A bad Brexit deal for Britain will kick Europe into a disastrous recession

  • Britain is on course for the worst course of action possible — “hard Brexit.”
  • New polling data shows that Britons want May to get a deal that EU officials have repeatedly shot down.
  • But a bad deal for Britain’s economy could spell recession for the whole of Europe.
  • The combination of “toxic politics” and economic dislocation is touted as the most deadly combination for all economies.

Britain is going to be punished when it comes to leaving the European Union.

Officials have repeatedly, and understandably, said that a Brexit deal must leave the country worse off than it was as an EU member.

But a bad deal for Britain means a bad deal for Europe — it could lead to a continent-wide recession.

Arguably, leaving the EU was always going to mean a bad deal for the UK. Why should it gain all the perks of being a member of the 28-nation bloc without adhering to every one of the “four freedoms.”

The four freedoms require member states to accept the free, unlimited movement of goods, capital, services, and people. The free movement of people was arguably the biggest concern for voters in the June referendum. Britain cannot pick and choose. 

One of the EU’s chief Brexit negotiators 
Guy Verhofstadt has said several times that Britain cannot “cherry-pick” a Brexit deal. Germany’s finance minister Wolfgang Schäuble said Britain should “pay the price” for leaving the European Union and added “there is no à la carte menu. There is only the whole menu or none.” The list goes on.

Bad politics, combined with economic dislocation and financial contagion would likely lead to recession across Europe

Prime Minister May is taking Britain towards a “hard Brexit” — Britain leaving the European Union without access to the Single Market in exchange for full control over immigration.

The complex, difficult agreement will cover everything from immigration to trade. A “hard Brexit” has also repeatedly been warned against by experts that say that this could be the worst case scenario for the country economically.

ING sent a lengthy note to clients last week on the potential impact Brexit would have on the UK as well as the rest of Europe. Here is what it said about the worst case scenario (emphasis ours):

“While both sides will start the Brexit negotiations seeking a deal that will minimise economic damage and hopefully generate positive results for their respective electorates, things could go very badly.

“The political backdrop means there are significant challenges and, in the UK’s case, this uncertainty could see more corporates choosing to sit on their hands rather than investing in their businesses. British households could also become more cautious, leading to a sharper slowdown in activity than we are anticipating.

“Should sterling come under further pressure due to Brexit worries, then inflation will stay higher for longer, squeezing spending power in the economy. Even worse, if there is electoral success for anti-EU parties, the prospect of EU break-up could return. Bad politics, combined with economic dislocation and financial contagion would likely lead to recession across Europe.”

Bad news for everyone

The prognosis for Britain’s Brexit talks and later the impact on the UK and wider European economy does not look good.

May is stuck between a rock and a hard place — she needs to appease Brexiteers that are desperate immigration restrictions but needs to make sure the UK economy does not go down the drain.

But Brexiteers want it all.

For example, p
olling expert John Curtice presented the data during a conference on Monday that showed the British public wants May to deliver the sort of Brexit deal that the European Union has shot down on multiple occasions.

Most voters support Britain’s free trade arrangement with the EU but at the same time are keen for May to impose stricter controls on migrants coming from the 28-nation bloc once the country has completed its exit.

 

Berenberg Bank said last week that “the EU can cope without an EU-UK trade deal much easier than the UK can since less of its GDP depends on the flows of trade between the two economies.

A severe downturn in the UK would be particularly felt in the Netherlands, Belgium and Ireland

“The same harsh reality applies to the EU financial services passport. While EU27 member’s usage of the passport to access the UK is greater than vice versa, the relative value of it still matters more for the UK,” it added. 

But ING highlights how May’s claim that “no deal for Britain is better than a bad deal” — suggesting that the UK is prepared adopt World Trade Organisation Rules if necessary — is unlikely to be true (emphasis ours):

“A visit to the WTO website shows the diverse and sometimes seemingly illogical nature of the tariffs imposed. If you look at the US and download the ‘simple’ spreadsheet offering a fairly broad summary of tariffs, it comes to 19,575 lines.

“This will mean corporates (both UK and European) will have to quickly familiarise themselves with the situation and be faced with some fairly hefty increases in import costs. Corporate sentiment would likely deteriorate further and more businesses look to move operations into Europe. A severe downturn in the UK would be particularly felt in the Netherlands, Belgium and Ireland given the importance of trade with the UK.”

And here is the chart:

The deadly combination of ‘toxic politics’ and economic dislocation

The EU needs to make an example out of Britain for leaving the EU — after all, it needs to show other EU members that life is not better off outside the bloc. 

Britain’s referendum last June already helped catalyse and give strength to increasingly active anti-EU parties across France and the Netherlands.

ING warned in its note (emphasis ours):

“Giving the UK the ‘greatest possible access’ to European markets appears to be the economically rational choice for both sides. But the UK is concerned that mainstream European politicians are looking to make an example of the UK in order to shore up support for the EU.

“The UK government’s response has been that it isn’t in Europe’s interest to punish Britain to ‘make a political point,’ which in any case would only make Europe ‘poorer.’ These political risks may recede.”

Latest polls show that centrist candidate Emmanuel Macron is expected to win France’s presidential election, according to an Ipsos Sopra Steria poll.

But right-wing party Front National’s Marine Le Pen is still popular and other recent polls show that she is still in the running and a month before the first round of France’s presidential election, 43% of voters are hesitant about who to vote for — which could sway the result.

Meanwhile, in the Netherlands, Dutch parties have ruled out working with Geert Wilders’ right-wing party PVV.

But as my colleague Elena Holodny pointed out last month:

“… it’s important to note that there are significant differences between the political systems, electorates, and domestic political, social, and economic conditions of all these countries — including the US and the UK — meaning that it is difficult to predict how one election will turn out based on the results of another country’s.”

So it is still anyone’s game.

ING pegs Italy as being a huge issue that could later hurt Britain in Brexit talks, hinder a decent deal, and therefore hurt the economies of the UK and wider Europe (emphasis ours):

“The big uncertainty is Italy, which goes to the polls within the next twelve months. The concern is that the first and third place parties in opinion polls are both decidedly anti-EU.

“Should the next Italian government decide that they want a referendum on leaving the EU (this will require constitutional change), then the EU could be inclined to take an even tougher line in Brexit negotiations to make leaving look as unattractive as possible in an act of EU self-preservation.

“In a worst-case scenario, fears of EU break-up could see toxic politics combine with economic dislocation and financial contagion, which would spell disaster for the European economy — not just the UK economy.”

So it does not look good for Britain or Europe. Britain is heading towards a stubborn “hard Brexit.” But, while it will lead to a disastrous outcome for the UK economy, Europe is going to feel the pain too. 

More from Business Insider UK:

This column does not necessarily reflect the opinion of Business Insider.

NOW WATCH: A penthouse owned by Trump’s trust is on the market for $US35 million — here’s a look inside

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.