Brexit Bulletin: Planning for Failure

(Bloomberg) -- Today in Brexit: While Labour leader Jeremy Corbyn is in Brussels for talks with EU chief negotiator Michel Barnier, the focus is on planning for a cliff edge. 

With just a nervous few weeks left before the U.K. and the European Union hope to strike a deal, both sides have been thinking about what happens if the deadlock can’t be broken.

The U.K. spent the summer dribbling out contingency plans for a series of industries – including warnings that flights might be grounded if the EU doesn’t grant reciprocal approvals to its planes – and yesterday ambassadors from the bloc’s 27 remaining countries discussed what their response should be.

The issue is highly sensitive for the EU. It doesn’t want to give the U.K. the impression that it’s ready to remedy the most painful consequences of a no-deal Brexit should talks collapse. For the Europeans, there’s no alternative to the deal on the table. But the EU is also aware that it needs contingencies in place to keep planes flying, customs controls working and medicines flowing. The bloc also wants to avoid what one ambassador called “uncoordinated” action by governments should the cliff-edge loom.

The U.K. has signaled that it expects “mini deals” to be done, even if the overall Brexit deal fails. But this is to misread the EU’s intentions, European diplomats said. Ambassadors on Wednesday discussed what bilateral action the bloc would take. The EU thinks there will be little trust left (and little time) to make agreements. The Financial Times reports that the European Commission explained to ambassadors that it could fast-track emergency EU legislation in as little as five days if needed.

European governments believe “preparedness work has to intensify in the months ahead at national as well as EU level,” according to a document drawn up ahead of Wednesday’s meeting. Officials are looking at the British political situation and see pitfalls ahead. U.K. Prime Minister Theresa May said on Tuesday that she would prefer leaving the EU without a deal rather than the one currently on offer, even if some of her senior ministers are trying to pull her back from the abyss, the Times reports today.

The prospect of May being toppled, another general election and the stance of the opposition Labour, whose votes May might need to get approval for any deal, creates still more uncertainty. Labour leader Jeremy Corbyn – who meets EU chief negotiator Michel Barnier in Brussels today – could hold the key. In a speech yesterday, he opened the door to backing a deal if it “includes a customs union and no hard border in Ireland; if you protect jobs, people’s rights at work and environmental and consumer standards.”

Today’s Must-Reads

• Bloomberg interviewed French President Emmanuel Macron. He said he’d welcome Britain back to the EU.
• The bad-tempered Salzburg summit last week was an “accident” and mustn’t be repeated, according to Dutch Prime Minister Mark Rutte in an interview.

Brexit in Brief

Budget Date | U.K. Chancellor of the Exchequer Philip Hammond will make his annual budget speech on Monday, Oct. 29, just 10 days after the crunch Brexit summit. Hammond announced the speech in a tweet, ending months of speculation caused by uncertainty over Brexit and the slow progress of the negotiations. Hammond didn’t want the budget to clash with the October meeting in Brussels, or the potential follow-up summit in mid-November.

Courting Uncertainty | A U.K. court is considering whether the European Medicines Agency can use Brexit to exit its 500 million-pound ($660 million) rent bill in London. At a pretrial hearing on Wednesday, Judge Marcus Smith asked what would happen if Brexit didn’t actually happen. “Suppose there’s a second referendum, what is the court to do in light of that uncertainty?” he asked. The EMA, which is moving its headquarters to Amsterdam, argued that the very act of Brexit would justify it breaking its 25-year lease, with 21 years left to run. The agency pays 13 million pounds per year to occupy more than 10 floors in the U.K. capital’s Canary Wharf district.

Every Chance | The chances of a no-deal Brexit are above 50 percent, influential U.K. lawmaker Nicky Morgan said. “The risk of a negotiated no-deal” after the Salzburg summit “is looking high, so you’re looking at, I’d have said, over 50 percent,” Morgan, the head of the U.K. Parliament’s Treasury Committee, said at a financial-services conference in London. “But that’s 50 percent where a deal is perfectly possible.”

Throw of the Dice | Some bookmakers agree with Nicky Morgan’s pessimistic forecasts. Betway rates the chances of the U.K. crashing out of the European Union without an agreement at 5/6. That suggests a 55 percent probability, compared with 40 percent before last week’s stormy meeting of EU leaders in Salzburg.

Air Warning | The head of an industry group representing almost 300 of the world’s biggest airlines slammed the impasse that threatens to ground planes after Brexit as unprofessional and showing disdain for passengers. A deal removing the risk of disruption to flights when Britain leaves the EU must be hammered out within weeks or bookings will begin to suffer, International Air Transport Association Chief Executive Officer Alexandre de Juniac said in an interview. “Everybody thinks there’ll be a solution and so they’re not deterred from buying a ticket. But the closer we get to April, the more uncertain things are and the bigger the impact will be,” he said.

Price Rises | Food and drink imports to the U.K. could be hit with tariffs of 9.3 billion pounds a year, lifting supermarket prices, if the country crashes out of the EU without a deal, according to a report published on Thursday by Barclays Bank. If the Brexit negotiations fail to break the current impasse, grocers would face an average tariff of 27 percent on goods brought in from the EU and consumers could see some of that cost passed on in the form of higher store prices, the study warned.

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To contact the editor responsible for this story: Timothy Coulter "Tim" at tcoulter@bloomberg.net, Jones Hayden

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