What a “chaotic Brexit” could mean for Britain

There's been a lot of speculation in the press in the past few days about the idea of a transition period after Britain leaves the EU in March 2019. Indeed, reports have suggested that the government has informally agreed this period could last for up to three years, something that the chancellor, Philip Hammond, essentially confirmed on Friday.

But what exactly does this mean, and what are the consequences if we don't have such an agreement? Professor Anand Menon of Kings College London (KCL) has released a report for the UK In A Changing Europe, a research centre that is part of KCL. In it he looks at the consequences of both a "chaotic" and "cliff-edge" Brexit.

Menon thinks that there are essentially four types of Brexit. A "smooth Brexit" would involve both finalising the terms of any divorce and agreeing a comprehensive trade deal. Until the end of last week, this was still the government's official position, as the PM still insists that both can be settled by 2019. However, in reality this is "very unlikely" as there are "a lot of details to be worked out". Probably the best that can be achieved is a "degree of fudgery", where the UK and EU agree in principle to keep post-Brexit trade as open as possible, but leave the exact details to be worked out during a transition period.

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This leads us onto the second scenario. In this case, Britain and the EU would finalise the divorce, but there would be a transition period during which Britain would have to obey EU rules and make continued contributions while it worked on a long-term trade deal. At the moment "everyone seems to be converging on three years", since this would enable the government to sort everything out by the time of the next election. It would also give the government more time to hold informal trade talks with non-EU countries, though it can't agree anything until it leaves the EU.

However, there is a "huge amount of ambiguity" since the government seems to be divided between the exact rules that would be in force during the transition period, especially over immigration. For example, Home Office minister Brandon Lewis recently stated that Britain could restrict EU immigration during this period. Menon agrees that it's possible that Europe may be willing to make concessions on freedom of movement, and accepts that "there's no harm in asking". However, he warns that trying to negotiate "via the Today programme" could be counterproductive, as governments in Europe "have to be seen to defend the interests of their citizens living in the UK".

Menon also warns that agreeing a transition period doesn't guarantee that a trade deal will be reached, especially since "the EU won't necessarily say yes to anything we propose". Instead, it merely buys more time, in effect, "postponing the exit from the single market, rather than stopping it". Indeed, if it looks like a long-term trade agreement won't be reached, or the agreement will only grant limited access to the single market, it could end up make it easier for firms to draw up plans for a possible move away from the UK.

If there isn't a transitional deal we could end up with a "cliff edge Brexit", where we agree to a divorce agreement, but leave on World Trade Organization (WTO) terms, which would entail significant tariff barriers. While it is "impossible to know for sure" what would happen, most economists estimate that trade would fall by up to 40%, with a 3% permanent hit to GDP. Because of geography and the extent to which the single market has cut barriers to trade in services, any bilateral trade deals are unlikely to fully compensate. For example it's been calculated a trade agreement between the UK and US would only boost UK GDP by 0.2%.

The final scenario is a "chaotic Brexit". This is where Britain and the EU are unable to negotiate either a divorce agreement, or a transitional period, by March 2019. This could happen either if the clock runs down, or if British negotiators end up walking out of the talks. In this scenario the British economy would not only be hit by the effects of a sudden reversion to WTO terms, but it would find itself in a legal battle with Brussels over the division of any obligations and assets. Individuals could end up suing Westminister, for example in the case of a university researcher employed as part of EU funded projects.

If Britain did decide to unilaterally leave the EU, it could take up to a decade for both sides to even agree a forum for hearing any cases. Professor Menon worries that the "difficult" nature of the exit talks means that the chances of such a negative outcome are a lot higher than people think. Indeed, he puts them as high as 30%.