A Bad Brexit Deal Could Set Off Europe Wide Recession

Leading Brexiteers including the British Prime Minister Theresa May suggested that the UK could walk away from the negotiation table if the discussions were unfavorable to the UK. This sparked iterative rounds of discussion on the possible impacts of a "no deal scenario" - where the UK leaves the EU without agreeing any sort of agreement. If this happens, the UK will have to rely on the World Trade Organisation's trading rules in its relationship with other EU member states.

EU officials on the other hand have maintained their view that a Brexit deal should leave the UK worse off than if it were a member of the EU. Their rationale is simple, you can't expect to leave the EU, and still cherry pick the good perks. Allowing this, according to them may encourage other countries to do the same.

A recent report from renowned analysts James Knightley, James Smith and Viraj Patel at ING made a strong claim that a bad deal for the UK may set off a continent wide recession in Europe.

They opined that uncertainties caused by Brexit will force corporations to withhold capital and major spending in the UK. Households could also exercise a little extra caution on their spending; consequently leading to a sharp fall in economic activities.

The medium term instability of the British Sterling may also continue, leading to a prolonged inflation. This will further drop the aggregate purchasing power in the economy.

Worse still, the rise of alt right movements across Europe increases the chances of another Trump-like electoral victory in an EU member state; thereby increasing the prospect of another EU referendum. Protectionism, alt right politics, combined with economic dislocation and financial contagion may trickle down a major recession across Europe.

The British Prime Minister is faltering between appeasing Brexiteers with stricter immigration restrictions and the need to uphold UK's vibrant economy.

Sadly Brexiteers want them both.

John Curtice made a presentation in a conference on Monday showing how majority of the British public actually want a cherry picked Brexit deal, the same one EU Leaders have shut down multiple times. They want free trade and tighter immigration control. The best of both worlds.

Could the British public be aiming for the stars with the hope of landing on the moon? Or we actually think that 27 countries need us more than we need them? Or maybe there is some actual strong bargaining chip in Theresa May's "Brexit deal negotiation chest"?

A German bank last week claimed that the EU 27 will cope better in the event of a bad or no deal scenario with the UK than the UK. Contrary to the UK's EU dependency, the EU's GDP depends less on trade with the UK.

The same applies to the EU financial services passport. Ironically however, EU27's usage of the financial services passport to access the UK's market greatly supersedes that of the UK's usage in relation to accessing the EU's market. However, the relative value of the market access matters more to the UK than the EU.

ING's analysts James Knightley, James Smith and Viraj Patel maintained their view, in support of that of May's; that a no deal situation is better for the UK than a bad deal.

Their conclusion was based on a critical analysis of the WTO's trade rules, sanctions and tariffs. Using the US tariff summary for example, you realise that organisations within UK and EU will be faced with heavy increases in import costs. These increased costs will force corporations to move further into Europe. This downturn in the UK will cause a negative trade deficits with Netherlands, Belgium and Ireland given the importance of trade with the UK.

See the chart below: -

Alt-right politics effect

The referendum results in the UK last year sparked an anti-EU movement across countries like France and Netherlands. These movements spread the fear that that EU is obsolete and may break up, such malaise combining with economic dislocation and financial contagion, would spell disaster for the European economy - not just the UK economy.

Conclusion

A bad Brexit or no Brexit deal is in no way good for the British economy, but don't be mistaken to think that Europe will not feel the pain to.

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