Odds increase for a ‘no-deal’ Brexit transition in December

Standing in for the Prime Minister at PMQ’s yesterday, 29 April, Foreign Secretary, Dominique Raab re-confirmed that the UK Government had no intention of delaying the final transition step in the Brexit process beyond the presently scheduled date of 31 December 2020. The Leader of the SNP, Ian Blackford, had asked was it not better to deploy the extension to the transition period in order to focus the nation’s efforts on dealing with the Coronavirus pandemic. The transition to complete independence from the EU will add yet more uncertainty to an already unique unstable and unpredictable economic and social environment.

His question comes as from all sides – the EU, the wider Parliamentary scrutiny committees, and industry bodies – concern is growing that the UK risks crashing out with a ‘deal’ and in a climate that means preparations in place for a smooth transition will not be in place.

Chair of the Committee on the Future Relationship with the European Union, Hilary Benn MP, set five questions to the Minister in charge of Brexit arrangements, Michael Gove, Chancellor of the Duchy of Lancaster, to report progress on:

  • the negotiations on the ‘Future Relationship’ between the EU and UK – along with his current assessment of the chances of agreement in all the areas that the UK wishes to have a relationship with the EU by the December deadline;
  • implementation of the ‘Withdrawal Agreement’ – and in particular the timetable for establishing the governance structures, including that for the Ireland/Northern Ireland Protocol – and the UK’s policy for reporting on those discussions;
  • the arrangements to identify goods moving from Great Britain to Northern Ireland that may be at risk of subsequently entering the EU;
  • Government and business preparedness to implement the Future Relationship – and the mechanisms that are in place to enable the public and private sector to consult and feedback as the negotiations progress;
  • the list of the EU agencies and programmes the UK currently participates in – and an indication of whether the Government is seeking to continue this participation after the transition period, and on what terms.

Gove’s response was non-specific, as illustrated with references such as: “The Government and Civil Service are working hard to deliver a complex and challenging portfolio of work to ensure the UK is well prepared for the end of the transition period. This Government has a track record of preparedness on these matters” – and – “We will discuss with the EU how best to manage our friendly relations, but any solution has to respect our red line of no commitments to follow EU law and no acceptance of the jurisdiction of the CJEU. There are limited options for third country membership of EU bodies, and we have been clear we shall be operating on the basis of existing precedents.”

The response was also at odds with official reports from the second round of negotiations between the EU and UK – which were held ‘virtually’ due to Coronavirus restrictions – with little progress reported by either side.

View from the European Commission

Michel Barnier, EU chief negotiator, in his post-discussions press release: “In recent days, the UK government has made clear that it would refuse any extension of the transition period. We take note of this choice. My recommendation is, therefore, that we work hard until June and think carefully about our joint response to this question of extension taking into account the economic situation and the consequences of our decisions.

“Right now though, the consequence of the United Kingdom’s decision is that the clock is ticking.

“We have just 8 months ahead of us to advance on three workstreams: Ensuring the proper implementation of the Withdrawal Agreement; preparing ourselves to the negative economic consequences that the end of the transition period will entail; and negotiating a future partnership between the European Union and the United Kingdom with a view to limiting those negative consequences…

“…But now – if we want to make tangible progress – we need to move beyond clarifications and put more political dynamism into proposals aimed at building compromises…

“…The UK cannot refuse to extend the transition and, at the same time, slow down discussions on important areas…

“…June will also be an occasion do take stock on what real progress the UK has made for the implementation of the Protocol on Ireland and Northern Ireland. We need clear evidence that the UK is advancing with the introduction of the agreed customs procedures for goods entering Northern Ireland from Great Britain. We need clear evidence that the UK will be able to carry out all necessary sanitary and phytosanitary controls, as well as other regulatory checks on goods entering Northern Ireland from outside the EU as of January 2021, in 8 months’ time.”

View from the UK

David Frost, UK chief negotiator for post-Brexit relations with the EU is quoted in a press release from Downing Street as saying that: “Limited progress was made in bridging the gaps between us and the EU.

“Our assessment is that there was some promising convergence in the core areas of a Free Trade Agreement, for example on goods and services trade, and related issues such as energy, transport, and civil nuclear cooperation.

“We regret, however, that the detail of the EU’s offer on goods trade falls well short of recent precedent in FTAs it has agreed with other sovereign countries. This considerably reduces the practical value of the zero tariff zero quota aspiration we both share.

“There are also significant differences of principle in other areas. For example we will not make progress on the so called “level playing field” and the governance provisions until the EU drops its insistence on imposing conditions on the UK which are not found in the EU’s other trade agreements and which do not take account of the fact that we have left the EU as an independent state.

