Download Christopher Granville's note "Brexit: Inevitable FTA"

  • The latest Brexit flare-up – over the UK’s avowedly treaty-breaking Internal Market bill – is useful for showing how an FTA is the only realistic outcome.
  • The UK is still grappling with the painful Ireland-related reality that you can have a ‘real’ Brexit – in the sense of leaving the EU’s single market and customs union (SM/CU) – or an unchanged UK, but not both.
  • The UK government’s move to pre-empt unacceptable impairment of sovereignty from a no deal outcome under the exit treaty terms would lead to an equally radical loss of control through the WTO channel – in addition to an international legal and political storm ranging not only the EU but also the US against the UK.
  • Lying on the right side of the borderline between unacceptable and merely uncomfortable, the thin goods-only FTA now under negotiation is the only way for the UK to go.
  • Even in what we see as the unlikely event of no FTA deal being reached by year-end, this would prove only a temporary crash – from which a deal would soon be salvaged.
  • When (not if) the FTA deal comes into view, GBP will recover losses against EUR to regain its average post-referendum level – that is adequate for absorbing the economic jolt from leaving the SM/CU.
  • An inevitable starting point for the future UK-EU relationship, the FTA would then lead either to chronic disputes or a benign extension into services.
  • Which of these two trends prevails – and, therefore, the longer-run outlook for sterling through the continuing Brexit saga, will hinge on how the deal balances the trade-off between the UK’s desired vagueness and the EU’s scope for retaliatory action.