The possibility of a no-deal Brexit is “uncomfortably high” the Governor of the Bank of England Mark Carney told the BBC on Friday morning.
Although the possibility is still unlikely, Carney reiterated that it was in the interest of the EU and UK to secure a transitional deal.
Managing bad news
The pound’s exchange rate reacted negatively to Mr. Carney’s statement.
But, this was not the only piece of bad news to make the headlines. The key services confidence indicator IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) dropped from to 53.5 in July, down from 55.1 in June. That still indicates growth for the service sector but suggests a slowdown for the economy.
Carney’s warning comes hours after a high-ranking but unnamed European Commission official told Reuters that an “ambitious” EU-UK trade deal is possible if the two parties manage to avoid a physical border between Northern Ireland and Ireland.
That is a tall order. The European Parliament warned earlier this month that the lack of a solution for N. Ireland would jeopardize the transition period, not merely the scope of a final deal.
In any event, Carney said the Bank of England is preparing for the possibility of major challenges emanating from a “no deal” scenario, in the form of price hikes, logistics and trade disruptions. Preparation means boosting confidence in the banking system, that is, “avoiding panic.”
If the UK fails to agree on the terms of its divorce with the EU and leaves without a deal, it would revert immediately to World Trade Organization rules in March 2019. This is expected to cause serious disruption on value chains, as well as critical logistical chains such as food, energy and medicine.
The Bank of England raised interest rates on Thursday to 0,75%, that is, the highest in Europe followed by the Bank of Sweden. The UK wants to address not only surging inflation but also surging private debt to the tune of 90% of the GDP. Critics were warry of rising interest rates amidst decelerating GDP growth. He confirmed that markets – as a “rule of thumb” – could expect 1,5% over the next three years.
Some Conservative MPs called out Mr. Carney’s statements as “project fear” aimed at undermining Brexit.
‘No deal’ agenda
The UK and Brussels parties agree that the UK will lose access to the Single Market, which allows goods, services, capital and people to move freely across borders in March 2019.
London wants to retain access with ambitious terms but is struggling to find a formula that ensures the European Court of Justice has no jurisdiction over the UK and there is no freedom of movement. The UK government is proposing maintaining the status quo in the movement of goods and capital but not on services and people. To do so, the UK wants to apply EU Customs rules without being a member of the Customs Union, leading to a “combined” rather than “single” customs area, which will also allow the UK to sign its very own trade deals.
The European Commission’s chief Brexit negotiator Michel Barnier has hinted there is room for maneuver if the UK steps forward with a compromise in Northern Ireland. Barnier expresses confidences for “a good outcome,”
Barnier said some 80% of issues related to Britain’s divorce with the EU have already been settled and that he was confident that negotiations on the remaining 20% could result in “a good outcome.”
There is little opposition to a free trade deal with zero tariffs, no import quotas and access to public procurement markets. Security cooperation on issues as sensitive as the exchange of biometric data and passenger name records are also agreed upon. And although the UK will not be party to the European Arrest Warrant, there is scope to negotiate an effective mechanism for swift and effective extradition. However, border checks still appear inevitable, in Ireland as elsewhere.