“On fisheries, the EU’s mandate appears to require us to accept a continuance of the current quotas agreed under the Common Fisheries Policy. We will only be able to make progress here on the basis of the reality that the UK will have the right to control access to its waters at the end of this year.

“We now need to move forward in a constructive fashion. The UK remains committed to a deal with a Free Trade Agreement at its core. We look forward to negotiating constructively in the next Round beginning on 11 May and to finding a balanced overall solution which reflects the political realities on both sides.”

Taken all-in-all, the odds of a no-deal Brexit on 31 December 2020 have increased – whilst Government, business and citizen preparedness will be lower than it was a year ago when – before they were re-deployed to dealing with Covid-19 – there were 5,000 civil servants engaged in preparing for the changeover.

Our team has focused for four years on identifying changes, consequential risks to continuity of business, and mitigation strategies. This expert support will be critical in the coming months – and is additional to, not instead of, dealing with the Coronavirus crisis.

We have included references to Northern Ireland in this article – and its unique situation of having a shared and open land border with the EU.  This will be subject of a future insight article and report on any findings of a specialised committee on the Northern Irish Protocol – scheduled to meet for the first time on 30 April.

Parliamentary scrutiny, reporting and decision-making processes

Incredibly – with only 8 weeks to go to the deadline for a decision on to apply for an extension to the transition period beyond 31 December – and almost 4 years since the referendum – a new structure for Parliamentary scrutiny of the Brexit arrangements has just been announced.

There are to be 5 Sub-Committees established: EU Environment; EU Goods; EU Security and Justice; EU Services; and International Agreements.

At the time of writing, each of these is no more than title and broad description of the area under focus (details, below). There are no lines of inquiry listed, no meetings planned, no news to report, or any output on record. Put this is the context of a decision in June on extending the transition and the lack of meaningful progress towards concluding a detailed framework to come into play on 1 January 2021.

EU Environment Sub-Committee: examines EU policy on agriculture, energy, climate change, the environment, food, fisheries, biosecurity and public health. It also considers the environmental aspects of the UK-EU level playing field.

EU Goods Sub-Committee: scrutinises the UK-EU negotiations on future trade in goods, including customs, the ‘level playing field’, consumer protections, public procurement and transport. It also considers EU policy and legislative proposals in these areas.

EU Security and Justice Sub-Committee: examines the Government’s approach the UK’s future relationship with the EU in respect of internal and external security matters, including criminal justice, policing, data-sharing and defence.

EU Services Sub-Committee: considers matters relating to the UK’s relationship with the EU in the services sector. This includes trade in financial and non-financial services, as well as UK-EU cooperation in the areas of science, education and culture. The Sub-Committee conducts inquiries in these areas and scrutinises relevant EU documents, asking questions and raising concerns through correspondence with UK Ministers.

EU International Agreements Sub-Committee: scrutinises all treaties that are laid before Parliament under the terms of the Constitutional Reform and Governance Act 2010 and considers the Government’s conduct of negotiations with states and other international partners.

Contact for further insight and support: john.shuttleworth@europartnership.com


Head of EU negotiations, Michel Barnier: European Commission Press Release.


Head of UK negotiations, David Frost: Prime Minister’s Office Press Release.


Coronavirus adds further uncertainty in the event of a no-deal Brexit on 31 December 2020

The UK ended its membership of the EU on 31 January 2020 – after 40 years of increasing integration. It has been recognised by all sides since the result of the ‘leave’ referendum was announced in June 2016, that a ‘no-deal’ Brexit was anything but a ‘clean’ break. Thousands of processes, laws, regulations, shared projects and freedoms would each have to be carefully examined by each side – and the future arrangements negotiated, legislated and practicalities put in place.

Experts had suggested that the negotiations would need several years – a figure of three was mooted – to complete Brexit planning in an orderly fashion. Meanwhile, the UK and EU agreed that things would continue pretty well as they were on 31 January to allow for an orderly severance – known as the ‘transition’ period.

One key difference of opinion is that, despite being offered an extension to the transition period to 31 December 2022 should it prove necessary, the UK Conservative Government legislated for a latest end date to transition of 31 December 2020 – in line with their winning election manifesto.

The scene was set – and talks between UK and EU opened in Brussels on 3 March…but came to an abrupt halt just a few days later due to the coronavirus outbreak. The previously agreed – and already tight – timetable for the talks cannot now be met.

In the light of the pandemic, external observers, including the International Monetary Fund, have suggested the UK and the EU should not “add to uncertainty” from coronavirus by refusing to extend the period to negotiate a post-Brexit trade deal.

