Brexit talks continue ahead of Europe summitEU leaders are set to meet on 17–18 October, with Brexit firmly on the agenda. Updated:
Brexit talks in Brussels are continuing between the UK and the EU ahead of the meeting of the 27 EU leaders on 17 and 18 October as the deadline of 31 October for agreement on the terms of how the UK leaves the EU approaches. The deadline, under Article 50 of the Lisbon Treaty, was extended earlier this year from the original 29 March date to April and then until the end of October.
Catherine Barnard, Ph.D., professor of European Union and labour law at Cambridge University in the UK, said, “a deal on terms that the EU will agree seems rather remote, but remember of course we are now in the most sensitive stage of the negotiations”.
A no-deal exit would hit Sterling and raise import costs for businesses, said Alpesh Paleja, lead economist at the CBI (Confederation of British Industry), which advocates for 190,000 UK businesses. “The pound fell about 12% after the [June 2016] EU referendum, and it is not implausible to expect a similar decline in the event of a no-deal [Brexit],” he said. The movement could come before the 31 October deadline, if a no-deal Brexit looked like the likely outcome of the negotiations, he added.
There would also be volatility in global markets, but they “may rebound much quicker, although that would depend on the degree of Brexit disruption”, he said.
The CBI Business Optimism Indicator for the UK manufacturing sector was down to -32% for the third quarter this year, and in the event of a no-deal Brexit, UK business sentiment would sharply fall further, he suggested. At the same time, inflation would increase as a result of increased import costs, Paleja said. He added that the Consumer Prices Index measure of inflation peaked at just over 3% in the months after the 2016 Brexit referendum following the fall of the pound. The latest CPI rate, for August, is 1.7%, according to official figures.
On 15 October there were signs that the issue of the customs border between the UK and Ireland could be resolved. In a 3 October statement, European Commission President Jean-Claude Juncker stressed that the UK Withdrawal Agreement must contain an operational solution, rather than arrangements to be developed and agreed during the transition period. He added that the solution “must meet all the objectives of the backstop: preventing a hard border, preserving North-South co-operation and the all-island economy, and protecting the EU’s Single Market and Ireland’s place in it”.
The backstop — the mechanism to prevent a hard customs border between Ireland and Northern Ireland, which was in the deal agreed by former UK Prime Minister Theresa May and the EU last November — was earlier rejected by current Prime Minister Boris Johnson as “undemocratic”.
Meanwhile, MPs in the UK Parliament’s House of Commons are likely to meet on 19 October. This would be one of the very rare occasions when Parliament has sat on a Saturday.
It is also the date that the EU Withdrawal (No. 2) Act — the so-called “Benn” Act — comes into play if MPs haven’t approved a deal or voted to exit without a deal. In these circumstances, the legislation, which received royal assent on 9 September, requires the UK prime minister to send a letter to the EU president requesting a further extension to the Article 50 negotiating deadline to 31 January 2020. The Act’s other requirements are set out here by the Institute for Government think tank.
A Scottish court, in a case brought by three campaigners against a no-deal Brexit, has deferred until 21 October its decision on whether it should sign such a letter in the event that Johnson fails to do so.
Barnard said the question would then be whether the EU agrees to the extension and what length it would be. This would depend on whether the EU anticipates an election or even a referendum. It could grant a longer extension of the deadline to June 2020, she said.
“[A no-deal Brexit] will have major implications for British business in the services sector, which is reliant on sending people [to Europe] to do short-term contracts.
“They will be able to attend conferences … because they will be able to do that under the regulations that allow them to go as essentially tourists for 90 days. What they won’t be able to do is do paid work in other countries unless they have got a work permit.”
For all businesses, the question will be about tariffs in the event of a no-deal Brexit, Barnard said. Particular sectors that are highly dependent on imports and exports, such as farming and fishing, will be hit hard, she added.
Financial system resilience
The Bank of England Financial Policy Committee’s (FPC’s) 9 October summary said that “the core of the UK financial system, including banks, broker dealers, and insurance companies, is resilient to and prepared for the wide range of risks it could face, including a worst-case disorderly Brexit”. A 2018 stress test showed that banks could weather a disorderly Brexit and “still have significantly more capital than in 2007”, the FPC said.
However, the FPC said Brexit uncertainty “is weighing on business investment, the prices of UK assets, and flows of foreign capital into the UK, most notably in commercial property and leveraged lending markets”.
It warned that “material risks of economic disruption remain”.
Beyond the current Brexit uncertainty, the UK economy faces a number of challenges and opportunities, said Paleja.
“Brexit has really sucked the oxygen out of Whitehall [the UK’s centre of government], and the focus needs to be on boosting the UK’s productive potential, whether it is industrial strategy … infrastructure … looking at the UK’s skills gap.”
The ageing population in the UK — and other advanced economies — is a further challenge, he said.
“The UK will need to navigate a shifting global landscape going forward,” he said. “The UK does have a lot of comparative advantages that do serve emerging economies both big and small in the later stages of their development as they mature.” These include, he said, financial services, professional and business services, healthcare, and education, in particular higher education.
However, as the UK currently lags behind other economies on automation, the country faces a challenge providing support for workers who may be displaced by automation and need retraining or reskilling, he said.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.