What are some of the scenarios that might play out?

Peter Westaway, Vanguard’s Chief Economist for Europe, explains the most likely scenarios and how things might play out for the United Kingdom in its efforts to withdraw from the European Union.

TRANSCRIPT

Global macro matters

Lara DeLaIglesia

Lara de la Iglesia: So, Peter, what are some of the more likely scenarios that might play out with Brexit?

Peter Westaway: Yes, there are a lot of different scenarios that can play out. Probably the most simple one is the clean break from the EU. And that’s really what the government are aiming for as their policy. That’s sometimes called a hard Brexit. And it involves the U.K. leaving the EU, leaving the single market.

And what it would mean is that the free movement of labor between the EU and the U.K.—that means [EU] citizens can freely come and work in the U.K.—would no longer be allowed. And there would also be less jurisdiction in U.K. courts from the EU. Those are two of the things that I think many people that voted to leave were looking for.

Now one of the big problems with that is that it does introduce complicated trading relationships between the U.K. and the EU. And many people think that will have quite big costs in terms of the trade between the two areas. And, in particular, it presents complications for the border between Northern Ireland and southern Ireland. The U.K. government is very keen that there is completely frictionless trade between those two areas, but a hard Brexit makes that very difficult.

Peter Westaway
Peter Westaway

So, increasingly, people are now talking about a customs union between the U.K. and the EU. So that’s preserving an important element of EU membership, but it does facilitate that free trade between the U.K. and the EU. It means that there would no longer need to be border checks when goods went across the border in Northern Ireland and southern Ireland. And it would more broadly be slightly less economically costly.

The problem with the customs union is it prevents the U.K. from striking deals with third countries. And, one of the advantages [for] the people that wanted to leave the EU, was that it would free up our ability to trade with fast-growing emerging markets or the United States and so on.

Lara de la Iglesia: Right.

Peter Westaway: So, there’s a lot of uncertainty around that. But I would say that that customs union arrangement is our most likely scenario. We probably put about a 50% probability on that outcome.

Now all of those outcomes I’ve described so far are quite costly in terms of the economic implications. Many estimates say that, perhaps in the long run, there could be 5%–10% lower GDP in the very long run because of that reduced trade.

Lara de la Iglesia: Okay, interesting. Are there other less likely Brexit scenarios then?

Peter Westaway: There’s one other really important possibility that many people don’t put much weight on at all, but we probably think there’s a 10% to 15% chance of that. And that is, believe it or not, that Brexit still doesn’t happen at all.

So, how would that happen when the people have voted for it?

Well, the way it could happen is because there’s so much uncertainty within the U.K. government, it’s simply not possible to get any version of Brexit voted through Parliament. And if that happens, if there isn’t agreement, it’s possible that the government falls, and another general election is held.

And, if that were to happen, it’s possible that that new government calls for another referendum, and in that new referendum the vote is reversed.

So, it’s not a likely outcome but, in our view, it’s sufficiently likely to be worth talking about, and I don’t think many people are giving that much weight.

So, overall, what’s so astonishing about the situation is that the whole range of possibilities, from no Brexit to a disastrous cliff-edge Brexit, are still in play two years after the original vote and, now, less than a year before the supposed Brexit date is actually going to happen.

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