IMF Managing director, Kristalina Georgieva, was asked in a BBC interview what she thought about the prospect of a ‘no-trade’ Brexit in 8 months time. She felt that because of the “unprecedented uncertainty” arising from the pandemic, it would be “wise not to add more on top of it…I really hope that all policymakers everywhere would be thinking about reducing uncertainty. It is tough as it is, let’s not make it any tougher,” she said.

The IMF chief had previously already backed the parties reaching a deal – warning that a no-deal Brexit would hit the UK economy by up to 5%.

Without a deal, the UK and EU will move overnight to trading on ‘World Trade Organisation’ terms from 1 January 2021 – including significant new taxes and checks on trade.

Background Detail

A UK-EU Withdrawal Agreement (WA) was concluded in October 2019, accompanied by a non-binding Political Declaration (PD).

The PD set out a framework for the future relationship. Together the WA and PD provide an outline scope and timetable for the future relationship negotiations.

The WA provides for the ‘transition’ period. During the transition, EU law (with a few exceptions) continues to apply to the UK. The transition period ends on 31 December 2020 – but could be extended “for up to one or two years” if both the UK and EU agree to do so by 1 July 2020.

The PD sets out the shared intent of the UK and EU to get future relationship agreements in place by 31 December 2020. The PD includes provision for a high level UK-EU meeting to take place in June 2020 to ‘assess progress’. It commits the UK and EU to using ‘best endeavours’ by 1 July 2020 to have: concluded and ratified a fisheries agreement; and conducted equivalence assessments. Decisions on reciprocal data exchange and adequacy of security are to be complete by the end of 2020.

Before the coronavirus hiatus, the proposed timeline envisaged negotiations being concluded before the 15-16 October 2020 summit of 27 EU leaders European Council meeting.

At the time that negotiations were suspended the joint UK and EU statement described the talks as “constructive”. They said that there was agreement in some areas – but there were differences in areas including: governance, “level playing field”, fisheries, and judicial and police co-operation in criminal matters.

Despite the suspension of talks, the UK Government has repeatedly stated that it will not ask for or agree to an extension of the transition period – referring to the Conservative manifesto commitment. Indeed, the Government went so far as to legislate to prohibit itself from agreeing an extension with the EU.

Labour Party leader, Keir Starmer, has said keeping to the deadline of ending the transition on 31 December seems “unlikely”. In addition to the IMF comment, above, there have been calls by many trade and commercial organisations along with other opposition parties and MEPs to extend the deadline.

On 18 March the Prime Minister said that he had no intention of changing the legislation that prevents the Government from agreeing an extension.

In Brussels the EU trade commissioner, Phil Hogan, has said that in every EU member state, civil servants were busy dealing with the Covid-19 situation. He explained there were not enough people “who are able to apply themselves to these intensive [Brexit] negotiations that are required to be concluded in such a short space of time”. He believes that a comprehensive trade deal could not be concluded in time for a 31 December deadline.

There is already one very significant impact of the UK no longer being an EU member state. It is no longer part in the EU’s decision-making and legislative processes. Nevertheless, under the terms of the Withdrawal Agreement, all new EU laws that come into force during the transition period will apply to the UK.

Prior to Brexit, the Government said most EU law due to come into force during the transition period would have been agreed while the UK was still an EU member state, with full representation and voting rights. However, the coronavirus pandemic means the EU is having to make certain policy decisions at speed and bring new rules into force more quickly than is often the case.

The Government was also planning to use the transition period to begin negotiating new trade deals with countries outside the EU to come into force after the transition period ends. The priority was to launch negotiations with the US, Australia, New Zealand and Japan. On 24 March, however, the Government said that whilst both sides remained fully committed to negotiating a free trade deal, the ‘unprecedented coronavirus situation’ means all sides are “looking at options to conduct the negotiations in a way that reflects the current situation and respects public health”. More pressure and uncertainty for business, trade and finance in a no-deal scenario on 31 December 2020.

Our team has modelled the requirements for managing a no-deal scenario – and businesses across the EU and UK now risk adding these onerous additional impediments to free trade to a global economy that has been undermined and weakened by the impacts of Covid-19.







Coronavirus – a preliminary view of some of the social and economic impacts

The World is at war with an unseen enemy. Mark Twain is attributed in saying that “history does not repeat itself – but it does rhyme”. So, what are the lessons that we can apply to help us to model the future and best prepare to re-build society and the economy – and plan for the new normal?

