The Day After Brexit – More Trouble Ahead?

The long and painful Brexit saga appears to finally be at an end, barring some unforeseen shocking development. British Prime Minister Boris Johnson gambled that a snap election would end the stalemate in Britain’s parliament, and he won big, with a resounding election victory. Johnson can now fulfill his campaign promise to leave the EU at the end of January. However, the friction and acrimony between the UK and the EU are likely to continue, as the sides must negotiate a free-trade deal, as the UK leaves the single market after 46 years.

The transition period, which commences on February 1^st, gives the sides only 11 months to hammer out a comprehensive trade agreement. EU officials say that such a time period will suffice only for a ‘bare bones’ agreement and want an extension. However, Boris Johnson insists that a deal can be reached by the end of 2020, and is showing little patience for the EU’s position. If no deal is reached by the end of 2020, then the UK and EU would trade on World Trade Organization (WTO) rules. Given the close economic integration between the two economies, failure to reach a deal in time would lead to cross-border disruption and would have a negative impact on the UK and eurozone economies.

The Canadian Model

It’s unclear what type of free-trade agreement the EU and UK will work out. Prime Minister Johnson has said that he would like a deal that is “on the model of a super Canada plus arrangement”. This is a reference to the EU’s free trade deal with the EU, known as CETA. This agreement eliminates most tariffs but does not remove any regulatory restrictions. This means that Canadian exports must undergo custom checks when arriving in EU ports. Johnson wants a deal with the EU to cover goods and services and to include mutual recognition of standards.

On the assumption that the EU agrees to Johnson’s proposal (which is not a given), it is difficult to see how a comprehensive agreement could be inked in just 11 months. The CETA agreement required seven years of negotiations until it was signed in 2017. The gap between London and Brussels over the time period for the talks already appears wide – Johnson wants to wrap up the deal in 11 months, while the EU’s guidelines on negotiating trade agreements state that “reaching an agreement usually takes several years”.

It appears that after the Brexit divorce, we could see plenty of acrimony between London and Brussels, as the sides seem headed to a clash over the post-divorce arrangement. This could spell trouble for both the British pound and the euro.