The transition period which was supposed to end on March 29, 2019 was extended to October

31, 2019 (BBC, 2019). Earlier, Bank of England (BOE) outlined four possible scenarios that
could take place in the case of deal or no-deal, these range from a very close relationship with
EU to virtually no trade agreements between the regions. During the transition period GDP fell
down gradually, the share of FDI in the UK fell from 25% of all EU to 18% (Bank of England,
2018), in the meantime, Germany became the hotspot for investors (CNBC, 2018). Financial
service and Automobile industries have hit the hardest and the impact will continue in the future
(LSE, 2019). However, the loss of FDI will be recovered if the UK is able to make a deal with
the EU and follows a close relationship.

The worst case scenario is no-deal disorderly Brexit where high inflation and interest rates will
cause GBP to fall by 25% against both USD and Euro (Shropshire Star, 2018). It is also
forecasted that the international trade will collapse and the economy will slow down due to
labor-short supply and low productivity. FDI will reduce more sharply and it will lead to reduced
productivity due to lesser competition (Bank of England, 2018). EU accounts for 45% of the
UK’s export trade (House of Commons, 2019). One of the reasons for such a high share is the
absence of tariffs, if these are imposed then the trade will surely fall. Tariffs are as high as 74%
for tobacco products and 22% on orange juice (Kimberly, 2019).

Under disruptive Brexit, the situation would not be significantly different but there will be
comparatively lesser damage. GBP will fall by 15%, it will be at USD1.10/GBP (Shropshire
Star, 2018). UK may decide tariffs based on WTO’s Most Favored Nation rules but that implies
that it should have same rules for all countries it does not have a trade deal with (House of
Commons, 2018). In that case, it will be difficult to simplify tariffs and trade will fall for a
significant period until the regional trade agreements are finalized.

Under a less close relationship, Sterling will appreciate by at least 2% (Howes, 2018). The trade
and FDI will recover as a result of easy policies. A close relationship will see a rise in GDP up to
2% (Matthew, 2019). The rationale is that it will recover the loss caused due to the disruption
caused after the initial Brexit vote on June 23, 2016. GBP is forecasted to appreciate by 5% in
2019 Q1 (Howes, 2018). Trade would flourish as there would be no tariff under this scenario.
FDI will increase as the companies that would have shifted elsewhere will come back.
It is highly unlikely that the government will settle either with a very close relationship as it will
not make the Brexit meaningful or no-deal Brexit as its disasters will have a severe impact on the
economy.

Scenarios GDP Unemployment Inflation Interest

rate rates
Close Relationship 1.75% No data No data No data
Less Close Relationship 0.75% No data No data No data
No Deal – Disruptive Brexit -3% 5.75% 4.25% 3.75%
No Deal – Disorderly Brexit -8% 7.5% 6.5% 5.5%
Table 1 Source: Shropshire Star (2018) and Bank of England (2018)

Figure 1: (Bank of England, 2018)

The negotiations that Theresa May has proposed do not talk about the free flow of people
(Kimberly, 2019). One of the main reason why UK citizens voted for Brexit was that they
wanted a strict stand against immigration especially from Africa and war-affected Middle East. 3
Million EU nationals work and live in the UK without any visa, London has become the world’s
capital. Similarly, close to 1.4 million Brits live in EU countries. A no deal Brexit will cause a
problem for them. Multinational companies will shift their base from the UK to EU countries for
example Bank of America will be shifting its European headquarter to Dublin (Kimberly, 2019).
Further, the UK will have to pay an EU exit fee. The best possible scenario is UK adopting a
Norway like model where it will be closely associated with EU in terms of trade and flow of
people, will be governed by many laws through agreements but won’t be a member and would
not have any voting rights. May’s plan is similar to it but the far right opposition is against a
close deal as it will defy the essence of the Brexit.

Another important matter is the Northern Ireland and mainland Ireland border resolutions. These
regions culturally intertwined, currently without any border but the Brexit would require the
establishment of some control to monitor the flow of goods and people. A border will have
socially adverse consequences while no border will increase economic risk. The government is
unable to decide on this issue and it will be an underpinning factor for EU-UK relationship.
Further, the UK will lose the support of the EU in research & development, energy, and
environmental protection through its state of the art technology. Inter-region public contract
participation will be discontinued. The UK has a comparatively younger population as compared
to Germany, the young generation will lose job opportunities that will be created in Germany.
UK could lose Scotland as the heavy majority voted against Brexit and subsequently they can
enter into a separate deal to become EU’s member.
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Appendix