or a chaotic Brexit look like?

If the UK were to leave the EU on 29 March next year without having secured the terms of its exit, regulatory gaps would open up across virtually every area of commerce. Most areas of the economy would likely be thrown into turmoil, as frameworks governing everything from flying arplanes across the Channel to importing medicine cease to apply. Let’s look at a few examples.

Movement of goods

More than €250 billion of goods cross the English Channel between France and the UK every year. They make the journey in 2 million trucks that cross the English Channel from Calais to Dover, the closest point between Britain and the continent, or by train through the Channel Tunnel.

At present, vehicles from both sides of the Channel make the journey within just a couple of hours. The speed of the crossing is vital for products like fresh food, flowers and pharmaceutical imports.

It's also critical for Britain's auto industry, which operates on what's called a 'just-in-time' inventory, with components arriving at the factory just as they're needed. Britain assembles more than 2 million cars each year, but nearly all the parts come from the continent. The fluidity at the border is essential and every minute of delay comes at a huge cost.

All that would change under a 'no-deal' or a disorderly Brexit, as new or no customs rules are likely to mean that all goods crossing the UK/EU border are stopped for inspection.

Britain's Freight Transport Association says any change in the current system could cause massive delays at the Channel border. Just a two-minute check per vehicle would mean a tailback of lorries from Dover almost all the way back to London and, similarly at the other end in France, a tailback of well over 15 miles. It’s a sobering prospect.

Unfortunately, it’s not just very visible areas involving the movement of goods which will be affected if Brexit ends up being messy...

Cross-border company operations

The BDI industry association - one of Germany's most influential lobby groups - warns that a disorderly Brexit would cause a huge crisis, creating difficulties for tens of thousands of companies in Europe and hundreds of thousands of employees in Britain and the European Union.

BDI’s Managing Director, Joachim Lang says that many German companies are preparing for this eventuality. Some want to suspend production in Britain from April 2019 as they fear that delivery routes cannot be secured. Others are moving their headquarters from Britain, adjusting their legal frameworks and looking for new transport routes.

While there is no overall figure for how much companies have spent on preparing for Brexit, some German pharmaceutical and chemical companies have apparently spent up to ￡100 million each on contingency arrangements.

Product standards and professional qualifications

The UK’s Office for Budget Responsibility (OBR) is worried that without agreement on standards and qualifications, “all existing goods may need to be re-approved before sale and services trade would be severely restricted by the loss of market access."

That situation would create bottlenecks of goods and could lead to households and businesses stockpiling goods in advance, further aggravating any shortages.

No agreement on standards might also mean that British aircraft and trains become unable to operate in European countries, effectively isolating the UK from the rest of the continent.

Financial contracts

Echoing concerns from the Bank of England, the International Monetary Fund (IMF) believes that millions of financial contracts between UK banks and their counterparts across the rest of Europe could collapse in the event of the UK crashing out of the EU without a deal.

The Bank estimates that ￡69 trillion (US$90 trillion) is being held by EU-based institutions through British clearers. If arrangements aren’t made in time and the current rules are suspended upon the UK’s exit from the EU, this could become a potential flashpoint.

The IMF says that even the possibility of this eventuality has the potential to spook stock markets around the world, leading to volatility. That’s also a key driver of the Bank’s call for an urgent acceleration in contingency planning with the EU.

In reality, no-one knows how things will look

None of this is new news - the prospect of Brexit has been haunting markets and businesses for months.

The truth however, is that with negotiations in a nearly constant state of flux and months still to go until the UK leaves the EU, no-one really knows what the impact of Brexit will be.

It could be short-term and severe or long-term and more moderate. The consequences will also depend on who you are.

Winner and losers?

It seems likely that things are going to get uncomfortable for both UK and EU firms in the short term, but what if you operate a company in a country that doesn’t have the benefit of a Free Trade Agreement with either the UK or the EU?

It is possible that in some sectors, non-EU players might actually be better off in a post-Brexit world. Here are a few examples:

• New Zealand dairy producers may find it easier to compete against EU traditional competitors including cheese suppliers in France and Italy (whose prices will become less competitive in British shops, once new tariffs and increased transport costs are factored in). They’ll also be cheered by the prospect of no longer having to compete against Eurozone subsidies and preferential treatment when selling their cheese, cream, yoghurt, milk and baby formula to the UK.
• South Africa’s burgeoning call services sector - which gets more than half its work from Britain and competes with India and the Philippines - is hoping to attract larger inflows as the impact of Brexit bites and firms seek savings by moving operations offshore.
• Australians companies wanting to send staff to Britain are hoping to benefit from the British government's decision to end freedom of entry for EU citizens. The move removes an incentive for UK-based companies to prefer EU workers, who currently don't require sponsorship, making it easier for UK firms to recruit Australians (we’ve historically been popular in Britain for our work ethic).

In short, the picture is still unclear. As the IMF puts it:

“It is still hard to gauge Brexit’s impact... since much will depend on the nature of the final agreement.”

Let’s hope the politicians and bureaucrats manage to hammer out a sensible deal in time…

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