In exactly seven months to the day, the United Kingdom is scheduled to leave the European Union (EU). However, it remains uncertain whether Brussels and London will succeed in agreeing on a withdrawal deal in time. This is the case even though both sides are already in agreement about certain essential aspects of Brexit – the size of the final payment, citizens’ rights, the length of the transitional phase. However, one issue which is still highly controversial for both negotiating parties is how a “hard“ border between the two Irelands can be prevented. What is more, this problem can hardly be separated from the question of how future trade relations are to be structured, and there is a deep divide between the positions of the two sides on this score.
If no solution is found for the intra-Ireland border, there will be no withdrawal agreement, and therefore no transitional phase. There is a significant risk of a so-called “no-deal Brexit,“ i.e. of a disorderly, chaotic British departure from the EU in the coming spring, and this risk is indeed looming larger every day. We ourselves put the probability of such a disorderly exit scenario at very nearly 50%. All the same, we believe that the chances of Brussels and London striking a deal do still outweigh this risk because hardly anyone can have a legitimate interest in a “no-deal Brexit.” It is not improbable that the process will be resolved by a last-minute decision at the EU summit scheduled for mid-December.
In our opinion, the greatest risks derive from the domestic-policy situation in Great Britain, which continues to be extremely tricky. It is still questionable whether the prime minister will manage to hang on in office. The Conservative party conference, due to be held in late September, will play a decisive role here – as her laconic assertion yesterday that “a no-deal Brexit would not be the end of the world“ graphically illustrates, Theresa May is scarcely likely to make any major concessions to the EU prior to this event. And there is a further complication: even if an agreement is reached in Brussels, it will still have to surmount parliamentary hurdles, above all in Great Britain. That too cannot be taken for granted.
It is, by now, touch and go whether a Brexit solution inflicting as little damage as possible can be achieved. The coming weeks will therefore be fraught with considerable uncertainty. A “stormy autumn“ lies ahead of us. The British pound ought to remain under pressure relative to the euro, putting a further brake on UK economic growth. We have already been factoring such a development into our forecasts for quite some time, and are therefore leaving the latter unchanged.