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Talk of 'no deal' Brexit rises as divorce negotiations stall

Last Updated Oct 19, 2017 at 6:40 am EST

Pro-EU supporters hold European Union flags with a Union flag across the street from the Houses of Parliament in London, Tuesday, Oct. 17, 2017. (AP Photo/Matt Dunham)

LONDON – As Brexit negotiations between Britain and the European Union stutter and stall, one question looms larger and larger: What if there is no deal?

It’s an increasingly plausible prospect that stirs fear in many U.K. politicians and businesses — and hope in the hearts of staunch Brexit supporters.

Divorce talks between Britain and the European Union have limped through five rounds without a breakthrough, and Britain is due to leave the EU in less than 18 months, on March 29, 2019. When it does, thousands of laws, agreements and regulations covering everything from trade to crime-fighting to aviation will cease to apply. Unless new arrangements are in place, the U.K. will crash out of the EU single market and trade with the bloc on World Trade Organization terms, which would mean tariffs on goods and uncertainty for services.

The OECD economic think-tank forecast this week that switching to WTO rules would cut U.K. growth by 1.5 percentage points in the first year, push down the already-devalued pound, deter investment and trigger a downgrade to Britain’s credit rating.

“Only fantasists and fanatics talk up no deal,” U.K. Labour Party Brexit spokesman Keir Starmer said Tuesday.

But committed euroskeptics like John Longworth of pro-Brexit lobby group Leave Means Leave believe such talk is merely defeatism.

“The U.K. has been far too weak in the negotiations, far too accommodating,” said Longworth, a former head of the British Chambers of Commerce.

“I think that the EU will string out the negotiations as long as they possibly can in order to extract the maximum of benefit for them. In which case the best possible option for the U.K. is to go to World Trade Organization rules from March 2019 — and declare it now.”

Both Britain and the EU downplay, though don’t rule out, the possibility of a no-deal Brexit. U.K. Brexit Secretary David Davis said this week that “we are straining every sinew” to reach an amicable divorce, followed by a new free trade deal.

But Prime Minister Theresa May also warned Wednesday that “it would be irresponsible of government not to prepare for all possible scenarios” — including no deal. She said the government would not “accept a deal at any price to the British taxpayer, whatever the damage that would do to our economy.”

A deal — at least on the divorce terms and a two-year transition period Britain is seeking — would have to be clinched months before the March 2019 deadline to give individual EU national parliaments time to ratify it.

The impact of failure could be profound. The flow of goods could be disrupted, imperiling thousands of jobs. Three million EU citizens living in Britain and a million Britons elsewhere in the bloc would be in limbo. British finance minister Philip Hammond has said it’s even conceivable air traffic will be grounded — though he insisted such an outcome is highly unlikely.

Even the milder forecasts predict major economic fallout. About half of Britain’s trade is with the EU, and research by economic think-tank the Resolution Foundation and the University of Sussex said a “no deal” Brexit would mean price increases for food, clothing and vehicles costing the average family 260 pounds ($342) a year, and could put hundreds of thousands of jobs at risk.

Longworth dismisses such gloomy forecasts. He believes Britain can thrive by rejecting the EU’s myriad economic regulations and becoming more like Singapore, with “a lower tax, lower regulation, lower tariff, more enterprise-friendly economy.”

Meanwhile, a battle between proponents of “hard” and “soft” Brexit is raging within the British government. Prime Minister Theresa May, weakened after losing her parliamentary majority in a June election, is trying to reconcile Cabinet ministers like Hammond who want compromise and conciliation to soften the impact of Brexit, and gung-ho leavers including Foreign Secretary Boris Johnson and Trade Secretary Liam Fox.

This frustrates EU officials, who wonder whether May has the authority to strike and deliver on a deal. European Parliament president Antonio Tajani said divisions within the British government are “not good for good work in the next months.”

Most economists and politicians believe it in the interests of both Britain and the EU to make a deal. Failure would hurt both sides, though Britain would suffer more because its economy is smaller.

But the longer talks drag on, the more likely failure becomes.

Leaders of EU nations meet in Brussels on Thursday and Friday, and are likely to say there has not been enough progress on divorce terms to begin discussing future relations — though they may give Britain hope by signalling the breakthrough could come at December’s EU summit.

The main roadblock is money. The EU estimates Britain must pay something over 60 billion euros ($70 billion) to settle its financial commitments to the bloc. Britain thinks that is too much, and won’t commit to any figure until the EU agrees to move talks on to future relations.

Jonathan Portes, a professor of economics at Kings College London, said the impasse means there could be “a pause, a hiatus or indeed a complete breakdown in negotiations over the next couple of months.”

Portes doesn’t think such a breakdown would necessarily be final. He says that in the long run, a deal remains likely — though not certain.

“I still think that it is clearly in the interests of both sides to have a deal, and that there is not a majority in the U.K. Parliament or the country for a really destructive, chaotic ‘no deal,'” he said. “But politics is strange.”

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Follow Jill Lawless on Twitter at http://Twitter.com/JillLawless