There’s just under 100 days to go until the U.K. leaves the European Union (EU) and despite a Brexit deal being on the table, both sides are stepping up preparations for a ‘no-deal’ divorce.
After months of fraught negotiations, the U.K. and EU struck a Brexit deal (or “withdrawal agreement”) last month; the trouble is, no one in the U.K. parliament likes it that much.
With British politicians set to vote in mid-January on whether to approve or reject the Brexit deal, the odds are stacked against it.
British Prime Minister Theresa May tried to get Europe to amend parts of the Brexit deal, particularly the troublesome future status of Northern Ireland if no trade deal is struck, but without success.
There are growing calls for a second referendum to be held and even one ministers close to May, Work and Pensions Secretary Amber Rudd, suggested on Wednesday that she could see the merit in a second vote if parliament cannot reach a consensus in January, but so far May has rebuffed the idea.
As such both Britain and the EU are stepping up preparations for a “no-deal” scenario in which the U.K. leaves the bloc without a divorce deal or 21-month transition period in which a trade deal could be struck.
“There’s an awful lot of fluidity in the situation,” according to Christopher Peel, chief investment officer at Tavistock Investments, “Theresa May has managed to negotiate this far with the EU and Europe has gone as far as it’s going to go,” he told CNBC’s Capital Connection on Thursday.
“I think ultimately it really is up to the prevailing government of the day in the U.K. to make it happen and I think MPs over the coming break will look within themselves and think they’ve got to make a tough decision.” Peel said a no-deal would be catastrophic for both sides” and needs to be avoided at all costs,” a view shared by those across the channel.
‘An absolute catastrophe’
Essentially, leaving without a deal on March 29, 2019 leads to the infamous “cliff-edge” scenario in which EU law abruptly ceases to apply in the U.K. and it’s expected that British businesses will face severe disruptions.
The leader of the U.K. House of Commons (the lower house of Parliament) Andrea Leadsom said Thursday that a Brexit “no-deal” would not be a good outcome for the U.K. in the short term, Reuters reported, but it would not be good for the EU either.
In a bid to minimize that foreseen disruption, the European Commission set out its contingency plans for a range of sectors on Wednesday in the event of the U.K. leaving the bloc next March without a withdrawal agreement and transition period.
The measures cover areas including financial services, air transport, customs, and climate policy, among others.
However, the Commission warned that “these measures will not – and cannot – mitigate the overall impact of a ‘no-deal’ scenario, nor do they in any way compensate for the lack of stakeholder preparedness or replicate the full benefits of EU membership or the terms of any transition period, as provided for in the Withdrawal Agreement.”
It also warned that most banking, insurance and other financial firms in Britain would be cut off from the EU if there is no divorce deal.
Commission President Jean-Claude Juncker said on Wednesday that the “risks of a disorderly exit are clear. It would be an absolute catastrophe; therefore the Commission is trying to prevent this disorderly exit from the EU from happening but you need two to perform a decent tango,” he said during a press conference.
Meanwhile in the U.K., the government has allocated an extra £2 billion ($) to government ministries in the event of a “no-deal” Brexit and order 3500 troops to be on standby and reportedly reserving space on ferries for emergency food supplies.
It also published reforms to its immigration policy on Wednesday in which it ended the special treatment given to EU nationals and placed more emphasis on skilled workers.
“Uncertainty is certainly very high and is likely to remain so,” Marie Owens Thomsen, global chief economist at Indosuez Wealth Management, told CNBC Thursday. “There’s very low probability of increased clarity until mid-January, then the clouds might clear (when the U.K. parliament votes) but until then we’ll have our heads in the clouds.”
In the case of a “no-deal” Brexit, it’s expected that the U.K. would have to fall back on World Trade Organization (WTO) rules and that import duties would be placed on EU imports, and vice versa. The challenges these tariffs would pose, along with the added bureaucracy associated with restrictions on the movement of goods, was underestimated, according to Owens Thomsen.
“The real issue might be the red tape and documentation, and filings and border checks that will have to be put into place if things don’t go as smoothly as one can hope that and that’s something that most people seem to underestimate, or forget what it was like before goods could flow freely throughout the EU,” she told CNBC’s Capital Connection.