In any war, the winner the side that makes the fewest mistakes. Every victory comes from imagining a scenario, then testing its assumptions, then responding to how those assumptions play out in real life. This is true of military campaign and dealing with economic circumstance.

The global Covid-19 crisis has the potential to destroy both the social and economic orders as humanity has known them for the last five decades. The relative stability of the World order since the mid-20th Century has been underpinned by steady growth and a tolerable balance of power between nations and civil forces. Today, hundreds of thousands of businesses – especially in the ‘small and medium’ category – face implosion of their revenue base, and as balance sheets are devalued through lack of activity and markets. As the population begins to be released to socialise in the months ahead, new forms of economic activity and distribution of whatever wealth remains must be constrained by the need to engender fairness across society and power the greater good over self-interest.

The policy response to the global financial crisis of 2008-09 offers important lessons. In the weeks after the failure of Lehman Brothers, it became apparent that the damage to the financial system could push the entire World into a 1930s-type depression. The then UK chancellor, Alistair Darling, has said that Britain came within hours of “a breakdown of law and order” on the day the Royal Bank of Scotland was bailed out. The policy response came quickly – and was substantial. Central banks slashed interest rates, pumped liquidity into the financial system – and bought private sector assets.

The conditions of extreme uncertainty at the moment of the financial crisis had something in common with today – and with wartime scenarios. The ‘normal’ rules of good government just have to be eased. And as the situation unfolds – with both the dramatic scale of the impact and the extent of the timescales before life returns to the new ‘normal’ becoming evident – the need is for speed and scale in the response. Cost is now a problem for the future. Decisions have to be made on the basis of imperfect and fast changing information. This requires improvisation, an acceptance that most decisions will be imperfect, and acceptance that many decisions will be wrong and may even prove counter-productive.

With hindsight the decision not to bailout Lehman Brothers in 2008 might be thought an epic mistake. The subsequent responses to the unfolding situation saved a global economic collapse. However, the cost of the later response was far greater than a single bail-out – and the consequential down-turn has taken over a decade to recover.

Coronavirus has implications that are an order of magnitude greater than the Financial Crisis.

In their response to today’s Covid-19 threat policymakers appear, consciously or not, to have absorbed at least some of these lessons. The immediate fiscal and monetary interventions have been on a huge, and in some areas, unlimited scale. UK Treasury officials are not yet unable to estimate the cost a the raft of new measures to support households as they are dependent on ‘demand’ – and are, therefore, open ended. The US Federal Reserve has said it will buy US treasury bonds in unlimited quantities – and, in radical move, the Fed will for the first time, buy corporate debt.

Policies are rolling out at an unprecedented speed – in much the same way that the allies’ wartime economy often prioritised volume over quality. Right is good enough, it doesn’t need to be perfect – Russian and American tanks were of variable design and quality, but they were produced in far greater numbers than Germany could manufacture. A national emergency robs decision makers of the luxury of time – but not, we trust, of transparency.

Britain’s Chancellor, Rishi Sunak said last week that we cannot allow “the perfect be the enemy of the good”. 800,000 SME’s in the UK need his words to become deeds.

There also seems, at least in some quarters of the USA, to be a recognition that some inefficiencies are the price that must be paid for a fast and comprehensive response. Neel Kashkari, President of the Minneapolis Fed, told The Wall Street Journal: “If a bunch of businesses get help that didn’t need it, that’s fine, that’s much better than taking a decade to rebuild the labor market….We just have to get over it, err on the side of getting more help out there”.

The battle against coronavirus calls for a more unified response than the efforts to arrest the global financial crisis. Bailing out banks and supporting financial markets was hardly popular. The mobilisation of the state today, and the expansion of its role, have so far proved generally uncontroversial. Politicians seem more likely to stand accused of doing too little.

This week’s expansion of those working under the command and control of the state demonstrates needs the consent and the active support of the public. So far, that support is evident – 700,000 people, for instance, signed up for the UK government’s NHS volunteer scheme in less than ten days, almost three times the original target.

Popular support – as in times of war – give government the scope to act on a significant scale. With much private sector activity suppressed, public spending will be needed to sustain household incomes and support business. Government activism, whether in expanding the NHS, taking over capacity in the private health sector, the suspension of rail franchises or a vast scheme of income support, is the order of the day.

Public spending will soar. Last week’s US $2 trillion stimulus package is equivalent to almost 10% of GDP. The Financial Times estimates that the increased public spending announced in the UK in the last two weeks amounts to over £60bn, or 3.0% of UK GDP. Public borrowing in 2020-21, which two months ago looked likely to come in at around £50bn, could now hit £200bn according to the Institute for Fiscal Studies.

