What does an EU-UK divorce cost without a trade agreement?

The time of truth is approaching. By Sunday, the EU and Britain must have found a solution to controversial points in the trade agreement. Otherwise the cost, especially on the London side, will be huge.

Predictions, such as witness and word, usually give a very vague picture of what is going to happen. However, in the event of a final “divorce” between Britain and the EU, which is very likely, as evidenced by statements on the sidelines of the EU Summit, they are more or less known and are described as follows: If by 31.12 there is no valid agreement on trade relations of the two sides, then the regulatory framework of the World Trade Organization will apply. That means border controls and a lot of levies. There is already talk of queues and border controls from 1 January, from 00:01, in case London and Brussels do not reach an agreement. A taste of what might happen was given on a rainy November day.

Traffic jams and price increases

In Calais, the French side has launched a pilot test of the controls that will take effect on January 1, if the British and the rest of the Europeans “break” them permanently. In Dover, on the British side, queues of five kilometers were formed by trucks. But the government in London also considers it realistic that from January 1, 7,000 trucks will have to wait for hours to cross. Traffic jams are a reflection of the new tariffs that will make products more expensive, if the provisions of the World Trade Organization are observed. On average, EU exports to Britain will rise by 3.1% due to tariffs and 1.4% due to “non-tariff barriers”, according to Oxford Economics. Behind them are big differences per product. Because if it is for cars or agricultural products, the increases can reach up to 10%, for dairy products up to 36%. The financial sector has agreed between London and the EU to stay out of the free trade negotiations. Without the City of London – a perception that seems to have been consolidated on both sides – the situation in this industry is marked in black.

Nevertheless, the economic stakes of trade between the two sides are enormous. In 2019, the volume of commercial transactions reached 500 billion euros. German exports to Britain amounted to 79 billion euros. It was the 5th largest trading partner of Germany. Just four years ago it was in 3rd place. And this is the result of Brexit, before it is even completed. And somehow the situation will continue. Most observers agree. That is why the tough stance of the Johnson government is astonishing and is evolving into a game of poker.

The economic price for Britain is heavy

According to a study by the IFO Institute in Munich, British industries import a lot of semi-finished products from the EU, for which they do not have many alternatives. It is another reason for the threatening price increases in Britain. Credit rating agency Euler-Hermes forecasts a 15% increase in import prices. Inflation may reach around 5% and the pound may depreciate by 10%. As a result, according to the Bild newspaper, borrowing from rescue packages would become more expensive for Britons. Most of the observers, who do not belong to Boris Johnson’s circle, agree that the consequences for Britain will be heavier than for the EU. After the first shock of the Brexit vote 4 years ago, “the situation has relatively eased,” said Mark Tenbig of the German Association of Small and Medium-sized Enterprises in the newspaper die Welt. “We are starting with a tough Brexit and German businessmen are prepared.” Such relative relaxation does not correspond to the climate on the other side of the English Channel and is mainly due to the epidemiological crisis that has hit Britain particularly hard.

According to the independent budget office QBR, in London the economy is expected to shrink by 11.3%. If a trade agreement with the EU is not reached, it will reach 13.3%. Even more pessimistic is the OECD, the Organization for Economic Co-operation and Development. In the medium term, the British economy will grow at a slower rate of around 3.5% even in the event of an agreement with the EU. If no agreement is reached by 1 January, the OECD predicts that within two years the recession will reach minus 5 %. The outlook for Britain is not rosy.

Source: Deutsche Welle