• Tue. Jul 26th, 2022

First impact of departure from EU is likely to be a sharp fall in pound’s value

Dec 11, 2020

A no-deal exit from the Brexit transition period on January 1st will plunge the United Kingdom into a world of uncertainty as Prime Minister Boris Johnson pulls the plug on nearly 30 years of EU single market membership overnight.
Consequences are likely to flow from such a decision in nine sectors from food to financial services and travel to medicines.
The first impact which is likely to precede the January 1st, 2021 departure date is a sharp fall in the value of the pound. At its most extreme, analysts predict it could lose more than a fifth of its current value against both the dollar and the euro if talks break down irrevocably.
Opinions differ on how low sterling could go. Jordan Rochester, a currency strategist at Nomura in London, predicts the pound could sink to near parity with the dollar, while Paul Robson, head of G10 currency strategy at NatWest Markets, is more optimistic, betting the pound may fall to the low $1.20s.
Leaving without a deal would most likely give UK government bonds known as gilts a boost as investors seek a safe-haven, allowing the Treasury to borrow even more cheaply than it can currently.
The financial services industry the UKs largest services export is likely to weather the initial storm of a World Trade Organization (WTO)-terms exit since it has been preparing for several years to leave on no-deal terms.
Many companies have already set up legal offices in the UK and EU to cater to local customers and have begun moving people and business. Some more relocations would likely be triggered by a hard rupture.
But no deal still jeopardises agreements to manage cross-border activity, from trading shares and derivatives to sharing data. How much business will leave London in the longer term is unknown.
Under the governments published reasonable worst-case scenario, up to 7,000 trucks could stack up on the motorways outside Dover and other Channel ports, with delays of up to two days.
The British government is expected to do everything it can to prioritise traffic flows on goods coming from Europe, but UK officials fear that queues will still form as a result of blowback from the EUs decision to bring in full border controls from January 1.
How long this will take to settle down is not clear. The government has warned that queues could last from three to six months and has plans to reroute traffic and deploy large numbers of portable toilets to the roadsides to cater for stranded drivers.
UK travellers to the EU will feel some of the most obvious consequences of no deal, although the restrictions caused by the Covid-19 measures could mask these changes initially.
Unless deals can be rapidly agreed with the EU, drivers will need to obtain an international driving permit and get a physical copy of their green card proof of insurance document from their car insurers. UK citizens will face longer queues at passport control as they use lanes for non EU-EEA passengers. Controls will also be stricter on bringing pets into the EU.
Brussels has announced unilateral steps to keep planes flying, but some problems may be experienced with flight connections. Travellers will also need to obtain travel insurance since the EHIC card that offered reciprocal care in EU countries will no longer be valid. The UK government was trying to negotiate a new reciprocal scheme, but it is not clear how lack of a deal will affect this.
A no-deal Brexit would lead to immediate food price inflation and shortages of some mostly perishable products in the supermarkets, say industry analysts.
Tesco predicts that tariffs imposed on January 1st will cause price rises for most EU goods, pushing up consumers overall food bills by 3 to 5 per cent. The government disputes this. The price of butter, which is mainly imported, will rise, while speciality cheeses such as feta will cost as much as 55 per cent more, according to the London School of Economics.
Analysts have stopped short of predicting overall food shortages, but imports of fresh produce will face delays caused by EU checks. The UK relies heavily on European fruit, lettuce and tomatoes in January, and it risks these products being left to rot at the border. At the same time, a collapse in lamb exports caused by tariffs is likely to lead to a domestic surplus.
Few industries are as exposed to cross-border trade as the auto industry. It expects prices to rise for consumers even if sterling drops, as cars and their components face up to 10 per cent tariffs after Brexit.
More than 1.5 million cars are imported to the UK in a typical year, while even those cars built domestically contain huge numbers of parts from across Europe. The industry has also warned it will be more difficult for the UK to attract electric cars, with manufacturers in Germany and elsewhere diverting their limited stock to more profitable markets.
Longer term, industry analysts warn that consumer choice is likely to dwindle if the government sets up its own standards and certification regime that may make it too costly to bother registering some models in the UK.
Leaving the EU without a deal would end UK involvement in the 80bn Horizon programme of research funding and collaboration, which could dent the ability of universities to do groundbreaking research in areas including science and medicine. The UK government and research organisations have said they will try to negotiate to secure a future relationship with Horizon even in the event of a no-deal Brexit.
The future of the Erasmus student exchange programme is unclear whether or not a deal is struck. Existing students will still be able to participate, but the government has said it will fund a UK global student exchange programme to replace Erasmus if it decides to end British participation.
Pharma leaders in the UK and mainland Europe are unanimous that patients will face the risk of delays to obtaining vital medicines in the event of a no-deal Brexit. Without a mutual recognition agreement accepting the validity of each others safety testing regimes, pharmaceutical trade bodies on both sides of the Channel have warned of delays of up to six weeks in obtaining medicines for patients.
In the short term, the UK government says it has taken contingency measures to avoid medicine shortages. The department of health has created a stockpile and instructed pharma companies to keep back six weeks worth of supply in the UK.
The protocol to keep open Northern Irelands 310-mile land border with the Irish Republic will continue to apply in a no-deal scenario, protecting the Belfast Friday peace agreement that ended the conflict in the region.
However, arrangements to create a trade border in the Irish Sea could come under pressure.
Even with the temporary measures agreed with Brussels this week to reduce border disruption, the imposition of full WTO tariffs between the EU and the UK will put a strain on the agreement that all goods flowing into Northern Ireland from Great Britain must follow EU customs rules.
Some hardline Brexiters could also use a no-deal exit to renew demands to drop the protocol entirely, damaging the Good Friday Agreement and threatening trade talks with US president-elect Joe Biden, who strongly supports the peace pact.
A no-deal could also destabilise the Norths devolved executive which is led by the pro-Brexit DUP and remain-supporting Sinn Féin. Copyright The Financial Times Limited 2020