Countries have always run up huge debts fighting wars and countering recessions. In the UK the financial crisis lifted debt from 40% to more than 80% of GDP. In coming months government spending will be the prop holding up economies across the West. Tax revenues will plummet. Levels of public debt seem likely to rise above the peaks seen during the financial crisis.

Crises or wars can shape economies in other ways. The financial crisis revealed deep fragilities in the financial system. Policymakers today are less tolerant of financial risk and banks face far greater regulatory scrutiny – yet are now being asked to lend as never before to keep business and employment open to resume. In the UK, the mass mobilisation of the second world war helped create a consensus in favour of big government, with the creation of the welfare state, widespread nationalisation and activist economic policies. The war helped popularise the idea of the state as a guarantor of welfare and economic security – and we may need to return to greater nationalisation and a welfare state to avoid deep and destructive inequalities as we come out of the immediate crisis.

The current crisis has revealed unforeseen – or rather foreseen but chosen to be ignored – weaknesses in food supply chains, medical supplies, healthcare provision and many other areas. What is highly efficient in normal times – such as ‘just in time’ food supply – has become a vulnerability in a crisis. Governments and voters may be unable – or unwilling – to return to the status quo once the first wave of the crisis is over. The step change in health spending now underway may never be unwound; and Switzerland, which for decades has seemed slightly idiosyncratic in its commitment to maintain strategic stockpiles of food, now looks like the example to all nations.

Pandemics have long been on the list of potential ‘black swan’ events – unexpected negative shocks with major consequences. However, for the public and private sectors around the globe, they have been ranked low down a long list of threats. This will change for nations everywhere – just as Hong Kong and Singapore’s experience of SARS has shaped their health policy – and their ability to responds to the coronavirus. What is unfolding today will establish pandemics as a core risk for businesses, investors and insurers – along with cyber-attacks, terrorism and climate change.

The long-term effects of an external shock often exceed the immediate effects – sometimes in quite unexpected ways. Thanks, in part, to the vigorous response of the Fed, the 9/11 terror attacks did not knock the US economy off balance. But the attacks transformed America’s defence and foreign policy, and triggered two long and expensive wars – in both social and financial terms – that have totally changed the balance of power in the Middle East. The Fukushima nuclear disaster in Japan in 2011 led to the closure of the country’s entire civil nuclear programme – and a surge in fossil fuel imports and in electricity prices…and higher energy prices squeezed spending on heating that have caused a surge in deaths far larger than that been seen in the original nuclear disaster.

Pandemics face humanity with a trade-off between human health and economic activity. The 1918 flu epidemic killed over 50m people globally – and almost three quarters of a million Americans. Many Americans carried on working because, in the absence of social security, they had no other source of income. Concern about the economic impact of restrictions on movement meant some US cities were slow to act and suffered far higher casualties than those which moved quickly. Remarkably, the US federal government had little formal role in combating the 1918 flu epidemic – and President Woodrow Wilson never publicly mentioned the disease.

Richer societies, with more extensive systems of welfare and government, have far greater capacity to control diseases and the social and economic consequences – and the greater and instant global press coverage is highlighting the inequalities between first- and third-world nations and their ability to protect life and welfare of their populations.

The restrictions on movement introduced across the developed World testify to a collective willingness to trade economic activity for human health. The loss of activity in the near term will be significant but deemed acceptable as a trade-off. Second quarter GDP in the US, EU and UK is likely to contract sharply. Professor Simon Wren-Lewis of Oxford University, this week updated his earlier analysis of the effects of a flu pandemic – now estimating that in the first financial quarter during the pandemic GDP is likely to contract by 30%. This is at least three times as much as any other forecast to date – but testifies to the potential economic impact of social distancing on activity.

In one important respect, what we are observing today is different from anything that has preceded it in modern times. In past crises, governments have sought to boost economic activity, whether to fight wars or counter the effects of a natural disaster or a downturn. This time, governments are suppressing economic activity through restrictions on movement in order to slow the progress of the coronavirus. The massive interventions by central banks and governments are designed not to stimulate activity, but to preserve jobs and businesses for an upturn in the second half of 2020.

In that endeavour policymakers seem to have been guided by the experience of earlier crises. They have acted swiftly – and on a large scale. ‘Conventional’ wisdom has been set aside and the established rules of government have been suspended or altered. This is to the greater good. The immediate effects of this crisis are immense. History suggests that the long term consequences will be profound.

I would like to acknowledge the work of the Deloitte economics team for their analyses some of which are included in this piece – and their generosity in allowing it to be quoted in these unparalleled times.