Brexit – risks have shifted but not decreased

The recent agreement on a transitional period after the UK’s exit from the European Union (EU) next spring is undoubtedly progress in the Brexit negotiations. It significantly reduces the risk of a disorderly departure, although this danger will only be fully averted once the entire exit agreement has been signed, sealed and delivered. There are still a number of hurdles that must be overcome to achieve this, such as a solution to the complicated issue of a hard or soft border between the Republic of Ireland and Northern Ireland.
What remains entirely unclear is just what kind of trade relationship the EU and the UK will have after the transitional period. The British government is adamant that the UK will not remain in the customs union, which reduces the probability of a „common-sense“ solution. London insists on being able to enter separate free trade agreements, which would not be possible within the framework of a customs union. It is therefore becoming increasingly likely that London and Brussels will „only“ agree on a free trade agreement. However, any negotiations to this end can only commence after the UK has exited from the EU. It will therefore remain entirely uncertain for quite some time just how the future trade relationship will play out in detail. And there is the persistent risk that the parties prove unable to arrive at an agreement at all, at least not before the transitional period expires.

Any Brexit optimism would therefore be highly premature. Instead, the risk profile of the Brexit is starting to shift, with medium-term risks declining and longer-term risks rising. This could have a lasting negative impact on the British economy. In fact, the impending Brexit is already slowing down Britain’s economic growth: within the G7, the UK has plummeted from its top position to the very bottom in terms of growth momentum. The Brexit is already costing the British economy around one percentage point in growth.

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