Two weeks to save the UK from ‘total financial chaos’

 news.com.au  3/17/2019 7:42:11 AM 

Even a perfectly executed Brexit was going to be bad news. But this?

Even before Brexit happens, UK corporates are fleeing. British vacuum company Dyson is off to Singapore. Honda has closed operations in Swindon. Easyjet has set up in Austria. Airbus — which employs over 10,000 people in the UK — has warned the government that it could go too.

Of course, not all these departures are 100 per cent caused by Brexit, but it is the backdrop to each of them.

Brexit is poison for the UK economy for a pretty simple reason — the European Union is a big free trade zone. When the UK leaves it gives up a lot of market access rights. Businesses who want to be in that Free Trade Zone will leave the UK to stay in it.

You might imagine the UK’s loss will be the EU’s gain. But the EU loses too. While a few companies might shift some factories and headquarters into the EU, their free trade area will get a big hole at its northwestern edge. The UK is the second biggest economy in the EU. Losing it makes the EU far less powerful.

Overall Brexit is a lose-lose and that hurts the global economy. We all suffer. Australia — and its great customer, China — will both be able to export less to Europe and the UK if they are both economically weaker. That ultimately flows through to a slightly weaker economy here and, most likely, a lower standard of living.

A BAD BREXIT

All the above is just the best case scenario. There’s still the chance of a bad Brexit.

The Brexit Deadline is March 29 — just two weeks away. The UK will be kicked out of the EU on that date unless something dramatic changes. And it is not just as simple as cutting the cords. The EU and UK are deeply entangled. It’d be like an Australian state trying to leave Australia.

The UK needs to sort out a lot of laws in a hurry and sign a huge agreements with the EU to stay on good terms. It needs a deal.

DEAL v NO DEAL

Exactly such a deal has been sorted out … on paper.

British Prime Minister Theresa May and the EU worked furiously to come up with an agreement on how the UK and EU split up. It covers things like what happens to British citizens living in Europe; what will happen on the border between Northern Ireland (part of the UK) and Ireland (EU member country).

The deal provides a “transition period” where the great divorce is put in practice. There’s also a bill for the UK to pay — estimated at £39 billion.

But with two weeks to go, the UK parliament has not agreed the proposed deal is acceptable. It is too angry and divided to agree to anything.

THREE BIG OPTIONS

1. Take the deal sorted out by the Prime Minister with the EU. (This deal has already been rejected in parliament twice).

2. Ask for an extension while they figure out what to do. (The EU’s 27 member states would have to agree unanimously to an extension. The French have ominously warned they are pretty much done negotiating.)

3. No deal Brexit. A no deal Brexit is the worst option. The UK just stops being an EU member with no transition period and no idea what the new rules would be. Will they have to build a big wall on the Irish Border? Will UK residents all be kicked out of Spain? Expect global stock markets to crash and total chaos to ensue.

Nobody really wants option number 3. But both sides are pretending it’s on the table because doing so makes it seem more urgent that people vote for their preferred option instead.

The likely choice is to ask for an extension. Even if granted, this doesn’t solve the problem at all. Just moves it to later in 2019. The uncertainty rumbles on and more firms will probably leave the UK.

If none of the three big options work there are back-up options. The UK could have another general election to see if the public would prefer a new government to run the Brexit process. The UK could even have another referendum on Brexit.

The risk of doing that is Brexit wins again. In which case it would get all its problems back again and the entire world would groan with despair.

Jason Murphy is an economist. He writes the blog Thomas the Think Engine. Continue the conversation @jasemurphy

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