EU, UK Inch Toward Brexit Pact as IMF Says ‘No-Deal’ Scenario Poses Risk to European Economy

The 'Leave Means Leave' Brexit campaign co-chair Richard Tice (C) talks to anti-Brexit activists at a fringe event at the Conservative Party Conference in Birmingham, England, on Oct. 1, 2018. Oli Scarff/ AFP/Getty Images

LONDON—Amid warnings that a “no deal” or hard Brexit could damage the European economy and global economy, the EU and UK are inching closer to a deal, as EU leaders prepare for a summit on Oct. 17.

The prospect of a “no deal” Brexit has been haunting markets and businesses in recent months, as governments rush to put together contingency plans, in case the UK and EU fail to reach an agreement on their post-Brexit relationship.

A report on Oct. 9 from the International Monetary Fund (IMF), the global lender of last resort, noted that uncertainty over Brexit is weighing down the European economy, and is one of a number of major risk factors for the global economy.

The UK and EU are coming to the end of an interim period, separated but still married, as they hash out the divorce agreement before a deadline in March 2019. The agreement will determine just how closely tied the UK remains to the EU system of regulations and laws—a hard or soft Brexit.

If no deal is agreed, then the UK and EU relationship will automatically move to rules set out by the World Trade Organization. A no deal scenario is seen as the preferred option by only a small minority of hardcore Brexit supporters who want to maximally sever ties with the EU.

Beware the ‘Disorderly’ Brexit

The no deal option is generally frowned upon by markets. But there’s another scenario that has them more worried—what has been named a “disorderly” or “chaotic” Brexit.

Sometimes called “crashing out of the EU,” that means the UK won’t have time to sort out a new framework of regulations on customs and trade before the March 29 deadline, when the UK cuts treaty ties with the EU.

Without resolving the problems, the uncertainty could panic the markets leading to a “spike in risk aversion,” the IMF said in its Global Financial Stability Report.

“It is still hard to gauge Brexit’s impact on financial activity and the change in employment, since much will depend on the nature of the final agreement,” said the IMF report.

“In general, the likelihood and severity of financial stability risks will be reduced by a closer relationship between the United Kingdom and the EU during the transition period and beyond, but will be heightened in the event of a hard Brexit,” the report said.

The IMF report follows a call by the Bank of England for an urgent acceleration in contingency planning with the EU. The Bank of England estimates that 69 trillion pounds ($90 trillion) is being held by EU-based institutions through British clearers. This could become a potential flashpoint if arrangements aren’t made in time.

Last month, prospects of a deal seemed to plummet as European leaders ladled scorn on Theresa May’s Brexit proposal at the last EU summit.

British Prime Minister Theresa May at a United Nations Security Council meeting on Sept. 26, 2018, in New York. Spencer Platt/Getty Images

The EU has set a November deadline to conclude Brexit negotiations. Any deal plan needs approval from both EU and UK lawmakers.

Recruiting Rebels to Defeat the Rebels

With EU leaders pushing for progress ahead of an EU summit on Oct. 17, the prospect of a deal is looking more likely.

As well as an apparent breakthrough in negotiations, May appears to be edging closer to solving the parliamentary math in the UK by poaching votes.

Many in May’s party see her plans as a watered-down Brexit that concedes too much to the EU.

An estimated 40 members of May’s party are thought to be willing to vote down anything too similar to her plan—enough to overturn her slim majority of 13.