No-Deal Brexit Will Inflict Serious Pain on Europe, Too
December 7, 2020
By Acuity Trading
Europeans seem more sanguine about Brexit than the British. More French column inches were filled with the death of former President Valery Giscard d’Estaing last week than with the risks of a messy end to decades of unfettered trade between the U.K. and the European Union.
The late president’s own view of Brexit — that it will be a bigger problem for the 66 million departing Brits than for the EU’s 450 million citizens — echoed broader public confidence that the bloc’s 27 members can absorb shocks better as a group than the U.K. alone. It also spoke to economic forecasts like the one from the International Monetary Fund, which estimates a worst-case scenario could knock almost 0.5% off the EU’s long-term potential output but almost 3% off Britain’s.
Yet there’s unlikely to be much schadenfreude on anyone’s part if ongoing trade talks end without a deal — an outcome with a 50-50 chance of happening, according to Ireland’s head of state.
“No deal” would be a huge test of the EU’s ability to manage crises. Whereas Giscard and his German counterpart Helmut Schmidt in the 1970s revved up deeper monetary and economic integration to pull Europe out of a funk, the current Franco-German duo of Emmanuel Macron and Angela Merkel would be managing the disintegration of ties with the EU’s third-biggest trading partner.
It would mean tariffs on 512 billion euros ($621 billion) of annual goods flows, as well as potential delays from customs checks, after the transition period ends Dec. 31. As modest as the estimated economic impact might look in aggregate, it would fall very unevenly and make some businesses unviable. Ireland is particularly exposed to new agricultural levies; around 40% of its agri-food exports are destined for the U.K., its biggest trading partner. A messy no-deal Brexit could cost it 6% of long-term output.
Germany’s beloved automakers, which rely on “just-in-time” manufacturing and whose parts crisscross the English Channel several times per car, would also be hit hard. The cost for Germany could be 8.2 billion euros in annual exports, according to Euler Hermes. And France, beyond fresh tariffs on wine and food exports to the U.K., would face the problem of its fishing fleets being denied access to British waters. While the trade at risk is only worth about 650 million euros, the livelihoods of coastal communities carry symbolic weight and Macron has promised to help them. It would be a political failure if these jobs were crushed by a Brexit they didn’t want.
The ripple effects would also be felt in Eastern Europe, where Slovakia and Hungary’s exports to the U.K. count for 1.5% to 3% of gross domestic product.
None of this would help the U.K. prosper. Still, managing no deal would also test Macron and Merkel’s ability to unlock economic support to keep the union together. Ireland is already in line to receive reallocated natural-disaster relief funds from the EU to help with Brexit, but these pale by comparison with the scale of the problem. Judging by the reaction to the EU Covid-19 stimulus package, it’s not easy to get 27 countries to agree on borrowing sprees.
Beyond money, the EU would have to take logistical and political decisions to protect its single market from a U.K. that will probably be pulling all levers to compete head to head. Nobody knows how destabilizing a Boris Johnson government would be in this scenario. A deregulating U.K. could open a back door into the single market via Northern Ireland, with the Irish border seen as a potential “smugglers’ paradise” if Johnson decides not to check the flow of goods across the Irish Sea as previously agreed. The EU would have to find ways to check goods somehow, while avoiding a return to a hard land border in Ireland.
This would all require deft diplomacy for a bloc that should be aligned with the U.K. on many issues yet has lost trust over the years. On the Iran nuclear deal, on digital taxes and on climate change the U.K. is in the same camp as France. Indeed, in security matters, Franco-British cooperation is embedded in bilateral treaties that would ideally survive a no-deal Brexit. Yet if there’s no deal, it’s hard to see how both sides could share information on criminals or law enforcement. The tortuous Brexit negotiations and anti-EU rhetoric have already eroded trust. The acrimony around no deal could corrode broader political ties.
Understandably, much of the no-deal focus has stayed on the U.K., where the political and economic stakes are high enough to imagine a possible breakup of the country itself. But the EU is also under pressure. If no deal can be found, it will be a huge test for the bloc — and Giscard’s hopeful forecast.