Delayed Brexit: The UK still on a cliff’s edge?

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Updated: March 29, 2019 6:22:32 PM

The most likely scenario could be the UK seeking a longer extension on the Brexit deadline from the EU

UK Parliament, theresa may, EU, brexit, Article 50 of the Treaty of Lisbon, Brexit options, world GDPThe withdrawal deal, negotiated by Prime Minister Theresa May and her government, was rejected twice by the UK Parliament, in January and March 2019, by a large majority.

Almost three years ago, the UK became the first member nation to vote to leave the EU. Article 50 of the Treaty of Lisbon—a formal process to leave the EU—was invoked in 2017, giving the UK two years to agree on a withdrawal agreement with the EU. Yet the original departure date of March 29, 2019, has been delayed and the government is searching for a way ahead. The withdrawal deal, negotiated by Prime Minister Theresa May and her government, was rejected twice by the UK Parliament, in January and March 2019, by a large majority. Lately, there have been a lot of voices in the UK asking for a new referendum or stopping Brexit. There seems to be a shift in sentiments from exit to wanting to remain in the EU.

There are several likely outcomes of Brexit and no possibility can be ruled out yet. However, the most likely scenario could be the UK seeking a longer extension on the Brexit deadline from the EU, which, if granted, would mean a temporary reprieve but continued medium-term uncertainty.

The EU comprises of 28 countries that share a common customs union and is a single market. The withdrawal deal is an agreement on how to implement Britain’s exit from the EU. The deal that PM May agreed with EU leaders envisaged a gradual process that would have minimised disruption of economic ties, a further two-year timeline to hammer out a trade agreement between the UK and the EU, and a clause to avoid creating a hard border between Northern Ireland (part of the UK) and Ireland (part of the EU). While the Brexit withdrawal deal was defeated twice by the UK Parliament, it also voted against leaving the EU without a deal in place.

This week, the UK Parliament conducted indicative votes on alternative Brexit options (going against the government’s wishes). None of the options, however, got a majority. The stalemate, thus, continues. So, what was pinching the UK to leave the EU?

Rising inflow of immigrants: Foreign-born residents in the UK have been on the rise and increased to 15% of the total UK population, from 9% in 2004. High membership fee: While the figure is not very significant, the UK is one of the highest contributors to the EU budget. In 2017, the UK paid £13 billion to the EU, while the EU spent £4 billion for the UK.

EU’s common laws: Common laws related to finance and banking, trade and tariffs, environment and labour for all economies within the EU made the UK feel stifled. There are some likely scenarios in decreasing order of likelihood:
The Speaker of the House, John Bercow, had earlier blocked a third vote on Brexit. According to the parliamentary procedure, the government cannot repeatedly put the same motion before lawmakers if it had been previously rejected. Therefore, the third vote this week on Brexit deal still remains a little uncertain. However, it is important because it also decides whether the UK will participate in the European parliamentary election, due in end-May.

Scenario 1: Longer extension for Brexit: The EU has been largely supportive of the UK’s decision to leave the EU amicably and has been vocal about wanting an orderly Brexit. With the consent of all the EU leaders, a longer extension on Brexit is the most probable outcome.

Scenario 2: Another referendum: The UK could conduct another referendum following mass protests by thousands of people as well as online petitions to stop Brexit; the petition has crossed 5 million signatories.

Scenario 3: Hard Brexit: If the UK Parliament does not support the deal or agrees on other alternatives with the EU by April 12, the UK will have to leave the EU without deal. This is seen as potentially damaging to both the economies.

Scenario 4: Stay in the EU: The UK can unilaterally revoke Article 50 of the Treaty of Lisbon and continue to stay in the EU. This can be done without the consent of the other 27 member states.

Scenario 5: Orderly Brexit: If the third vote on the Brexit deal is accepted, the UK would leave the EU in an orderly manner on May 22. Post this, there will be a transition period of two years to work out a trade deal with the EU. In this period, free movement of goods and people will continue.

The implications of Brexit

Any orderly Brexit scenario will, in all likelihood, be followed by a free trade agreement between the UK and the EU, though the UK will choose to have certain economic legislations that are different from the EU and will put some limits on migration from Europe. The UK will also negotiate new trade agreements with the rest of the world. In the case of a hard Brexit, there would be sudden disruptions in trade flows, too.

On global economy: The UK has a fairly small share in the world GDP (2.3%). However, London is the largest centre of finance in Europe. If Brexit happens, many large corporations could shift their base to other European countries such as Germany. The markets have had limited reaction to the Brexit events, so far. Short-term negative impact on global financial markets is possible in case of a hard Brexit.

On Europe: The UK and the EU are highly dependent on each other for trade. Seven of the top-10 export markets for Britain are EU countries. In a no-deal scenario, Ireland will be significantly impacted due to a high exposure to trade with the UK, followed by Belgium and the Netherlands. The EU saw the maximum growth downgrade in the IMF’s recent growth estimates for 2019 due to recession in Italy and growth slowdown in Germany.

Brexit could give rise to more euro scepticism. Far-right parties in economies like Sweden and Italy have started talking about going for similar exits. There is already a high economic disparity amongst member countries, which can lead to more friction.

The author is a corporate economist based in Mumbai

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